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The Wall Street Journal: Exxon Forms $5 Billion Joint Venture In China With Sinopec, Saudi Aramco

March 30, 2007 4:53 a.m.

BEIJING — In one of the biggest deals of its kind, U.S. oil giant Exxon Mobil Corp. Friday signed a deal with Saudi Aramco and China Petroleum and Chemical Corp., better known as Sinopec, to expand an oil refinery in China’s rich southern province of Fujian and add on a vast chemicals facility for completion by 2009.

With China still tightly regulating fuel prices, big oil is increasingly looking at the country’s surging demand for chemicals.

Exxon Mobil and Saudi Aramco will each own 25% of the roughly $5 billion project, with the rest held by Sinopec and the local government. The investors will more than triple the existing oil refinery at Quanzhou to a capacity of 240,000 barrels of fuel a day. The deal has been under negotiation since 2001. Key approvals were only handed down earlier this year. Aramco will provide oil for the project.

“When you look at price controls, refining is a difficult business in China,” Steve Simon, Exxon Mobil’s senior vice president and director in charge of downstream refinery and chemicals, said in an interview. Instead, the new venture will rely initially on its integration with a vast chemicals facility to tap into China’s quickly growing market for chemicals, where prices aren’t regulated. The new project will convert oil into the feedstock for plastics, paints, fibers and other basic chemicals essential to China’s surging manufacturing sector.

Mr. Simon said that by 2015, about half of global chemical demand will come from Asia, with China accounting for one-fourth. Royal Dutch Shell, BASF AG, and BP PLC are among the major players already investing in petrochemicals in China.

The signing Friday at the Great Hall of the People, China’s equivalent to Capitol Hill, also marks Exxon’s first big foray into retail gasoline marketing in China. A separate contract was signed by Sinopec, Exxon and Saudi Aramco for a retail joint venture to manage and operate around 750 filling stations and a network of terminals in Fujian. Royal Dutch Shell and Total SA have already established limited regional networks.

As China grows richer, its middle class is buying cars. Even as the growth in demand for fuel in Japan, Europe and the U.S. tapers off, Exxon expects China’s fuel demand to grow at pace of 4.3% over the next five years, creating an attractive market, Mr. Simon said. But China’s refiners have been operating at a loss because of government fuel-price controls. China fears raising fuel prices could spark inflation or lead to social unrest among its poor farmers.

Mr. Simon said he was confident the government would be moving to relax price controls, something officials have said, but had no indication of any timetable when that could happen.

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