China Insight: Oil giants to tap deep LPG processing

04 June 2012 00:00  [Source: ICB]

The country has witnessed booming investment in LPG deep processing projects, driven by hefty margins and soaring demand for downstream products such as propylene

State oil companies will move further into the field to extract C3s and C4s for petrochemical production

Sinopec and PetroChina, China's two largest state-owned oil giants, aim to take a share in the fast-growing liquefied petroleum gas (LPG) deep processing industry, attracted by strong profit margins.


LPG availability will fall as Sinopec expands into deep processing

Copyright: RexFeatures

LPG deep processing extracts C3 (propane) and C4 (butane) for processing into products such as propylene, aromatic gasoline, purified gas and methyl tertiary-butyl ether (MTBE). LPG is primarily used as a vehicle fuel as well as in household fuels in China.

The country has witnessed booming investment in LPG deep processing projects over the past two years, driven by hefty margins and soaring demand for downstream products such as propylene.

LPG consumed by these projects accounted for about 20% of China's total consumption last year, according to ICIS C1 data.

Most of these projects are owned by independent refiners or private chemical enterprises, while the two oil majors have made slow progress in building their own units.

However, Sinopec and PetroChina are accelerating their entry into the field, which may intensify competition for LPG feedstock.

Sinopec subsidiary Jingmen Petrochemical started up a 200,000 tonne/year LPG-based aromatization unit in mid-May, marking the beginning of LPG deep processing operations by major refiners. Since early 2011, some of Sinopec's subsidiary refiners have started considering building LPG deep processing projects, but have yet to obtain approval from the parent company, sources from those refiners said.

Sinopec is likely to standardize the installation of LPG deep processing units at subsidiary refiners, but the timetable is still unknown, a source from one of Sinopec's east China-based refiners said.

The deep processing units would be installed primarily in refineries that have high LPG production and difficulty selling the output, added the source.

Currently, Sinopec's refiners will not sign any long-term LPG supply contracts with buyers who use their gas for deep processing, because they want to keep enough resources for their own projects in the future.

Sinopec's and PetroChina's immediate subsidiaries have been slow in building LPG deep processing units because it is relatively difficult to obtain approvals for such non-core businesses. However, their third-tier companies - those whose core business is not refining and petrochemicals - have been active in the field.

Four LPG deep processing projects owned by Sinopec's and PetroChina's tertiary subsidiaries are in operation, two are in trial runs and three are under construction, according to ICIS C1 data. The nine projects have a total capacity of 1.34m tonnes/year.

The tertiary companies vary in their feedstock gas supply and downstream product sales, in line with the two oil giants' differing LPG sales strategies.

PetroChina Kunlun Gas has the right to allocate PetroChina's LPG, as it took over LPG sales from PetroChina's subsidiary refiners in 2009-2010.

Sinopec's refiners have more autonomy than PetroChina's to use their LPG because China's top oil refiner has yet to centralize LPG sales. As a result, Sinopec has more tertiary companies engaged in LPG deep processing projects.

Some independent refiners and chemical enterprises whose core business is LPG deep processing are likely to face more pressure as feedstock LPG supply tightens when Sinopec and PetroChina join them in more deep processing.

Sinopec and PetroChina, with their expansion into the LPG deep processing industry, will cut feedstock gas supply to the market as they will need to keep more for captive use.

In this circumstance, privately run LPG deep processing projects will suffer a larger shortfall of the raw material.

For example, as of late April, Shandong province - a typical market with booming LPG deep processing projects - had about 30 LPG deep processing enterprises with a total capacity of 5.39m tonnes/year, according ICIS C1 data.

If all these units operated at full load, they would need about 14,972 tonnes/day of LPG feedstock containing C4s. However, output of this feedstock in Shandong is only 10,270 tonnes/day.

Furthermore, the province is planning to add 1.45m tonnes/year of new LPG deep processing capacity in the future, which will further tighten the feedstock gas supply.

Author: Lydia Yu and Amity Chen

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