INSIGHT: The wider implications of INEOS’s China deals

04 July 2011 16:04  [Source: ICIS news]

LONDON (ICIS)--Having created its refining and trading joint venture with PetroChina, INEOS says it is making progress on the technology agreement with PetroChina’s parent, China National Petroleum (CNPC).

That cooperation is expected to help lever the company’s technology into concrete projects in what is now the world’s largest chemicals-producing nation, and possibly elsewhere.

On paper, PetroChina is paying a great deal – $1,015m (€700.4m) in cash – for access to the production and trading of just over 200,000 barrels of oil a day.

The companies have formed a 50:50 refining and trading joint venture based around the INEOS refineries at Grangemouth in Scotland and Lavera in France. INEOS says that the business has a turnover of $15bn and employs around 1,000 people. The refineries together process about 420,000 bbl/day of crude.

Yet there is more to the wider deal than just PetroChina’s inward investment.

“The completion of the joint ventures are of great importance for PetroChina’s global allocation of resources and market portfolio, as it explores the high-end European market and begins to establish PetroChina’s oil and gas operation centre,” INEOS said in a statement released on Sunday.

“We are delighted to have PetroChina as our long-term strategic partner in both the Grangemouth and Lavera refineries”, CEO of INEOS Refining, Calum MacLean, said. “The formation of the joint ventures provides further investment in our refineries and enhances their competitiveness in European markets.”

The refineries need investment – Grangemouth, for instance, to process heavier crudes – but INEOS has found it difficult, particularly in straitened economic times, to justify the spend.

The refineries are also closely linked with petrochemical production at both locations, having been part of the deal that INEOS struck with BP in 2005 to acquire Innovene, the largest part of the UK-headquartered oil company’s petrochemical assets.

Close integration of the facilities was one of the reasons why BP included the refineries in the Innovene sale package.

INEOS has been badly burned by its exposure to crude and the refined products markets, so acquiring a strategic partner for refining makes a great deal of sense.

It is not so long since the privately held company was forced to take an inventory holding loss of €1,005m as the price of crude slumped with the recession in the fourth quarter of 2008.

Running the refineries at full capacity requires raw material purchases of more than $40m a day if crude is priced at $100/bbl, a transactional value that dwarfs the exposure to petrochemicals.

INEOS is a petrochemical company with an annual turnover of $40bn. PetroChina is China’s biggest oil and gas producer and distributor, and one of the largest oil companies in the world.

INEOS, which is registered in Switzerland, is keen to conclude the refining and petrochemicals technology agreement with CNPC and develop its relationship with both China-based companies.

In chemicals, INEOS has polyolefins technology acquired from BP as well as legacy chlorine, polyvinyl chloride (PVC) and acrylonitrile (ACN) processes.

The company has strong European and North American operational bases but wants to gain a much stronger foothold in China, Asia and possibly the Middle East.

Strategic alliances with powerful partners put it in a better position to achieve these goals.

($1 = €0.69)

For more on INEOS, visit ICIS company intelligence

By: Nigel Davis
+44 20 8652 3214

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