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The Sunday Times: Shell coy over £1bn refinery in China

The Sunday Times: Shell coy over £1bn refinery in China

From Carl Mortished in Hong Kong

May 15, 2004

SHELL is talking to CNOOC, a leading Chinese oil company, about building a £1 billion oil refinery in Guangdong province to exploit the region’s demand for fuel.

The refinery would be built next to a vast petrochemical plant that CNOOC and Shell are building at Huizhou in Daya Bay. Costing $4.3 billion (£2.45 billion), the CSPC-Nanhai complex would supply raw chemicals for China’s rapidly expanding plastics and packaging industry.

Shell’s negotiations with CNOOC over a significant energy infrastructure project have emerged as concerns mount about the impact on the price of oil of China’s soaring energy needs.

The refinery, intended to be one of China’s largest with an annual capacity of 12 million tonnes, would help to satisfy a craving for fuel in a key manufacturing zone of the People’s Republic and would also provide naptha, a vital feedstock for the petrochemical plant.

A Shell spokesman confirmed that it had been invited to take part in the CNOOC refinery but was coy about whether a decision had been made. The prospect of a rival oil major taking a stake in CNOOC’s refinery would not be welcomed by Shell, which has been working for nearly two decades with its Chinese partner on a downstream project.

Simon Lam, chief executive of CSPC, the joint venture company, said that integrating the two plants could produce significant savings.

The petrochemicals complex is scheduled for start-up in November next year, when it will import condensate as a feedstock to be cracked into ethylene and propylene, the raw materials for manufacturing plastics. A supply of naptha from an adjacent oil refinery would reduce transport costs and enable the chemical plant to run at higher volumes.

Within a year China, once an exporter of petrol and diesel fuel, has been transformed into a frantic buyer, making a refinery investment a potentially lucrative venture. An expansion in private car ownership has stimulated demand but China’s creaking power grid has created a surge in diesel consumption.

According to David Hurd, head of oil research at Deutsche Bank in Hong Kong, the swing factor has been consumption of fuel oil. Last year it grew at more than twice the rate of China’s GDP, which advanced at the heady rate of 9.1 per cent. Mr Hurd said: “When you have a surge in GDP, China starts sucking in fuel oil. We no longer have much spare refinery capacity left because people have not been building refineries.”

The factories in Guangdong province that propel China’s economic growth fear a summer of blackouts as local power grids struggle to maintain supplies. The solution has been diesel generators and the surge in consumption has helped to propel the People’s Republic to the top tier in world oil demand, surpassing Japan last year to second place after the United States. Meanwhile, Guangdong’s workshops and factories are clamouring for plastics for packaging and components, a demand that the petrochemical plant will satisfy only in part. Mr Lam said he was unconcerned about competition from rival chemical plants under construction.

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