China’s Shandong province is finally caving into the pressure to rationalize small independent refiners. The province is retiring 500,000 b/d of capacity in 2020-2022 and another 500,000 b/d after 2022, according to ESAI Energy’s recently published China Watch. These closures will blunt the impact of the country’s numerous petchem-oriented refining expansion on the country’s overall distillation capacity. As a result, distillation capacity will grow a net 400,000 b/d annually in 2021 and 2022.
As ESAI Energy’s report details, Shandong alone has 3.7 million b/d of distillation capacity and is home to most of China’s independent refiners. In the past, Shandong government protected its local refiners, but as Beijing has pledged to reach peak carbon emissions by 2030 and achieve carbon neutrality by 2060, steps have been made to accelerate refinery consolidation in that province. In addition, there is growing competition from new refinery-integrated petchem projects which exacerbate the oversupply of transport fuels, squeezing the margins of Shandong’s fuel-oriented refineries. In response, Shandong announced that it would consolidate its refining industry by cutting one third of the province’s total capacity, or 1 million b/d, by 2025. Moreover, in the place of some of the rationalized capacity, Shandong is building a 400,000 b/d petchem-oriented refinery in Yulongdao. Construction started in late 2020 and probably will be completed in 2023.
“Shandong is a bellwether for rationalization and expansion of Chinese refining”, explains Yao Wu at ESAI Energy. “While the focus is often on new projects and the growth capacity, there is also a rationalization process well underway. Four of the nine refineries scheduled for closure were dismantled in 2020, and the rest will close in 2021-2022. Among other things, rationalization in Shandong is evidence that Beijing’s long-term goals to limit carbon emissions are having a real impact on today’s market. But provincial authorities have also joined state oil companies and textile companies in the pursuit of petchem-oriented refining investment that is fueling the expansion of refining activity, hoping to survive in the context of increasingly strict climate policies in China.”
Source: ESAI Energy