by Florence Tan

04-06-08 China National Petroleum Corp.'s (CNPC) pledge to build a refinery in Niger is the latest in a raft of major downstream deals, but is this expansion a smart strategy or an unnecessary move?
Capitalizing on emerging economies' inability to invest in domestic energy infrastructure, CNPC is agreeing package deals with governments that will see it pay for new refineries in exchange for much-needed access to oil and natural gas reserves. The footprint of China's biggest state oil firm already extends from Japan to Latin America on the basis of deals already signed, although many of these agreements aren't binding and there are question marks over whether plants will ever be built.

According to China's Ministry of Commerce, CNPC plans to invest $ 5 bn in developing Niger's Agadem oil block and will build a refinery to process 1 mm tons of crude each year, equivalent to 20,082 bpd. It will also build a 2,000-km pipeline in the country.
"That (refinery investments) could be what they need to offer in order to get what they need," said Sat Roopra, a consultant at Wood Mackenzie said.

China's domestic oil output is stagnating, forcing its state oil companies to look further afield for growth. But high oil prices have limited the number of sellers, meaning companies have to be more innovative in what they offer to secure priority for oil blocks.
CNPC, which is the parent company of PetroChina, has signed agreements in Costa Rica, Syria and Chad that are similar to its commitment in Niger. Notably, the pace of deal-making has quickened in the past 2 years.

The company plans to build a refinery in Costa Rica to process heavy crude from Venezuela, and it has also agreed to a $ 2 bn project in Syria where a 100,000-bpd complex will process crude from the Deir Ezzor area when completed in 2011. In Chad, CNPC will build the country's first refinery in the capital N'Djamena after signing an agreement in Beijing last year.
But not everyone is convinced by the rationale for such investments, arguing the money would be better spent elsewhere.
Brynjar Bustnes, an oil analyst at JP Morgan, said: "Unless the Chinese companies are making these foreign downstream investments for upstream access, I see little justification for doing it."

More benefits could be gained from the same cost if Chinese companies focused more on strengthening their hand in refining and marketing at home, he said.
Bustnes said that CNPC should seek more foreign investors for its domestic refinery projects, adding: "More importantly it may, at some point, force a more hands-off policy by regulators."

International footprint
In addition to satisfying oil demand in the host countries, investing in refineries can also help CNPC gain a foothold in the international market and profit from exports, said a Beijing-based consultant.
"CNPC and Sinopec should invest in refinery and petrochemical plants overseas as these projects will help to secure resources and allow companies to have an international footprint," he said.

In Sudan, the company is already exporting from its refinery there, selling gasoline and liquefied petroleum gas to neighbouring countries or elsewhere in the Middle East. It has been operating the Khartoum refinery since 2000, producing 2.2 mm tons of gasoline, kerosene, diesel and LPG per year. Last year, CNPC started up a 600,000 tpy refinery in Adrar, Algeria.
These refineries may allow CNPC some flexibility in obtaining products from overseas to meet China's demand without having to pay high international prices, the consultant said.
"They should have done it earlier," he said, adding that this would probably have partially shielded China from high international prices and severe product shortages.

China has been hit by repeated shortages of gasoline and diesel in recent years, with local refineries squeezed on one side by high crude oil and on the other by domestic price caps for oil product which haven't been eased for six months. While PetroChina and Sinopec refineries are running flat out, spurred by government demands to keep the pumps flowing and encouraged by big compensatory handouts, privately owned teapot refineries, which make up around 10 % of the country's capacity, are either shut or running at low rates.
This has forced China to turn to international markets where it has pay high prices to import large amounts of distillates. One analyst said imports would hit record-highs in 2008, based on sharp increases seen so far this year.

Apart from its Africa, Latin America and Mid-East efforts, CNPC has been active closer to home. It said recently it will hold talks with Japan's Nippon Oil, Japan's largest refiner, to invest in its 115,000 bpd Osaka refinery.
Nippon Oil will be responsible for operations, while CNPC will be in charge of crude oil purchasing and oil product sales from the refinery. The two aim to set up this joint venture by April 2009, with Nippon Oil holding a 51 % stake and CNPC holding 49 %.

However, some analysts aresceptical, given high operating costs in Japan.
"I can't see the benefits of cooperating with Nippon Oil," said the Beijing-based consultant. Those higher costs could mean losses when the products were sold in China, he said.
JP Morgan's Bustnes agrees. "I really don't see the rationale behind it from CNPC's perspective, except for the foreign partner who wants access to a potentially profitably big retail market."