Scenarios For China Refining & Petchem Output

By John Richardson

IF exploration and production (E&P) is the dog and refining the tail on the dog, poor old petrochemicals is merely a flee on the tail of the dog, goes the old saying.

Hence last November we reported on the strange case of how China’s drive to hit emissions targets under its 11th Five-Year Plan had led to coal-fired power stations being closed down.

Manufacturers in China’s southern and eastern provinces responded by switching on their diesel-run generators, thereby greatly boosting the demand for gasoil.

Sinopec was forced to cut polyethylene (PE) and polypropylene (PP) production as distillation columns were adjusted to make more gasoil at the expense of lighter ends, such as naphtha.

Gasoil that had been cracked directly in steam crackers was also diverted into the diesel pool.

Apparent oil demand grew by 17.7% in December last year as a result of refineries being run hard to meet the gasoil deficit, according to the International Energy Agency’s February 2011 Oil Market Report.

“China’s refiners also ran very hard in January in order to stockpile gasoil ahead of an anticipated demand spike over the Lunar New Year Period and to keep drought-hit areas well-supplied,” a Singapore based refinery consultant told us.

“This resulted in gasoil exports falling to their lowest level since late 2008.”

China’s trade deficit for February was the largest in seven years and much-bigger than anyone had expected.

This could have been either the result of the Lunar New Year denting demand more than anyone had forecast, and/or that government tightening measures are substantially slowing the economy.

Could this mean that refineries are now sitting on stockpiles of gasoil? If so, will Sinopec cut back on operating rates or try to get rid of middle distillates by increasing supplies to its crackers?

Might Sinopec also re-adjust distillation columns to make more light ends again, including naphtha, thereby further increasing petrochemical feedstock availability?

The resulting increase in domestic petrochemicals production would be a further blow to Asian and Western importers, who, we believe, are facing more supply from the Middle East. OPEC has reportedly increased oil quotas, thereby making more associated gas available to run crackers in Saudi Arabia, Kuwait etc a lot harder.

Our assumptions about China could be entirely wrong, of course, but what we have suggested above is certainly worth checking out. Or perhaps you can point out what is really going on out there?

Another potential complication highlighted by the IEA relates to coal supply.

“Coal shortages could emerge, notably in winter, thus boosting gasoil use again: some observers note that bottlenecks are becoming much more serious, while coal stockpiles are heavily depleted (although imports are growing rapidly),” writes the agency, again in its February report.

This is worth further research. If coal supply is already severely constrained, or becomes so, we could see a repeat of late last year. Local petrochemicals production could be cut back rather than increased.

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