China abandons downstream investments on poor returns
Singapore (Platts)--21Oct2013/1140 pm EDT/340 GMT
Chinese ambitions of expanding in the downstream overseas have all
but ground to a halt as poor profitability has dampened investment
appetite.
State-owned behemoths PetroChina and Sinopec had at one point seemed
keen on expanding in refining and storage overseas but while upstream
acquisitions have continued apace, downstream investment has dwindled
this year.
PetroChina formed the Petroineos trading and refining joint venture with
European chemical and refining company Ineos in 2011, paying just over
$1 billion in cash for a 50% stake in the Grangemouth refinery in
Scotland and Lavera refinery in southern France.
In 2009 it paid $2.2 billion to buy Singapore Petroleum Corp., giving it
a stake in the 290,000 b/d Singapore Refining Co. on Jurong Island.
In May last year there was also strong speculation that it had been
eyeing Valero Energy's shuttered refinery in Aruba, after having leased
5 million barrels of storage at St. Eustatius in the Caribbean.
At the time, analysts had said increasing its refining footprint in
Europe and the Caribbean would give PetroChina a stronger trading
position in the Atlantic Basin.
Expanding its presence overseas was also seen as a way to increase
profitability when its refineries in China were in the red due to
government price controls on gasoline and gasoil.
Nothing came of the Aruba deal and Valero later said it would convert
the refinery into a refined products terminal.
A change in management in the last year as well as an ongoing corruption
scandal involving former senior management officials has also shifted
PetroChina's priorities. While previously it was focused on maximizing
revenue growth, it is likely to adopt a more focused strategy going
forward.
"When we talk with PetroChina management, they talk about a shift in
strategy which is from volume to value and from quantity to quality,"
said an analyst in Hong Kong, who declined to be identified. "They are
saying they want to shift their capex [capital expenditure] more towards
the upstream sector, which is where they can make money, instead of just
losing money in the downstream."
This point has been driven home by Grangemouth, which has been
loss-making due to high costs as well as a significant fall in North Sea
gas output, which feeds much of its petrochemical units. This month
workers threatened industrial action after management proposed salary
and pension cuts as part of cost-cutting efforts to remain viable. Ineos
decided to shut the refinery on Wednesday in order to resolve the
dispute with its workers.
Another factor is that China has undergone significant domestic refinery
capacity expansions in the last few years so there is less urgency to
secure oil products overseas. On the contrary, companies are now likely
to reduce their refining investment to prevent the emergence of an
oversupplied market domestically, said a source at PetroChina.
"The European refineries are pretty much loss making. In future there
won't be any similar investments," he added.
Sinopec has not acquired any overseas refineries since it agreed to
partner in the export-oriented Yasref refinery with Saudi Aramco in
Yanbu in early 2012, after which it spent the rest of the year investing
heavily in storage. The company is the dominant refiner in China and has
concentrated its acquisitions mainly in the upstream in the last decade
to boost production and reserves.
It broke ground at the $840 million West Point oil storage terminal in
Batam, Indonesia a year ago and acquired a 50% stake in Swiss trader
Mercuria's Vesta Terminals in Europe around the same time.
These added to its 50% stake in the Fujairah oil terminal project in the
UAE alongside Singapore-based trader Concord Energy.
In June this year it agreed with Korea National Oil Corp. to build a
commercial storage terminal in Ulsan, South Korea.
Sinopec has said it will use the storage facilities to supplement its
trading activities in Asia and the Middle East, particularly once Yasref
starts operating next year.
While the companies may have scaled down their downstream investments,
they continue to support projects abroad that are either funded by other
Chinese state entities or linked to upstream investment.
Sinopec is reported to be involved in building a new refinery for
Cambodia as part of a loan agreement provided by the Export-Import Bank
of China, while PetroChina's parent China National Petroleum Corp. has
often supported refinery projects in Africa and Latin America.
--Song Yen Ling, yenling.song@platts.com --Edited by Alisdair Bowles,
alisdair.bowles@platts.com
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