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Eric Ng

Titan Petrochemicals Group is hedging its bets on its oil storage facilities business plan as uncertainties cloud the mainland's regulations on refined oil trading and pricing policies.

The oil trading and shipping company is diversifying into the storage business and has designated the first phase (370,000 square metres) of its one million cubic metres of oil storage facilities under construction in Nansha, Guangdong, to be for fuel oil.

It can adjust the remaining facilities to store fuel oil, diesel, petrol  or petrochemicals as construction will not be completed until the end of next year.

Titan is targeting international major oil producers and traders as its primary customers.

While the refined oil wholesale market is officially supposed to be opened to foreign participation in December next year under World Trade Organisation  entry commitments, Beijing has yet to clarify regulations on control of foreign firms' participation.

Presumably, foreign firms will be allowed to import refined oil products from overseas to be wholesaled in China, so they will no longer have to rely on PetroChina and China Petroleum & Chemical Corp  as their sole sources of refined oil.

'Under WTO principles, China cannot restrict refined oil imports [by December 11, 2006] but it's not that clear at the moment,' Titan chief executive Barry Cheung said.

Titan is in talks with international oil producers and traders to lease them storage facilities and hopes to sign some contracts in the first half of next year.

It expects to have up to 70 per cent of its Nansha facilities storing fuel oil and the remainder mainly petrol  and diesel.

However, it can adjust the volume of petrol  and diesel storage according to foreign firms' success in penetrating the mainland wholesale market.

Fuel oil is used for power generation, industrial burning and pow-ering vessel engines but it can also be refined to make diesel and petrol.

With a rapid rise in supply of coal-fired power plant capacity in the next few years, demand for fuel oil by power plants is expected to gradually fall as coal is cheaper than oil.

Mr Cheung agreed that fuel oil demand growth would  slow in a few years but added that a potential opening of the vessel bunkering market -  now a state monopoly - could give rise to new growth opportunities. China recently opened its jet fuel distribution market, also a previous monopoly.

Regulation of the oil trading market is not the only uncertainty facing traders and logistics providers, as price control measures by the central government have cut refining and trading volumes.

It also has clouded prospects of foreigners' chipping into the mainland wholesale market because prolonged high international crude oil prices and mainland fuel price controls could mean it would be unprofitable for foreign firms to enter the market.

The central government is expected to adopt a three-pronged strategy to combat growing losses in the crude oil refining industry, according to government and oil firm officials.

The targets are a rise in domestic fuel prices, which trail international levels, tax relief for refiners and subsidies for fuel-dependant industries and communities.

China's crude oil imports growth slowed dramatically from 33 per cent last year to 3.9 per cent in the first eight months of this year, as price control on domestic refined oil crimped profit margins and dampened incentives to raise refining volume.

Higher refined oil prices, albeit lower than international levels, also worked to suppress demand.

Import of fuel oil suffered a 13.6 per cent fall in the first eight months of this year as refiners are barely making money due to price controls on petrol  and diesel.

But demand might have been artificially restrained, Mr Cheung argued, adding the government eventually would do away with price controls although it was hard to know when this would be achieved.



Waiting game on reforms in oil industry