China investing US$10 bn in four mega refineries

China is on a roll. Against the back of the Covid-19 pandemic, the country has raised the stakes with the investment of tens of billions of dollars in new mega-refineries: in four projects with about 1.4 million barrels/day of crude-processing capacity.

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The four projects under construction will add on to the 1 million barrels the country has brought online since the start of 2019. All that capacity will add more petroleum products and plastics just as China National Petroleum Corp. sees fuel demand peaking in 2025 as electric vehicles come into the picture.

The new mega-refineries under construction in places like Zhejiang, Jiangsu and Yantai will be geared toward turning crude oil directly into petrochemicals and plastics. That’s particularly bad news for plants in Taiwan and South Korea designed to cater to China’s petrochemical market, said Harry Liu, executive director for oil markets, midstream and downstream at research firm IHS Markit.

The mismatched building boom comes after President Xi Jinping’s pledge last month to go carbon neutral by 2060 as clean energy and electric vehicles change the industrial landscape in China. It also positions the country to be an even bigger exporter of fuel, endangering refinery operations from South Korea to Australia to Europe.

Chinese refining capacity has nearly tripled since the turn of the millennium as the country’s oil giants tried to keep pace with the rapid growth of diesel and gasoline consumption, according to a Bloomberg report.

There’s now more fuel production than the country needs, leading to exports of nearly 1 million barrels a day, close to the volumes shipped by South Korea and India, according to research firm IHS Markit.

Domestic demand is likely to grow more slowly in the future as the country begins its long transition toward carbon neutrality.

Even before Xi announced the 2060 target, China National Petroleum Corp. said it expected refined products demand to grow by just 0.9% a year through 2025 and peak around then, compared to 5.6% average annual growth from 2000 to 2019.

This comes against the back of increasing vehicle sales over the last two months — the first market to rebound since the pandemic, with gasoline and diesel-guzzlers making up the vast majority of that. Still, CNPC researchers said they expect electric vehicles and alternative fuels such as hydrogen and ethanol to displace increasing amounts of petroleum fuel.

While the plastics emphasis means the new plants will produce less transport fuel on a relative basis than older plants, the supply of petroleum products will have to be sold somewhere. In the future, Chinese refiners could export fuels as far afield as Australia, Europe or even the US, according to traders in the region.

Those exports will eat into market share of existing refineries, potentially causing smaller plants within China, as well as others from Japan to Australia, to shutter permanently.

The coronavirus pandemic has accelerated the trend of refinery closures. The damage caused by the virus to demand is likely to be structural and permanent, according to IHS.

“Our current estimate is there’s going to be about 1 million barrels a day refining capacity that is facing closure threat,” IHS’s Liu said. “Out of which, 60% will be in non-China territories.”