China's State Oil Conglomerates Backtrack On Refineries Plan

China’s state oil companies are delaying the expansion of new refineries as the market of refined oil products shows obvious signs of a glut.

A postponed plan is the construction of a refinery near the city of Tianjin in northern China. Signed in 2010 as a joint-venture between Russia’s Rosneft and China National Petroleum Corp., the refinery was scheduled for completion in 2017 and could process 13 million tonnes of oil, of which 9 million would come from Russia.

Another delayed expansion is CNPC and Petroleos de Venezuela SA’s mega joint Jieyang plant in the eastern part of the Southern Guangdong province. The $9.08 billion refinery was originally set for opening in 2014.

“Almost all big refinery projects have been put off or delayed,” Li Li, research and strategy director at ICIS China, tells FORBES, adding that the $9 billion Sino-Kuwait Guangdong Integrated Refinery is also one of them.

The delays come at a time when China’s rapidly increasing processing capacity has resulted in a domestic supply glut. China added about 250,000  barrel-per-day of refining capacity in 2013 and total capacity is expected to be in the ballpark of 12 million bpd in 2014.However, The country’s oil consumption registered in 2013 the slowest rise in more than a decade. CNPC forecasted that demand would grow about 4 percent in 2014, driven by a growing consumption of gasoline.

The result is that China became a net exporter of refined oil products for the first time in four years in March. Exports of oil products were 650,000 barrels a day in March, while imports totalled 560,000 bpd.

“It is beyond doubt that there is an overcapacity in the refining sector… the rate of capacity utilization is low at every step,” Wan Xuezhi, an analyst at CIConsulting, tells FORBES, adding that there are still at least 30 refineries being planned or under construction.

However, Li says excessive capacity is no more than 5 percent of total demand, indicating that the sector is healthy in general and not likely to follow the path of the steel industry.

Still, investors are pulling out of the refining sector. BP Plc cancelled the plan to invest in Chinese refinery operated by PetroChina, according to the International Energy Agency.

International investors know what is going on… They are not putting their money blindly,” Li says.

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