INSIGHT: The strategic response to China growth

19 October 2009 16:30  [Source: ICIS news]

By John Richardson

SINGAPORE (ICIS news)--There’s always a danger of putting two and two together and making five, or even a much higher number.

But the evidence seems to be building that China is redrawing the global hydrocarbon map with big implications for the chemicals industry.

“You can imagine the same sort of speculation must have been around in the early 20th century during the rise of America and the IOC’s (International Oil Companies),” said a delegate on the sidelines of this week’s oil and refining Downstream Asia Round Table in Kuala Lumpur, Malaysia.

There is nothing speculative about the 4.6m barrels of oil China imported in July this year – 1.5m barrels more than in the same month in 2008.

China has almost been driving the global energy complex,” said Owain Johnson, Business Development Manager for Argus Media in a speech at the event.

“It has been filling up pipelines for new refineries, plus increasing strategic reserves.”

Mistake this apparent demand for real and immediate demand and you will be in big trouble.

China could very easily confound the rapid and sustained recovery optimists by cutting back on crude imports when it feels it has taken advantage of the bottom of the market; the same is already happening in chemicals.

Financial muscle (largely the result of all those export dollars earned during the West’s credit-fuelled economic boom) is not just heavily influencing global commodity markets.

From Nigeria to Equatorial New Guinea and Ghana, China’s state-owned oil giants are reported to be bidding for exploration rights to fill refinery pipelines in the long term – and to achieve greater energy security.

The giants might be in a position to outbid the IOCs (International Energy Companies) as they are less constrained by quarterly results and shareholder value.

The IOCs have been accused of spending more money on share buybacks than exploration in recent years. It’s also argued that they’ve turned the tap off on marginal projects during short-term dips in oil prices.

You cannot imagine the state-owned Chinese energy majors doing the same.

What could the outcome be for global oil markets work if there are less short-term economics-driven disruptions to new supply and/or new-supply prospects?

For the time being it appears as if oil is ahead of coal as a route to energy security in China, although this could easily change as the country has huge coal reserves.

“There has been a slowdown to coal gasification projects (producing transportation fuels and chemicals) because of water supply,” said Ying Min Ye, president of Beijing-based Chem 1 Consulting in another presentation at the same event.

Other well-documented problems with coal gasification in China include emission levels, logistics and capital costs.

The pace of China’s refinery-petrochemical expansions, though, is accelerating to such a degree that everyone everywhere else needs to think about the right strategic responses.

In 2009 alone 45m tonne/year of refinery capacity is scheduled to be brought on-stream, according to Ying.

This is being accompanied by a lot of new petrochemicals.

PetroChina started up a 1m tonne/year cracker at Dushanzi in September, according to ICIS news.

The Sinopec, ExxonMobil and Sinopec 800,000 tonne/year cracker at Fujian came on-stream in August.

A 450,000 tonne/year expansion at Liaoaning Huijan Tongda Chemical Co is due to start-up in Q4.

Tianjin Petrochemical, the 1m tonne/year Sinopec and SABIC joint venture, is scheduled to be commissioned in the first half of 2010.

A further 175m tonne/year of refinery capacity - with lots of associated petrochemicals - is planned for start-up by 2015.

This would leave China oversupplied in refinery products leading to increased competition with the Middle East and more trade disputes, predicted Ying.

But what is planned on paper doesn’t always happen.

Competing with the Middle East in refinery-product markets doesn’t seem to make immediate economic sense when you look at logistics disadvantages.

But the much-cheaper costs of capital and construction in China versus the Middle East are formidable advantages.

This potential vast increase in refinery capacity creates opportunities for foreign investors, such as building more terminals and storage

Upstream refining and petrochemical investments might be more limited, though.

Local engineering and construction expertise keeps improving, narrowing this avenue.

Delegates talked about the rising competitive threat from Chinese engineering, procurement and construction (EPC) players overseas.

Greater opportunities might exist for licensing or winning shares in joint ventures through differentiated downstream technologies.

Liquefied petroleum Gas (LPG), produced by refineries in remote locations, could be a feedstock option for higher-value propylene derivatives (via, perhaps propane dehydrogenation).

“Local demand for LPG (into heating, transportation etc) is limited and so an option is to use this for C3 derivatives other than polypropylene (PP),” Ying added.

The main roots to PP will remain fluid catalytic crackers (FCCs) and steam crackers.

There is also a big focus on natural gas for environmental and energy security reasons.

PetroChina signed a $41bn deal to buy liquefied natural gas (LNG) from the giant Gorgon project in Western Australia in August.

No plans exist to extract wet gas from these supplies (assuming that the gas arrives wet containing ethane, propane etc) for petrochemical feedstock, according to Ying.

And last week Russian Prime Minister Vladimir Putin was in China for a summit with Chinese Premier Wen Jiaboa.

On the table were discussions over huge natural gas exports from Russia to China, via pipelines.

PetroChina vice president Li Hualin reportedly went as far as to say that the company’s gas supply could match that of crude by 2015 in an interview earlier this week.

There’s a big potential for China to make use of this natural gas in automobiles through, say, condensed natural gas (CNG) – seen as cleaner that liquefied petroleum gas (LPG)-powered vehicles.

What might this mean for the pace of refinery capacity growth?

Will the biggest of all foreign investment opportunities lie in supplying China the green technologies it needs to surprise the world on emissions reductions?

It is changing, it is not simple, it won’t get any easier and some of the assumptions above are likely to be proved wildly wrong.

But at least life isn’t dull!

Read John Richardson’s Asian Chemical Connections blog
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By: John Richardson
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