A controversial petrochemical project in the southwestern province of Sichuan quietly went into operation in March, but questions about the China National Petroleum Corp. (CNPC) facility continue to linger.
The project is in Pengzhou, a city of 763,000 people some 15.5 miles northwest of the provincial capital of Chengdu. It was built by CNPC and the Sichuan government, with total investment of $6.1 billion (38 billion yuan) and an expected capacity of 800,000 tons of ethylene and 10 million tons of refined oil every year.
The project’s troubles started in 2008, when a large earthquake struck Sichuan. Later that year, a series of protests halted production.
The facility was back in the headlines this year because of a corruption probe. The Communist Party’s anti-graft watchdog accused Li Dongsheng, the former General Manager of the Pengzhou facility, of illegal bidding related to the project.
Considering CNPC has been losing money on refining, analysts wonder why it continues to back the Pengzhou project.
In October 2007, CNPC said it planned to start production at the Pengzhou petrochemical facility in 2010. But environmental concerns, the May earthquake that killed more than 69,000 people, and an unstable source of crude oil caused the delay of four years.
The project also cost CNPC much more than expected. It planned to invest $2.7 billion (17 billion yuan) in total, out of which $51.4 billion (320 million) yuan would go toward environmental protection. As of May 2013, the company had spent $6.1 billion (38 billion yuan) on the project, and $66 million (410 million yuan) on environmental protection.
The project has been a concern of Chengdu residents. In May 2008, hundreds of people protested against the project. Protesters said they were concerned about building a highly polluting refinery near rivers and in a region prone to earthquakes.
Then a few days after the protest, the large quake jolted Sichuan. Then Sichuan Deputy Communist Party Secretary, Li Chuncheng, told local media that Pengzhou was one of the two regions hit hardest by the quake.
In September 2008, the Ministry of Environmental Protection approved the project, saying it has met all standards. But residents remained worried, prompting the government of Chengdu to make an open promise in April 2013. A government spokesman said: “The government will not allow production of Pengzhou petrochemical until a legal review is completed, and the review process will be open to all citizens.”
However, the city’s government never said when the project had passed the review.
An unstable supply of crude oil was also an important reason work on the project was slowed, a source close to senior executives at CNPC said.
This is because Sichuan lacks large oilfields. The company has two large petrochemical facilities in Gansu province and Xinjiang Uighur Autonomous Region, both in the northwest, that process most of the oil produced in provinces near Sichuan and oil imported from Kazakhstan.
Supply has increased recently as imports from Kazakhstan grew and crude oil production in Xinjiang rose. Work on pipelines linking Gansu and Sichuan was completed in 2013, which made getting crude oil to Pengzhou easier, a CNPC report said.
CPNC’s refinery unit has lost money in eight of the past ten years and for three straight years, its annual reports shows.
A facility like the one in Pengzhou should require investment of about $3.2 billion (20 billion yuan) to build, an analyst at a foreign investment bank familiar with the industry said. It can earn about $4.82 (30 yuan) on each ton after tax, or about $48.2 million (300 million yuan) in a year assuming full capacity, she said.
The investment is huge but the profit margin is thin, the analyst said, so breaking even seems difficult.
“CNPC’s investments in building refineries are not necessarily market-based decisions,” she said. “If you were CNPC, would you have invested in such projects?”
A November report from China Galaxy Securities adds to the pessimism. CNPC will continue to lose about $1.5 on every barrel of refined oil in the next few years, the report said.
The Pengzhou petrochemical investment is about tapping the potential of a less developed market, an analyst at a Chinese investment bank said. “The market for refined oil in the southwestern region is still developing, with lower demand than the market in east, so it takes more capital investment in the earliest phase to help the market mature,” he said.
But the market in the region, namely Yunnan, Sichuan, Guizhou, and Chongqing, has been growing faster than more developed regions in recent years, the analyst said.
The total refining capacity of the four areas accounts for only 0.64 percent of the country’s total capacity as of 2013, making the region a “blind spot” of oil refining, a report from the CNPC Economics and Technology Research Institute said.
The Pengzhou project would give CNPC a chance to expand its footprint in the region and get ahead of rival China Petroleum and Chemical Corp. (Sinopec). Sinopec has more refineries, greater total capacity and better refinery locations than CNPC, analysts say.
In addition, the National Development and Reform Commission, the country’s top economic planner, began loosening control over pricing of refined oil in 2013, and CNPC has seen its losses fall since then.
‘Cyclical in Nature’
CNPC said this year it will put off opening two large refineries due to overcapacity concerns. It delayed a refinery in Kunming, in Yunnan province, by two years and one in Jieyang, in the southern province of Guangdong, by four years.
Its refineries are operating at lower capacity than two years ago, a CNPC report said. In 2011, they were operating at 86.9 percent capacity and last year the figure was eighty-three percent.
Demand has also declined this year. In January and February, demand for petroleum in the country fell by 1.9 percent compared to the same period last year, data from Platts, an energy industry information provider, show. Demand for diesel, the largest portion of refined oil, fell by 2.9 percent.
“Growth in demand for refined oil has slowed from seven percent in recent years to four percent in the past two years,” said the source at a foreign investment bank. “Demand for diesel is unlikely to pick up in the near future given slower economic growth, and car restrictions in large cities will continue to limit demand for gasoline.”
There have been very few plans to build new refineries in China in the last two years, and most projects involve the expansion of old factories, she said.
Jin Yun, an analyst at the CNPC Economics and Technology Research Institute, said the company is correct to delay some projects with low efficiency to counteract the decline in demand.
“The petrochemical industry is cyclical in nature, so it will not stay slow forever,” Jin said. The refinery industry will continue to expand in the future, he said.
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