NEA: end of the line for small oil refineries

Workers inspect pipelines at a refined oil storage facility in Puyang, Henan province. Oil refining companies will have to eliminate units with annual capacity of less than 2 million metric tons as the country upgrades its production chain. Tong Jiang / For China Daily

Li Yi / China Daily

Agency aims to clean the air and upgrade sector's technology by cutting capacity

China will shut down small, obsolete petroleum refining facilities as it pursues a two-pronged strategy of upgrading the industry's technology level while improving air quality, according to a document from the National Energy Administration.

Refining companies are being told to eliminate units with annual capacity of less than 2 million metric tons, according to the document.

The document was provided to China Daily by an individual who attended a meeting about it at the NEA.

"The government is working on improving the industrial chain of the refining sector, which has shown an increasing focus on clean production and environmental protection," said Sun Yansong, a researcher with ICIS-C1 Energy, a Shanghai-based energy information consultancy.

She noted that the authorities had announced similar capacity-cutting plans in previous years, with limited success. She said she believes the government will take stricter action this time.

In recent years, the domestic oil product market has been weak. Forcing out obsolete capacity will benefit the whole industry, said Sun.

The government also aims to limit refiners' debt burdens.

According to the document, the capital base - that is, companies' initial investment from internal resources in new refining projects - should account for more than one-third of the total investment. For expansions, the capital base should be more than 40 percent of the total investment.

The debt ratio of investors in refining projects should not be higher than 60 percent.

There are conditions on crude oil supplies as well. All new refining projects must ensure they'll have sufficient raw material supplies before the project can be approved. For Sino-foreign joint refining projects, the foreign side must be able to supply more than 60 percent of the crude.

The government won't approve new projects for companies that fail to eliminate capacity under an NEA-approved schedule.

The administration has drawn up a capacity reduction timetable for major refiners, including PetroChina Co Ltd and ChemChina Petrochemical Co Ltd.

PetroChina is to cut 3.1 million tons of capacity in 2014, and ChemChina will cut 3.6 million tons by 2015, according to data from the document.

According to ICIS-C1 Energy, China's refining output will peak this year. And with consumption growth of refined products falling to its lowest point in the past 10 years during 2013, the sector faces continued excess capacity.

In March, China was a net exporter of refined products, shipping out 650,000 barrels per day while importing 560,000 bpd.

The NEA aims to foster several large refining companies to achieve strong competitiveness through industrial concentration, combining upstream and downstream resources.

In cities including Ningbo, Shanghai, Dalian and Nanjing, China will build large refining bases with more than 30 million tons of annual capacity each.

In other cities - Maoming and Huizhou in Guangdong, Quanzhou in Fujian, Caofeidian in Hebei and Tianjin - refining bases with capacity of more than 20 million tons annually will be formed.

Dong Xiucheng, vice-president of the School of Business Administration at the China University of Petroleum, said it's inevitable that China will eliminate outdated capacity and increase refining efficiency by industry integration.