Hengli offers glimpse into China’s refining future
September 26, 2018
The private company is gearing up to open one of China’s most advanced refineries as it pursues horizontal integration strategies, writes David Flanagan
The impending start-up of Hengli Petrochemical’s new refinery on Changxing Island in Dalian City could be a significant turning point for the independent downstream sector.
The 400,000 bpd unit will be integrated with Hengli’s existing petrochemical operations on the island, adding a high-specification paraxylene (PX) production capability to Hengli’s extensive slate of petrochemicals such as ethylene, purified terephthalic acid (PTA) and materials for a wide range of applications in textiles, thermal power and machinery.
Hengli is the first independent company to develop a world-class refinery in China, with the Changxing plant’s scale far in advance of other private refiners that typically operate plants with around 100,000 bpd of capacity or less. The development also suggests a shift in focus for the sector, away from a vertical model that embraces expansion into upstream assets and retail fuel supply towards a new form of horizontal integration with downstream wholesale chemical products trade.
Hengli built its petrochemical facility at Dalian in 2010, and completion of its new refinery is scheduled for the fourth quarter. Final steps include the purchase of valve actuators and gearboxes for flow control systems at the refinery’s tank farms.
US contractor Honeywell UOP provided flares and low-nitrogen burner technology to control emissions to within half of the limit prescribed under China’s new emissions regulation. The government’s emission standard for the refining industry required that nitrogen oxide (NOx) emissions from industry furnaces should be reduced from 150mg per cubic metre in 2015 to less than 100mg by 2018.
China has set vigorous standards to eliminate pollution that is blamed for a range of problems, including acid rain and increased surface ozone concentration. Hengli has therefore come into the market at a time of greater regulatory burdens in China, driven by the far-reaching “blue sky” policies, but has embraced the challenges.
The Hengli complex now has more than 25 processes in operation and is on course for test runs in October. Rival operators such as China National Petroleum Corp. (CNPC), which also owns an oil refinery at Dalian, now face intensified competition and will eventually need to invest in newer facilities to remain competitive.
As well as the technical and operational progress, Hengli has moved ahead with feedstock agreements.
Singapore-based trading company Hengli Oilchem, majority-controlled by Hengli with state-run Sinochem owning a 20% stake, was established to support procurement activities. The company will buy crude on the open market for processing at the plant and has assembled a small team of traders led by a former buyer from Japan’s Itochu.
Hengli Oilchem was established following approval of Hengli’s application to import up to 20 million tpy (400,000 bpd) of crude oil by the National Development and Reform Committee (NDRC) through its Liaoning regional branch in April. The trading company started up operations in the summer and has already signed supply contracts with state-owned Saudi Aramco and Brazil’s state-run Petrobras. The first tanker of Brazilian oil arrived and was berthed at Dalian in late June to offload to the site’s tank farms.
On the sales side, Hengli signed an agreement with Sinochem to co-operate on supply and marketing of oil products in January.
While teapot refiners have experienced their share of challenges recently, the entry of Hengli’s refinery signals a further stiffening of competition. The project will set new standards for the private refining market, becoming a benchmark for the independent downstream.
Already following in Hengli’s footsteps is Zhejiang Petrochemical Co. (ZPC), which is developing a 400,000 bpd refinery in Zhoushan. This development is also tied into petrochemicals production, aiming to provide a degree of diversification away from a slate of conventional oil products.
The private joint venture refinery is set for a 2020 start-up and is also expected to sign agreements for the import of crude oil from Saudi Aramco and Petrobras, based on earlier applications. ZPC intends to expand the initial capacity to 800,000 bpd in the early 2020s.
The influx of new private capital into the downstream has not been stymied by perceptions of future over-capacity, but this is mainly because the focus appears to be on horizontal integration.
A trend is emerging of a more diversified style of high-capacity private refineries, integrated with petrochemicals production to achieve economies of scale and synergies in desulphurisation nitrogen reduction, supported by a dedicated crude oil import capability. Bigger independents want to take on the dominant state refiners by focusing on efficiency and strict emissions control.
Challenges will emerge, including the risk that tie-ups such as the products marketing agreement with Sinochem and their shared interest in the Singaporean oil trading company may obscure competitive relationships. The trade war between the US and China could also limit Hengli’s crude sources or even drive up technology maintenance costs, since the refinery is being built using some US components.
Hengli is gambling on the success of its horizontally integrated approach to create a large-scale downstream operation. Given that conventional oil product consumption growth has a limited shelf life while petrochemicals demand is forecast to boom, it seems as though the private company has backed the right horse.