Singapore (Platts)--26Jun2007

Privately-run refineries in east China's Shandong province will increase
their total nameplate straight-run fuel oil refining capacity by some 10
million mt/year to 50 million mt/year (1.15 million b/d) by the end of next
year, industry sources who had just visited most of the area's refineries told
Platts Tuesday.

     "A lot of them (independent refineries) are expanding or renovating their
residue fluid catalytic crackers and delayed cokers, in a way to increase
refined oil products like gasoil and gasoline's output and raise their
refining efficiency," one of the surveyed sources said.

     Currently, more than 30 independent refineries with a refining capacity
of 40 million mt/year are located in Shandong, consuming more than 80% of
China's imported straight-run fuel oil as major feedstock to produce refined
oil and petrochemical products. 

     About 4 million mt of straight-run fuel oil was imported into Shandong in
the first five months of 2007, according to the latest figures issued by the
Shandong provincial customs authorities. 

     With refining capacity being expanded, independent refineries in Shandong
are expected to consume 23.6 million mt of domestically-produced and imported
straight-run fuel oil in 2008, 3.6 million mt more than current annual demand,
sources predicted. 

     Nowadays more than 50% of independent refineries' feedstock comes from
state-owned refineries, according to sources. 

     The expansion in secondary refining is not expected to boost imports in
2008. Some of the refining capacity might not be brought on stream
immediately, especially if guidance prices for gasoil and gasoline set by the
Chinese government are not increased. 

     Independent refiners must sell their refined products at or below
state-set prices to be competitive, but pay internationally-set prices for
their straight-run fuel oil. 

     CONFOUNDS OFFICIAL PLANS TO DISCOURAGE INDEPENDENT REFINERIES  
   
     The expansion plans confound China's official efforts to close the
industry down, or at least discourage the independent refiners from continuing
business. China stated in its 11th five-year plan, spanning from 2006-2010,
that the central government would seek to close small refineries and crude
processing facilities with low efficiency--especially in regions with surplus
refining capacity.

    "As state-run refineries are also expanding to meet growing domestic oil
products demand, Shandong refineries' capacity could be more than needed in
2006-2010," one industry observer said. 

    Currently, the annual average run rates of independent refineries in
Shandong is around 50%.

    Chinese oil giant Sinopec is building a 10 million mt/year Qingdao
greenfield refinery in Shandong, which is expected to come onstream in 2008
and put more pressure on local independents. 

    However, "local refineries in Shandong are well-sheltered by the local
governments, which recognizes the industry as a significant and growing source
of tax revenues," another source said.