Bloomberg: Cnooc Parent to Buy Small Refineries, Build Storage (Update1)

By Winnie Zhu

Jan. 7 (Bloomberg) — China National Offshore Oil Corp., the nation’s third-largest oil company, plans to buy small refineries and build storage depots in eastern China’s Shandong province to expand into oil processing.

The state oil company has signed a memorandum of understanding with the Shandong provincial government, Liu Junshan, a Beijing-based spokesman for China National Offshore, parent of Cnooc Ltd., said by telephone today.

China National Offshore is buying so-called teapot refineries to diversify from oil exploration to oil processing and benefit from anticipated relaxation of fuel-price controls. The combined refining capacity of such plants, based mainly in the provinces of Shandong and Guangdong, is equivalent to about 40 percent of the oil-processing volume at China Petroleum & Chemical Corp., or Sinopec, Asia’s biggest refiner.

“This is a good time for the state oil company to acquire such money-losing refineries,” Zhang Guojun, an oil analyst with Pingan Securities Co., said in Shanghai. Cnooc Group will gain from changes to the nation’s fuel pricing system and surging energy demand, he added.

The government will steadily reform the pricing of oil products to reflect crude costs, the National Development and Reform Commission, China’s top economic planner said Dec. 10. Chinese oil refineries are losing money from processing crude into gasoline and diesel because of rising crude prices and government caps on fuel prices.

Price Controls

The Chinese government controls fuel prices to limit their impact on inflation. Benchmark crude oil prices in New York have gained 73 percent in the past year, reaching a record $100.09 a barrel on Jan. 3.

China will replace the U.S. as the largest oil user early next decade as its demand more than doubles to 16.5 million barrels a day by 2030, led by rising car ownership, the International Energy Agency said Nov. 7.

Shandong’s 2006 Gross Domestic Product expanded 18 percent, outpacing the nation’s 11.1 percent growth rate, to 2.2 trillion yuan ($300 billion), making the province the second largest in China.

“We have chosen Shandong as one of the major regions for the future development of our company,” Liu said. China National will build oil depots capable of storing 1 million tons of crude and fuels in the coastal province, he added.

The oil company is building its first oil-processing plant in Guangdong. The plant at Huizhou, close to its chemical venture with Royal Dutch Shell Plc, will start processing 12 million metric tons a year of crude into fuel products once it becomes operational in June.

Sinopec refined 76 million tons of crude oil in the first half of last year. China’s teapot plants are able to turn about 60 million tons of fuel oil into oil products each year.

To contact the reporter on this story: Winnie Zhu in Shanghai at [email protected] .

Last Updated: January 7, 2008 00:09 EST

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