by Florence Tan

05-08-09 PetroChina is taking advantage of a trough in the petrochemical and refining cycles to gain footholds in two strategically important oil trading hubs: Asia and Europe.
The downstream push puts it at odds with domestic peers China Petrochemical Corp., known as Sinopec, and CNOOC which have sought to capitalize on low oil prices and tight credit markets to buy producing oil fields abroad.

However, PetroChina's recent acquisition of a controlling stake in Singapore Petroleum and interest in other overseas plants will help raise its global profile, integration as well as ability to tap existing marketing networks.
"The best time to acquire refineries is when margins are low," said Paul Ting, president of consultancy Paul Ting Energy Vision, adding former TOSCO chief executive Tom O'Malley was well-known for such purchases.

PetroChina is now acquiring the rest of SPC's shares, and reports say it is also in talks with UK chemicals firm Ineos to buy the Grangemouth refinery in Scotland. In July, the Chinese government approved PetroChina's plan to acquire a 49 % stake in Nippon Oil's Osaka refinery. Company president Zhou Jiping has said it wants to take advantage of the relatively low oil prices to seek out opportunities overseas.
"PetroChina's more aggressive role in global refining acquisition indicates the desire of China to build integrated oil-refining systems," Ting said. In contrast to Sinopec, PetroChina has excess crude oil to supply refineries globally, he added.

Existing networks
In addition to their potential as outlets for PetroChina's crude oil, the refineries will provide established marketing and distribution networks in Asia and Europe.
"One of the key problems for emerging market giants is that they don't have access to customers and markets, which is basically due to a lack of credible and experienced sales, marketing and technical service personnel," said Ian Davenport, president of US-based consultancy Davenport International Associates.

Ineos, the world's third-largest chemicals company and the UK's largest private company, acquired BP's petrochemicals business Innovene in 2005. The deal included the Grangemouth facilities and the Lavera refinery in the south of France.
The 210,000-bpd Grangemouth refinery is strategically important because it's connected to the North Sea Forties pipeline, which carries about a third of the UK's oil to shore.

If a deal goes through, PetroChina will have a partner with access to markets in the US and Europe and provide technology for making petrochemicals in China, Davenport said. Similarly, PetroChina will also have access to SPC's production, marketing and distribution network in Asia, said Serene Lim, analyst at DMG & Partners Securities.
"Having been in the business for over 30 years, SPC has a steady stream of marketing customers," she said.

Last year, SPC traded 74.2 mm barrels of oil products, with about 60 % produced at its 290,000 bpd joint-venture refinery on Pulau Merlimau with Chevron. However, PetroChina is unlikely to enter the US market given the past experience of Chinese companies attempting mergers and acquisitions there, analysts said. CNOOC abandoned a $ 18.5 bn deal for California-based Unocal in 2005 in the face of opposition from US Congress.
"I think the US would be one of the last places for China to invest, unless some kind of government-to-government deals can be made," Ting said. "This, however, doesn't mean that China wouldn't do deals with US firms with a global refining presence."

Crowded China
PetroChina's overseas expansion has come at a time when new facilities continue to be built back home, despite slowing demand.
"The refining market is crowded. It's not easy to find a place to build a new refinery," said Bai Xuesong, consultant at China International Chemical Consulting Corp. PetroChina already operates 13 refineries, mainly in northern China, and has about 40 % of the market after a raft of expansions in the past few years. In addition to building new refineries in Guangxi and Sichuan provinces, it has joint ventures with foreign state-owned oil companies including Petroleos de Venezuela, or PdVSA, Qatar Petroleum and Russia's Rosneft.

Another Beijing-based consultant who declined to be named said PetroChina and Sinopec are worried about possible oversupply of oil products and petrochemicals, and may opt to expand existing refineries rather than build new ones in the 2011-2015 period. The legacy of splitting China's refining assets into two regions, with PetroChina dominant in the north and Sinopec in the south, remains strong despite PetroChina's push into the more lucrative southern area, analysts said.
Another Beijing-based industry observer said it's also becoming more difficult to find new sources of crude oil. China's economic planner -- the National Development and Reform Commission -- has told the oil companies that it will only approve projects with long-term feedstock sources.

Despite the benefits thatoverseas investments bring, some analysts said it remained unclear when global demand for oil products will recover, while operational costs for these facilities are higher than in China.
"The outlook is still bleak" especially with new refining capacity from India, Vietnam and China coming on stream in the second half of this year, Lim said.
Florence Tan, an energy reporter based in Singapore, mainly covers the Asian crude oil market for Dow Jones Newswires and formerly spent five years covering petrochemicals.