A profile of China's oil industry

Following is a profile of China's petroleum and chemical industry, updated on February 21, 2005 with figures for the whole year of 2004:

Overview:
China produced 174.503 mm tons of crude oil in the whole year of 2004, rising 2.9 % year on year. The growth is moderate, but still 1-2.3 percentage points higher than that of previous three years. The whole year output of natural gas stood at 40.769 bn cm, up 18.5 %. The crude oil processing volume reached 273.067 mm tons, up 13.7 %.
The output of major oil products amounted to 189.29 mm tons, up 15 %, and the growth rose 5.2 percentage points year on year. Among them, the output of gasoline was 52.498 mm tons, up 10.2 %; kerosene, 9.708 mm tons, up 14.1 %; diesel oil, 101.621 mm tons, up 19.5 %; lubricating oil, 101.621 mm tons, up 13. 6 %; and fuel oil, 20.826 mm tons, up 7.6 %.

Promoted by the sustained rapid development of the automobile, iron and steel, non-ferrous metal, chemical, electric power and transportation industries, China's oil consumption and demand continued to present a strong upward trend. The total demand for crude oil in 2004 approached to 290 mm tons, up 15 % over 2003, and the growth was four percentage points higher than that of the previous year. Among oil products, the demand for gasoline accounted for 52.16 mm tons, up 11.8 %; kerosene, 12.32 mm tons, up 19.2 %; diesel oil, 103 mm tons, up 16.7 %; fuel oil, 51.77 mm tons, up 20 %.
Pulled by the strong demand, China's oil supply increase was further accelerated in 2004. The total supply of oil (including crude oil and oil products) was composed of 364 mm tons produced domestically, up 8.9 %; 160 mm tons imported, up 34.6 %; 16.95 mm tons exported, down 22.8 %.

The total supply had a net increase of 507 mm tons over 2003, which was 74.89 mm tons or 17.6 % more than the net increase of 2003, and the growth was 6.6 percentage points higher than that of 2003. Among them, the supply of crude oil had a net increase of 292 mm tons, which was 39.14 mm tons or 15.5 % more than that of 2003; and the supply of oil products had a net increase of 216 mm tons, which was 35.74 mm tons or 20.5 % more than that of 2003.
The import of oil (including crude oil and oil products) continued to grow by a big margin in 2004. The whole year import reached 160.60 mm tons, scoring a sharp increase of 41.24 mm tons or 34.6 %. Among them, the import of crude oil accounted for 122.72 mm tons and after deducting 5.49 mm tons of export, the net import reached 117.23 mm tons, soaring 41.3 %; the import of oil products amounted to 37.88 mm tons and after deducting 11.46 mm tons of export, the net import reached 26.42 mm tons, skyrocketing 12 mm tons or 83.2 %.

The import of crude oil has made up a rising proportion of the additional supply in the year, which was 26.9 % in 2001, 29.4 % in 2002, 34.9 % in 2003 and 41.3 % in 2004. The growth showed a trend of acceleration. It reflects that the fast-growing Chinese economy relies more and more on the imported crude oil.
The oil price hike was the mainstream of the international oil market in 2004. As the average price of crude oil on the international market zoomed up by 30 % as compared with that of 2003, China's import cost had a big increase. The crude oil price hike cost China an extra $ 7.068 bn in its oil import in 2004.

China imported a record 122.72 mm tons of crude in 2004, growing 34.8 %, the fastest for the last four years. The total value was $ 33.91 bn. The per-ton price was $ 58.9 higher than in 2003. China's oil import mainly came from more than 20 countries, with Saudi Arabia (17.24 mm tons) and Oman (16.35 mm tons) being the first two, followed by Angola and Iran. Import from Russia grew the fastest, standing at 10.77 mm tons.
China's import of finished oil rose by 34.1 % to 37.88 mm tons in the same period, valued at $ 9.25 bn, up 57.7 %.

The high price of oil products remained firm on the Chinese market in 2004 and it surged up twice in May and October, making the supply tighter. Though the tight supply was eased remarkably and the price also fell two percentage points in December in wake of two cuts of the wholesale price of oil products, the general level of the oil product wholesale price in the whole year of 2004 was still 12.5 % higher than in 2003.
Among them, the price of No. 0# diesel oil soared 11 %; No. 90# gasoline, 11.2 %; No. 93# gasoline, 11.3 %; No. 20# fuel oil, 10.2 %; and heavy oil, 23.2 %.

China's petroleum and chemical industry realized 2.425 t yuan of gross output value, 2.33 t yuan of sales revenue and 270 bn yuan of profits in the whole year of 2004. Both sales revenue and profits set historical records, according to the China Petroleum and Chemical Industry Association. While chalking up a big rise in profits, the petroleum and chemical industry achieved remarkable results in readjusting the mix of products. The output value generated by new products of the whole industry grew 7.5 % year on year in the first 11 months of 2004.
In the whole year, China started construction of 3,693 projects concerning petroleum and chemical industry, 337 more than in 2003; and the number of projects completed reached 1,168.

Main investment is concentrated upon processing of crude oil and natural gas and production of organic chemical raw materials and synthetic materials. The industry had planned to invest 677.6 bn yuan in 2004, an increase of 26.5 %. However, the actual investment in the January-November period accumulated to 655.48 bn yuan.
The industry's investment is heavily injected into nine municipalities, provinces and regions including Tianjin, Inner Mongolia, Shanghai, Jiangsu, Zhejiang, Fujian, Shandong, Guangdong and Xinjiang, which accounted for 422.58 bn yuan or 62.4 % of the year's total planned investment.

China's output of crude oil in 2003 totalled 169.316 mm tons, up 1.5 % year-on-year; that of natural gas, 34.128 bn cm, up 6.8 %; and that of refined oil products, 242.551 mm tons, up 10.8 %. The growth rate of crude oil and natural gas slowed by one and 1.3 percentage points from the previous year respectively.
China imported 91.1263 mm tons of crude oil in 2003, up 31. 29 %, and exported 8.1333 mm tons, up 12.84 %, with the net import reaching 82.993 mm tons, up 33.43 %. China imported 28.239 mm tons of refined oil products in 2003, up 38.8 %, and exported 13.847 mm tons, up 29.3 %, with the net import reaching 14.392 mm tons, up 49.23 %. China became net oil importer in 1993 and imported 69.41 mm tons crude oil in 2002.

China's domestic crude oil consumption totalled 252.31 mm tons in 2003, growing 10.15 % over 2002. The rapid development of the national economy, especially the heavy and chemical industries has been the main driving force behind the rapid rise in the oil demand.
Profits in China's petroleum and chemical industry increased by a record high of 43.6 % in 2003, thanks to an oil price increase and strong domestic demand. The profits of the petroleum and chemical industry reached 176.4 bn yuan ($ 21.3 bn) in 2003, making the industry one of the richest in China's economy. Revenue rose by 26.4 % year-on-year to 1,800 bn yuan ($ 217.7 bn).

Outlook:
The consumption demand on the Chinese oil market is predicted to maintain the sustainable upward trend in 2005. The country's oil production will upgrade steadily, while 40 % of the oil supply will still depend on the import. The supply and demand will basically be balanced. The market price will keep firm at a high level with small drops. After falling to a relatively stable position from the high level, the price will post a trend of picking up modestly.
In 2005, the gross output value (at current price) of the petroleum and chemical industry is predicted grow 10 %-15 %, sales revenue, 9 %-14 %, and profits, around 10 %, according to the China Petroleum and Chemical Industry Association.

Output of main products will continue to expand, and many of them may grow faster than expected. For instance, China had planned to produce 3.8-4 mm tons of polyvinyl chloride (PVC) by 2005, but the target was reached as early as in 2003. It is predicted that the output of PVC will hit 5.7 mm tons in 2005, 40 %-plus more than the target. The output of chemical fertilizers is predicted to reach 44 mm tons in 2005, 3-6 mm tons more than the original target
The output of oil products will come up to a rather high level. Among them, the output of crude oil is predicted to top 172 mm tons; gasoline, 54 mm tons; and diesel oil, 106 mm tons. Following is a table showing the output of major oil and chemical products in 2000-2005.

Growth of supply and processing volume of crude oil is forecast to slow down in China in the first quarter of this year, according to industry experts. The country's monthly output of crude oil is estimated to stand at 14.70 mm tons in the following two or three months because of the sharp rises of production on some oilfields of the China Offshore Oil Corp.
Supported by the brisk demand for petroleum, processing volume of crude oil will maintain at a high growth in the first quarter, averaging at about 23 mm tons per month. But due to the high growth in the previous year, the growth of crude oil supply and processing volume will slow down a bit.

At the same time, import of crude oil and net import volume will maintain high in the period, keeping at more than 10 mm tons per month, likely to pose an increase year on year. But the growth rate will be not as high as the first quarter of last year. Production growth of most oil products will also slow down in the first quarter based on the high growth in the same period last year, and that of some other oil products may go down. Import of oil products will increase in the first quarter, while growth export will be affected by the country's abolishment of export drawback on most of the oil products.
Anticipating a demand for 51 mm tons of fertilizer this year, China will produce 47 mm tons and import three to 4 mm tons in 2005 to keep the market balanced, the National Development and Reform Commission said. China's total consumption of fertilizer expects to increase by 5. 6 % in 2005 while domestic production will rise by just 4 %, the commission said.

China's consumption of fertilizer reached 48.3 mm tons (in 100 % purity) in 2004, up 9.5 % over 2003, while its domestic fertilizer output reached 45.2 mm tons with a hefty increase of 16.2 %, according to the statistics by the commission. Because of the government's increased attention to grain production following a five-year decline, there has been strong demand for fertilizer since last year, and the price has climbed. Recently, tariffs have been imposed on fertilizer export.
Oil refining and ethylene industries, are the leading and core sectors, and also the development focus of China's petroleum and chemical industry in the years to come. For China's oil refining sector, main tasks are to readjust the structure, raise the oil refining and processing level and efficiency; and for the petrochemical industry, they are to increase the total ethylene production, form several world-level ethylene production bases of international competitiveness, expand the proportion of synthetic resin in production of three major synthetic materials, and accelerate developing the raw materials and monomer of synthetic fibres.

The readjustment emphasis of China's oil refining industry will be put on eliminating a batch of small backward oil refining facilities and building several import crude oil processing bases; perfecting the supporting facilities of oil refining capacity and raising the quality of oil products; and enhancing the ratio of diesel oil to gasoline and increasing the output of products of high added value and clean oil products as well.
Synthetic resin, the downstream petrochemical product of ethylene, now is in great demand in China, and China has to import it in bulk to satisfy the fast-growing demand. So polyethylene, polypropene, polyvinyl chloride, polystyrene and ABS resin will all be among the products to be developed rapidly in China.

Energy-efficiency, environment-friendliness and resource-efficiency are the important content and prerequisite for China's petroleum and chemical industry to keep a sustained, rapid and healthy development.
In addition, fine chemical and special chemical products will become new points of growth. The country's key industries including machine-building, electronics, automobile, construction and information sectors will need a great varieties of fine chemical and special chemical products.

The fine chemical and special chemical industries should focus on developing such varieties as new type of chemical materials, new type of high-grade paints for the use of automobile, construction and communications, functional materials and adhesive, special chemical products and narometer materials for the use of electronics and information industry.
Moreover, feed additive, food additive, paper-making chemicals, water-treatment chemicals and biochemical products will also be developed rapidly. China is unlikely to adjust downward the retail prices of petrol, said Jiang Jiemin, president of PetroChina. The pricing power for terminal market rests with the related State Council department instead of with PetroChina.

When the international oil price broke the $ 55 point, China did not raise the retail price of petrol, thus plunging PetroChina and Sinopec into deficit. Recently, when the international oil price dropped, China still maintained the prevailing prices in the country and that is associated with the domestic prices in the previous period, which was not put in its right place.
China adjusted the petrol prices on three occasions from March to August 2004. In Beijing, the 90# gasoline rose to 3.42 yuan per litre and 97# gasoline rose to 3.90 yuan per litre. After that, despite the mad rise in international price until it reached $ 55 per barrel, China maintained the domestic prices, which were lower than the international price. This has lured foreign airplanes and ships to get refill in China.

Then the international prices of oil began to fall until December 10, 2004, when the New York futures dropped to $ 40.71 per barrel. PetroChina and Sinopec adjusted the ex-factory prices of diesel and clean petrol. But the ex-factory price adjustment would not affect the interests of the petrol producers. But it is up to the State Development and Reform Commission to decide whether or not the retail prices of petrol and other oil would be raised.
Following sharp hikes in 2004 pulled by upstream products, the prices of chemical products in China are expected to decline moderately in 2005, by some 5 %. The expected fall of chemical products prices in 2005 should be attributed to a number of reasons, say, slowdown of global economic growth, decline of international oil price and domestic macro economic control measures which may curb the growth of demand.

Anyway, as the government pays great importance to agricultural development and farmers have higher enthusiasm for growing crops, the farming film demand will increase in 2005, which will bring up the demand for polythene.
China has planned to produce 46.5 mm tons of fertilizers in 2005, which will comprise 33.50 mm tons of nitrogenous fertilizer, 11 mm tons of phosphate, and 2 mm tons of potash, according to the State Development and Reform Commission. China's chemical fertilizer output (in 100 % purity) is estimated to reach 45.3 mm tons in 2004, a hefty increase of more than 15 % over the 39.24 mm tons in 2003.

Thanks to the government's extreme importance paid to grain production after a five-year decline, there has been strong demand for fertilizers in the country since last year, and the fertilizer price has climbed all the way. Recently, tariffs have been imposed on export of fertilizers.
China is expected to rely on imports for 40 % of its petroleum consumption in the coming years. China's oil demand may surge to 400 mm tons in 2020, with an average annual increase of 12 %.

Government policy:
After several years of study, China has decided to levy fuel tax at an appropriate time this year, according to Xie Xuren, Director General of the State General Administration for Taxation. Xie told that the crude oil price has been on a very high level and that has made the country decide to levy fuel tax when an appropriate time arrives.
Chinese Ministry of Commerce has announced the import quota of chemical fertilizer for 2005. Following is the distribution of the tariff quota for import of chemical fertilizer, according to an announcement issued by the ministry:
-- Diammonium phosphate, 6.56 mm tons, of which 4.59 mm are for state-owned trade firms, and 1.97 mm tons for non-public sector.
-- Compound fertilizer, 3.29 mm tons, of which 2.30 mm tons are for State-owned companies, and 990,000 tons for non-public sector.
-- Urea, 2.80 mm tons, of which 2.52 mm tons are for state-owned firms, and 280,000 tons for non-public sector.

Those which have got the quota can start going through procedures for import quota certificates as of January 1, 2005. According to the Catalogue of Industrial Guide for Foreign Investment promulgated by the State Development and Reform Commission and the Ministry of Commerce on November 30, 2004, and effective as of January 1, 2005, China encourages foreign investment in the following fields:
1. Risk prospecting and exploration of oil and natural gas (only in the form of non-equity joint venture);
2. Development of low-penetration oil-gas field (only in the form of non-equity joint venture);
3. Development and application of new technology to raise the crude oil extraction rate (only in the form of non-equity joint venture);
4. Development and application of new technology concerning oil prospecting and exploration (only in the form of non-equity joint venture);
5. Deep-processing of needle tar and coal tar;
6. Production of asphalt for heavy-burden roads;
7. Production of olefin by heavy oil catalytic cracking;
8. Production of ethylene with an annual production capacity of 600,000 tons and above (to be controlled by the Chinese side;
9. Comprehensive utilization of ethylene by-products C5-C9;
10. Large-scaled production of polyvinyl chloride resin (vinylic process)
11. Production of organochloride serials (excluding those of high residuals);
12. Production of benzene, toluene, dimethylbenzene; ethandiol and other organic chemical raw materials and their derivatives;
13. Production of necessary raw materials of synthetic materials: bisphenol A, 4.4'diphenyl methane diisocyanate, and toluene diisocyanate;
14. Production of synthetic fibre raw materials: fine terephthalic acid, acrylonitrile, caprolaitan, AHsalt;
15. Production of synthetic rubber: solution butadiene-styrene, butadiene rubber, isoprene rubber, chlorobutadiene rubber, urethane rubber, acrylic rubber and chloroethanol rubber;
16. Production of engineering plastics and plastic alloy;
17. Production of fine chemicals: new products and technologies of catalyst,aids and oil additives, dye and colorant processing technology, electronics and paper-making use high-tech chemicals, food additive, feed additive, leather chemicals, oilfield aids, surfactant, water processing agent, adhesive, inorganic fibre, and inorganic power filler;
18. Production of aids, oil and dye for textile and chemical fibre drawing-spinning use;
19. Production of exhaust cleaner, catalyst and other aids;
20. Production of natural perfume, synthetic perfume and single ion perfume;
21. Production of high-function paint;
22. Production of chlorating titan white;
23. Production of substitute of fluorchloroparaffins;
24. Production of coal chemical products;
25. Development and production of new forest chemical technologies and products;
26. Production of ion membrane for caustic soda use;
27. Production of bio-fertilizer, high-concentration chemical fertilizers (such as potash fertilizer and phosphate fertilizer), and compound fertilizer;
28. Development and production of new varieties of chemical fertilizers of high efficiency, low toxicity and low residual;
29. Development and production of bio-pesticide;
30. Development and production of inorganic, organic and biological membrane for environmental protection use;
31. Comprehensive use, treatment and disposal of waste gas, liquid and residue.

According to aforesaid Catalogue, foreign investment is restricted in the following fields:
1. Construction and operation of oil refinery;
2. Production of ion membrane caustic soda;
3. Production of light-sensitive materials;
4. Production of benzidine;
5. Production of chemical products easy to make narcotics (such as ephedrine, benzeneacetic acid, piperonal, safrol(e), acetic oxide);
6. Production of sulphuric acid process titan white;
7. Processing of ludwigite;
8. Production of barium salt.

China will adopt new standards to calculate and register its verified oil and natural gas reserves to get accurate data. The calculation will be based on the Classification of Resources and Reserves of Oil and Natural Gas, a new national standard that was implemented beginning October 1.
The calculation will focus on the geological reserves and workable reserves of the country's oil and natural gas to facilitate their rational utilization and protection.

China's booming economy is feeling the pinch caused by shortages of energy resources, including oil. To ease energy shortages, the Chinese government has stepped up the prospecting and extraction of domestic oil and natural gas resources. In 2003, the country spent 22.7 bn yuan (about $ 2.7 bn) on the prospecting of oil and natural gas resources, a jump of 20.55 % from the previous year.
China has accelerated the pace of opening its finished oil market to the outside world as marked by establishment of a joint venture between China's Sinopec and Britain's BP Group in Beijing on November 4. The new company, called Sinopec-BP (Zhejiang) Petroleum, is the third finished oilretailing joint venture approved by Chinese government so far. Before it, two finished oil retailing joint ventures between PetroChina and BP Group, Sinopec and The Netherlands' Shell Group have been established in succession. In addition, Sinopec and France's Total signed an agreement on setting up a fuel oil company in October.

China has started a strategic oil reserve program, and plans to build strategic crude reserves equivalent to the volume of oil import for 35 days by the end of 2005.
China lowered the tax rebate rate for the export of petrol from 13 % to 11 % from January 1, 2004, while cancelling the tax rebate for the export of crude oil, kerosene, diesel oil, lubricating oil, fuel oil and other oil products. This year, China will grant import certificates, instead of import quota, to the import of oil products by state-owned traders.

Major players:
Sinopec Group, one of China's two oil giants together with PetroChina, realized consolidated profits of 42.5 bn yuan in 2004, a hefty increase of 19.7 bn yuan or 46 % over 2003, according to Chen Tonghai, general manager of the group. The group posted sales revenue of some 600 bn yuan for the year of 2004, an increase of 28.6 % over 2003. Gross profits before taxation amounted to 95 bn yuan, an increase of 24.2 bn yuan.
Chen also said that Sinopec's main work in 2005 will include: further recapitalising listed subsidiaries, setting up an asset management company, improving the foreign trade system and crude oil import system, and pushing forward reform of the chemical distribution system.

PetroChina's Changqing Oilfield in Shaanxi Province registered a record growth in its oil and gas output in 2004. The total amount of oil and gas equivalent produced by the oilfield in the year was 14.03 mm tons, a net increase of 2.88 mm tons over the previous year. Specifically, the oilfield produced 8,102,000 tons of oil, 1,086,000 tons or 15.5 % more than in 2003, and 7.44 bn cm of natural gas, 2.26 bn cm or 43.5 % more than in 2003.
The oilfield also verified 126.98 mm tons of oil reserves and 81.287 bn cm of natural gas reserves in 2004.

The Shengli Oilfield in east China's Shandong Province turned over a record 26.74 mm tons of crude oil and 900 mm cm of natural gas in 2004, company sources said on January 11. The figures are the highest reported in the past four and six years respectively. In 2003, the oilfield based in Dongying turned out 26.58 mm tons of crude and 810 mm cm of natural gas.
A company spokesman said the oilfield has taken advantage of China's macro-control policies as well as the climbing oil prices and expanded production, enhanced management, improved efficiency and further explored the international market. Thanks to its technological innovation and optimised allocation of resources, the company's gross revenue increased to 72.88 bn yuan ($ 8.8 bn) and added value climbed to 48 bn yuan ($ 5.8 bn) in 2004.

Shengli oilfield has maintained balance between oil exploitation and reserves for eight years in a row. Its proven oil reserves have been growing by more than 100 mm tpy for 22 consecutive years. In 2004, it reported an additional 28.12 mm tons of exploitable oil reserves and 1 bn cm of newly proven natural gas reserves.
Shengli Oilfield is the second largest onshore oilfield in China following PetroChina's Daqing in the northeast. It has a history of more than 40 years and its daily output of crude oil averages 520,000 barrels.

China National Petroleum Corp (CNPC), the nation's largest oil conglomerate, had made a record profit of over 110 bn yuan ($ 13.3 bn) in 2004. This represents a year-on-year rise of more than 50 %, thanks to strong oil prices and robust domestic oil demand.
The company registered a revenue of over 560 bn yuan (67. $ 5 bn), a 15.7 % increase year-on-year, CNPC President Chen Geng said on January 13. Chen attributed the company's stunning performance to China's continuous rapid economic growth in 2004, soaring international oil prices and the improved management of the company.

In 2004, the company produced 111.76 mm tons of crude oil, accounting for 64 % of China's total crude production. CNPC also produced 28.7 bn cm of natural gas, or 70 % of the country's gas production. The aggregated sales volume of petrol, kerosene and diesel oil reached 66.81 mm tons in 2004, up 10.4 % year-on-year.
The company's annual investment in 2004 jumped 7.8 % year-on-year, reaching 126.6 bn yuan ($ 15.3 bn), mainly in its major business of oil and gas exploitation and production, oil refining and petrochemical production.

CNPC discovered 520 mm tons of new proven oil reserves, and 243.6 bn cm of proven natural gas reserves in 2004, according to the company. CNPC's executives said the company is increasing its natural gas production and transportation capacity to satisfy growing gas demand in China.
Chen said his company is close to completing a second Shaanxi-Beijing gas pipeline. The second line, which spans 900 km from Yulin in Shaanxi Province to Beijing and neighbouring areas, will help greatly alleviate current gas supply shortfalls in Beijing and Shaanxi Province.

China National Petroleum Corp. (CNPC): It focuses on the exploration and production of oil and gas. It controls all oil and gas fields, oil refineries and petrochemical enterprises in 12 provinces, autonomous regions and municipalities mainly in north and west China, including Inner Mongolia, Tibet, Ningxia, Xinjiang, Liaoning, Jilin, Heilongjiang, Sichuan, Shaanxi, Gansu, Qinghai and Chongqing. It is expected to produce 200 mm tons, or some 1,400 mm barrels of crude oil, and 100 bn cm of natural gas by the year 2010.
China National Petrochemical Corp. (Sinopec): It prioritises the production of petrochemicals. It controls oil and gas fields, oil refineries and petrochemical enterprises in 19 provinces, autonomous regions and municipalities mainly in the east and south.

Sources: China Petroleum and Chemical Industry Association, CNPC, Sinopec, National Bureau of Statistics and the General Administrationof Customs.