Evolution of Chinese Independent Refineries

EVOLUTION OF CHINESE INDEPENDENT REFINERIES

James Gao Industry Analyst SCI International Business Unit

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http://intl.sci99.com/ 3 Evolution of Chinese Independent Refineries

Evolution of Chinese Independent Refineries

4 http://intl.sci99.com/ History and Current Situation of Shandong Independent Refineries Evolution of Chinese Independent Refineries

1960–1999 2000–2010 2011–2014 2015–Present Birth & Breaking Through Tough Reform & Rise From Disordered to Well- Import & Export Policies Organized

2016 Chinese Oil Refining Capacity bbl/day 2012–2016 Shandong Independent Refineries’ Structure Capacity 3,040,000 2,736,477 Sinochem 2,540,000 Quanzhou Other CNOOC, 5% 2,265,189 21 ChemChina Petrochemical , Independe , 3% 2% nt 2,040,000 China Refineries, 8% North 1,540,000 PetroChina, Industries 27% Others, Group, 1% Shandong 1,040,000 25% 13,124,760 bbl/a Sinopec, Independent 37% Refineries, 540,000 17%

40,000 2012 2013 2014 2015 2016

5 http://intl.sci99.com/ History and Current Situation of Shandong Independent Refineries Evolution of Chinese Independent Refineries

Independent Refineries’ Refined Oil Products Output

2012–2016 Shandong Independent Refineries’ 2012–2016 Gasoline and Diesel Output Comparison between Gasoline and Diesel Output Shandong Independent Refineries and Chinese Refineries

million bbl million bbl

350 302 3,000 19.38%20% 300 2,500 18% 250 2,000 197 16% 200 1,500 14% 150 1,000 100 500 12% 50 0 10% 2012 2013 2014 2015 2016 0 2012 2013 2014 2015 2016 Shandong independent refineries' output

Gasoline Diesel Chinese output Shandong independent refineries' proportion Shandong independent refineries’ gasoline and diesel output is increasing. The output reached 473.44 million barrels in 2016, covering 19.38% of China’s gasoline and diesel output. 6 http://intl.sci99.com/ Content Evolution of Chinese Independent Refineries

1 Previous Issues — Insufficient Crude Oil & Product Quality Upgrade

2 Current Situation Content — Three Rights Obtainment & Status Promotion 3 Current Issues — Challenges & Opportunities

4 Chinese Independent Refineries’ Future — New Start of Independent Refineries

7 http://intl.sci99.com/ Evolution of Chinese Independent Refineries

1 PART ONE

Chinese Independent Refineries’ Previous Issues — Insufficient Crude Oil & Product Quality Upgrade

8 http://intl.sci99.com/ Chinese Independent Refineries’ Previous Issues Evolution of Chinese Independent Refineries

Insufficient crude could be refined was the biggest bottleneck, and the consumption tax worsened the fuel oil refining .

2009 Shandong Independent Chinese Consumption Tax of Oil Products Refineries’ Feedstock Structure

RMB/L Gasoline Diesel Fuel oil $35/bbl 1.52 1.4

1.2 1.12 1.1 1 0.94 0.8 Crude oil 2009 Fuel oil 43%

57% 0.2 0.1 0.03

1994 2005/9 2006/4 2008/1 2009/1 2014/11 2014/12 2015/1 9 http://intl.sci99.com/ Chinese Independent Refineries’ Previous Issues Evolution of Chinese Independent Refineries

The upgrade of Chinese gasoline and diesel national standards made the refining difficulty double for inferior feedstock.

S content comparison

Sulphur content limit 1.54% 1.52% 1.5%

GB III 0.6%

GB IV

GB V Merey Shengli M100 ESPO crude oil oil

10 http://intl.sci99.com/ Chinese Independent Refineries’ Previous Issues Evolution of Chinese Independent Refineries

Loan Difficulty Tax Pressure

1 3 5 2 4

Environmental Low Brand Recognition Product Protection Pressure Homogeneity

11 http://intl.sci99.com/ Chinese Independent Refineries’ Previous Issues Evolution of Chinese Independent Refineries

Suppressed by feedstock and policies, independent refineries were sold and eliminated.

Crude oil & Acquisition Policy Exchange oppression

Elimination

12 http://intl.sci99.com/ Content Evolution of Chinese Independent Refineries

1 Previous Issues — Insufficient Crude Oil & Product Quality Upgrade

2 Current Situation Content — Three Rights Obtainment & Status Promotion 3 Current Issues — Challenges & Opportunities

4 Chinese Independent Refineries’ Future — New Start of Independent Refineries

13 http://intl.sci99.com/ Evolution of Chinese Independent Refineries

2 PART TWO

Chinese Independent Refineries’ Current Situation — Three Rights Obtainment & Status Promotion

14 http://intl.sci99.com/ Chinese Independent Refineries’ Current Situation Evolution of Chinese Independent Refineries

Crude oil policy loosening is in favor with the general public and also a transformation of state attitude.

2011–2015 Crude Oil Proportion in Shandong 2015 Raw Material Structure of Shandong

Independent Refineries’ Raw Materials Independent Refineries

2011 2011

- 2015 Crude oil 77.18%

77% Others 70% 22.82% 62% Bitumen mixture 58% Fuel Oil 53%

15 http://intl.sci99.com/ Chinese Independent Refineries’ Current Situation Evolution of Chinese Independent Refineries Independent refineries’ operating rate increased greatly, backed by the sufficient supply of crude oil.

2012-2016 Shandong Independent Refineries' Operating Rate 70% 64.40%

60%

50%

40%

30%

20% 26.04% Jan-12 Jul-12 Jan-13 Jul-13 Jan-14 Jul-14 Jan-15 Jul-15 Jan-16 Jul-16

16 http://intl.sci99.com/ Chinese Independent Refineries’ Current Situation Evolution of Chinese Independent Refineries

Independent refineries are becoming more and more competitive, through capacity expansion.

Top 10 Shandong Independent Refineries 2012–2016 Shandong Independent Refineries’ Unit: bbl/day Ranking Region Refinery Capacity Crude Oil Processing Volume bbl/day 1 Changyi Petrochemical 160,438.36 1,600,000 1,455,015 2 Dongming Petrochemical 150,410.96 1,400,000 3 Huaxing Petrochemical 140,383.56 1,200,000 4 Dongying Hualian Petrochemical 124,339.73 1,000,000 5 Huifeng Petrochemical 116,317.81 800,000 6 Dongying Wantong Petrochemical 116,317.81 600,000 445,417 7 Weifang Hongrun Petrochemical 114,312.33 400,000 8 Hengyuan Petrochemical 110,301.37 200,000 9 Dongying Tianhong Chemical 100,273.97 China Offshore Bitumen 0 10 100,273.97 2012 2013 2014 2015 2016 (Binzhou)

17 http://intl.sci99.com/ Chinese Independent Refineries’ Current Situation Evolution of Chinese Independent Refineries

Main types of imported crude oil that independent refineries are processing

Refinery Crude Type Dongming Petrochemical Oman, Mandji, Merey Lijin Petrochemical Oman, Cinta, offshore oil, Shengli oil Kenli Petrochemical ESPO, Cinta, offshore oil, Shengli oil Others, Oman, Yatong Petrochemical Oman, Duri, Urals, offshore oil, Shengli oil Hongrun Petrochemical ESPO, Kuwait 36% 32% Huifeng Petrochemical Oman, Escolante, Vasconia Tianhong Chemical Oman, Cinta, Songkhla, offshore oil, Shengli oil Chambroad Petrochemicals Arabian Heavy ESPO, Duri, Luqing Petrochemical ESPO, Oman 12% 20% Qirun Chemical Oman, Escolante, Mezcla, Haiyou Petrochemical Sadun, Escolante Hengyuan Petrochemical West African oil, offshore oil Imported Crude Oil Types Qingyuan Petrochemical offshore oil, Djeno Shenchi Chemical offshore oil, Shengli oil

18 http://intl.sci99.com/ Chinese Independent Refineries’ Current Situation Evolution of Chinese Independent Refineries

Crude oil demand is increasing, and more independent refineries are applying for quotas. Unit: bbl Refinery 2017 1st Batch 2016 Dongming Petrochemical 48,092,400 54,900,000 Panjin North Asphalt 41,504,400 51,240,000 Hongrun Petrochemical 37,258,800 38,796,000 Lijin Petrochemical 22,838,400 25,620,000 Kenli Petrochemical 16,396,800 18,446,400 Baota Petrochemical 3,367,200 45,091,2001 2 3 Yatong Petrochemical 14,713,200 20,203,200 Huifeng Petrochemical 12,224,400 30,451,200 Luqing Petrochemical 15,957,600 18,885,600 Tianhong Chemical 27,450,000 32,208,000 Chambroad Petrochemicals 5,709,600 24,229,200 Qirun Chemical 15,225,600 16,104,000 Haiyou Petrochemical 3,147,600 23,424,000 Hengyuan Petrochemical 12,810,000 25,620,000 Wudi Xinyue Chemical 8,784,000 17,568,000 Qingyuan Petrochemical 14,786,400 29,572,800 Shenchi Chemical 9,223,200 18,446,400 Jincheng Petrochemical 10,980,000 21,960,000 Xinhai Chemical 13,615,200 27,230,400 Total 334,084,800 539,996,400

19 http://intl.sci99.com/ Chinese Independent Refineries’ Current Situation Evolution of Chinese Independent Refineries Refined oil products export is a new beginning. The export volume will increase, but the increase will be limited.

2012–2016 Chinese Gasoline and Diesel Export Volume 2012–2016 Chinese Gasoline and Diesel Apparent million bbl Consumption Volume 140 million bbl 117 1,255 120 1,400 1,200 100 1,019 82 1,000 80 50 55 800 60 600 40 400 20 200 0 0 2012 2013 2014 2015 2016 2012 2013 2014 2015 2016

Gasoline Diesel Gasoline Diesel

20 http://intl.sci99.com/ Chinese Independent Refineries’ Current Situation Evolution of Chinese Independent Refineries

Sufficient Crude Oil

Operating Rates Increasing

Industrial Position Improving

Capacity Expanding

21 http://intl.sci99.com/ Content Evolution of Chinese Independent Refineries

1 Previous Issues — Insufficient Crude Oil & Product Quality Upgrade

2 Current Situation Content — Three Rights Obtainment & Status Promotion 3 Current Issues — Challenges & Opportunities

4 Chinese Independent Refineries’ Future — New Start of Independent Refineries

22 http://intl.sci99.com/ Evolution of Chinese Independent Refineries

3 PART THREE

Chinese Independent Refineries’ Current Issues — Challenges & Opportunities

23 http://intl.sci99.com/ Chinese Independent Refineries’ Current Issues Evolution of Chinese Independent Refineries

Despite the benefit of crude oil policy, independent refineries still face problems.

Production Infrastructure Procurement Marketing

Will new crude oil be How can the crude oil How will independent How will independent suitable for independent be imported, curbed refineries reduce risks, refineries sell their refineries’ units? by low transportation with no crude oil products, considering capability? import experience? severe oversupply?

24 http://intl.sci99.com/ Chinese Independent Refineries’ Current Issues Evolution of Chinese Independent Refineries

Simplify the crude oil purchasing process, and try to raise their international position.

How to purchase the China Petroleum Procurement crude oil Federation of Independent Refineries 5

Disordered bidding refineries with imported crude oil use right and imported crude oil procurement qualification

Lack of bargain power 7 applying refineries S! Loan difficulty 7 S High transportation refineries with cost imported crude oil use right

25 http://intl.sci99.com/ Chinese Independent Refineries’ Current Issues Evolution of Chinese Independent Refineries

Build more pipelines to reduce transportation costs.

Yanzi Line (453km) Laizhou Port 莱州港 Ridong Line (446km)

Huangwei Line (190km)

Laichang Line (110km)

26 http://intl.sci99.com/ Chinese Independent Refineries’ Current Issues Evolution of Chinese Independent Refineries

The raw material change leads to a rising tax expense, so the fuel oil will still exist in the short term.

Fuel oil Crude oil

purchase 1,218 RMB/mt purchase 0 26.70 USD/bbl

Gasoline and diesel consumption tax

sale 2,110 / 1,411 RMB/mt 36.03/26.88 USD/bbl

27 http://intl.sci99.com/ Chinese Independent Refineries’ Current Issues Evolution of Chinese Independent Refineries Raise sales volumes of gasoline and diesel.

Cooperate with state- 2015 Shandong Gas Stations Layout owned enterprises Increase purchase volumes

SHELL CNOOC 0.78% 0.47% Private PetroChina 63.39% 8.71% Build more gas stations Others Sinopec 67.12% 22.93% Compete with state- owned enterprises Cooperative marketing

Appropriate export Shandong Independent Refineries 3.73%

28 http://intl.sci99.com/ Chinese Independent Refineries’ Current Issues Evolution of Chinese Independent Refineries

Increase the plant competitiveness.

Newly-added refining units of Shandong independent refineries

Delayed coking 5% Follow-up unit update

RFCC 8% Enhance units’ Reformer competitiveness 12% Hydrogenation Hydrogenation technology 47% Units need to adapt to the feedstock structure change Atmospheric and vacuum 28% Units’ energy consumption reduction

29 http://intl.sci99.com/ Chinese Independent Refineries’ Current Issues Evolution of Chinese Independent Refineries

The “floor price” protects refineries’ profit.

Shandong Independent Refineries’ Oil Refining Profit RMB/mt 800 700 600 500 40/bbl 400 300 200 100 0 Jan-15 Apr-15 Jul-15 Oct-15 Jan-16 Apr-16

30 http://intl.sci99.com/ Chinese Independent Refineries’ Current Issues Evolution of Chinese Independent Refineries

Strengthen international cooperation, and lengthen industrial chains.

November 2015 Dongming petrochemical signed a Lihuayi Group signed agreements on Chambroad established a trading company in long-term crude oil supply agreement crude oil import with BP, Dutch Shell , overseas with a main business of importing with BP ; Switzerland Vitol ,etc. crude oil . The imported crude oil usage volume The imported crude oil usage volume The imported crude oil usage volume for Challengesfor Dongming Petrochemical is 7,500 for Lijin Petrochemical& Ois 3,500pportunitieskt/a. Chambroad is 3,310 kt/a. kt/a.

 采购Production  The floor price makes the crude oil refining come into  运输Infrastructure practice.国际合作加强 January 2016 2015 Tianhong Chemical signed The independent refineries Hengyuan Petrochemical acquired Russia's Rosneft providedProcurement10,000kt a strategic agreement with without crude oil non-state the Malaysian-Based Shell Refining of light crude oil for ChemChina. BP on crude oil import; import trade qualification are The crude oil import quota of Company. The Iimportednternationalcrude oil cooperationalso active to explore is the usage volume for Tianhong overseas market ChemChina is 10,000Marketingkt/a . The application of 3,720 kt/a imported crude oil use right from chemicalstrengthening.is 4,400 kt/a. Hengyuan Petrochemical is waiting for approval

31 http://intl.sci99.com/ Content Evolution of Chinese Independent Refineries

1 Previous Issues — Insufficient Crude Oil & Product Quality Upgrade

2 Current Situation Content — Three Rights Obtainment & Status Promotion 3 Current Issues — Challenges & Opportunities

4 Chinese Independent Refineries’ Future — New Start of Independent Refineries

32 http://intl.sci99.com/ Evolution of Chinese Independent Refineries

4 PART FOUR

Chinese Independent Refineries’ Future — New Start of Independent Refineries

33 http://intl.sci99.com/ Chinese Independent Refineries’ Future Evolution of Chinese Independent Refineries

The industrial position of Shandong independent refineries is promoted. The demand for crude oil will be rising in the short term.

National policy ① 2012–2016 Chinese Crude Oil Apparent Consumption support bbl/day Volume 14,150,000 ② Break state-owned 12,150,000 refineries’ monopoly 10,150,000

8,150,000 Transformation & ③ upgrading 6,150,000 4,150,000

Activate the refining 2,150,000 ④ industry 150,000 2012 2013 2014 2015 2016

34 http://intl.sci99.com/ Chinese Independent Refineries’ Future Evolution of Chinese Independent Refineries

Crude oil will be the only raw material, and Shandong independent refineries will start a new round of reshuffle.

Mature stage of Shandong Profit = Survival independent refineries 山东地炼发展成熟之时，必能与中  Capital cost 字头企业分庭抗礼  Unit cost Crude oil  Operating cost Raw  Labor cost material ＞99%

Future position = Survival

Serious homogenization &  Brand intense internal competition  Integration

35 http://intl.sci99.com/ Chinese Independent Refineries’ Future Evolution of Chinese Independent Refineries

National policy orientation

Independent refineries are a major force to promote the development of China's oil refining industry, and three rights delegation is only a new start for independent refineries.

The Chinese government hopes to build a large-scale and diversified development pattern in Chinese oil refining industry.

The marketization of China's oil refining industry has never stopped, which is the foundation for the healthy development of China’s refining industry. Shandong independent refineries are of great significance for China’s refining industry.

Due to the tough energy security situation, the future Chinese policies will proceed from this aspect .

36 http://intl.sci99.com/ Evolution of Chinese Independent Refineries Excellence Creates Miracle DATAAnalyst COLLECTION Team

http://intl.sci99.com/ 37 Excellence Creates Miracle SERVICE SYSTEM

Data Report Value Added Service

Supply – Capacity, Output, Import, Regular Report Event and training Stock, Operating rate, Storage Weekly/Monthly/Annual report, Data capacity, Refinery data, etc. analysis report Consulting Advertisement Demand – Export, Apparent Multi-client Report consumption volume, etc. 2017–2020 China’s Independent On-the-spot investigation Refineries Business Report

http://intl.sci99.com/ 38 CONTENTS

2017–2020 China’s Independent Refineries Operation Report Contents

1 Part 1 1960–2017 China’s Independent Refineries Development History 2 Part 2 China’s Independent Refineries’ Refining Process Analysis 3 Part 3 China’s Independent Refineries Product Circulation Analysis 4 Part 4 China’s State-Owned Integrated Refineries & Independent Refineries Oil Processing Section Key 5 Part 5 China’s Independent Refineries Development Outlook

http://intl.sci99.com/ 39 Evolution of Chinese Independent Refineries

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