Petrodollars: the Sinopec-KPC refinery is hitting some rough spots

Sinopec and Kuwait Petroleum  have plans to build a refinery in southern China. Beyond that, how this project is going to turn out is anybody’s guess. In this week’s Oilgram News column Petrodollars, Song Yen Ling discusses the “bumpy” path the project has taken.

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China’s largest refiner China Petroleum & Chemical Corp, or Sinopec, announced in its annual report in March that a new 15 million mt/year refinery and petrochemical project in southern Guangdong province’s city of Zhanjiang would be operational by 2016. This would be one of its major investments in refining over the next few years and would suck up a significant part of its downstream budget.

What Sinopec did not mention however, was that the project is a joint venture with Kuwait Petroleum Corp.

While construction of the refinery is progressing as planned, the evolution of the project has been more bumpy.

A source at KPC’s overseas arm Kuwait Petroleum International said this week that both companies are still discussing the economics of the project and that the latter was concerned about profitability. In addition, the ownership structure of the project is also not fixed. When contacted, an executive at the Beijing office of KPI would only say the company was still involved in the venture but declined to give any further details.

“The talks are not going well and in the end I think Sinopec will just proceed with the refinery on its own. The project has already been approved and is being constructed. Whoever the partners are, the refinery will be built,” said one highly placed observer.

The roots of the project were sunk in 2004, following a top level agreement between both countries’ heads of state.

The idea was for KPC to follow in the footsteps of Saudi Aramco, which had started negotiations for a similar joint refinery and petrochemicals project in neighboring Fujian province in 1997. It later started up in 2009.

Notoriously protectionist about domestic oil projects, Chinese state companies were open to joint venture refineries with producer national oil companies because they provided security of oil supply, a key concern for Beijing as China’s crude imports rise.

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There were problems for KPC from the start. It had originally been paired with state company PetroChina to develop a 240,000 b/d refinery and associated ethylene plant in Nansha in Guangdong, with the understanding that a fifth of the crude supply would come from Kuwait.

After working closely with PetroChina for nearly a year on the feasibility study and other preparation work, China unexpectedly switched KPC’s partner.

“The news caught KPC by surprise because PetroChina had not given KPC any indication that it had been replaced. A month later, KPC sent a delegation of officials to Guangdong, where Guangdong provincial officials officially informed KPC of the change in its JV partner but offered no explanation,” according to a September 2009 diplomatic cable from the US embassy in Beijing leaked by Wikileaks, quoting Meshari Al-Mahmoud, KPC’s chief representative in China.

When things finally progressed with Sinopec, there was local and state opposition to the Nansha location because of environmental concerns and a new site in Zhanjiang was eventually selected in 2009. The refinery would also have a 1 million mt/year ethylene plant and a 300,000 mt/year jetty.

KPC and Sinopec would jointly take a 50% stake in the $9 billion project, although the Kuwaitis were free to bring in a third partner to help defray the risk and costs. Privately however, the Chinese were opposed to any other foreign entity and protested when Kuwait later proposed Dow Chemical and Shell as minority partners.

The main obstacle though, was that Sinopec was unwilling to grant oil product marketing rights to KPC, which saw it as a vital way to mitigate heavy refining losses due to oil product price caps imposed by the Chinese government in the domestic market.

Nearly a decade after the deal was initially proposed and with construction well underway however, this sticking point remains and the Kuwaitis seem no closer to reaching any real agreement with Sinopec.

There are currently two other joint refinery projects being developed, both involving PetroChina’s parent China National Petroleum Corp. One is a venture with Venezuela’s state-owned PDVSA, for a 400,000 b/d refinery in Jieyang city in Guangdong. Construction started in May last year and is slated to be ready by 2015, CNPC has said.

The other is a 260,000 b/d refinery partnering Russia’s Rosneft in the eastern port city of Tianjin, that will likely be underpinned by ESPO crude, volumes of which the Russians earlier this month pledged to boost to China. The project broke ground in 2010 but made little progress because of profitability concerns and its original targeted start date of 2015 now seems unlikely.

–Song Yen Ling, with Oceana Zhou in Beijing


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