CHINA INDEPENDENT OIL REFINERIES: Haike focused on transport fuels despite ongoing petrochemical shift

This feature is the last of a five-part series on China's small independent refiners.

S&P Global Commodity Insights made its first visit to these refiners in 2012 when they were little known, and barring a break during the COVID-19 lockdown, our team visited the refiners every year from 2014 until 2019. We resumed our visit in the summer of this year, during which we spent five days visiting Qingdao, Dongying, Binzhou, and Zibo, meeting senior officials with nine independent refineries, four trading houses, and the Qingdao port authority.

These trips have allowed us to capture the rise in their influence and sway over the international and domestic oil markets in their heydays to a more recent turn in fortunes as the government disavows them in favor of larger, integrated plants.

The small Shandong-based independent refineries in this series include privately owned plants with capacities between 40,000 b/d – 214,000 b/d and exclude those under the state-owned ChemChina and the large integrated refining and petrochemical complexes.

With China's transportation oil demand set to peak in the coming years, most independent refineries in Shandong have shifted to producing petrochemical products. But the Haike Group stands out with its focus on new transport fuels.

Headquartered in the heart of Dongying city, the group is investing in sustainable aviation fuel (SAF) and special materials for lithium battery production.

Independent refineries in Shandong used to maximize their combined gasoline and gasoil yield at over 70%. They were not involved in jet fuel production due to tight quality control for aviation safety until the Yatong Petrochemical got permission in 2020.

But China's demand for gasoline and gasoil is widely expected to peak by 2025 amid efforts to cut carbon emissions.

"In 2022, EV sales accounted for 28% of China's total new car sales, which was well ahead of the government's target of 25% set for 2025. EVs market share has expanded further to 33% this year nationwide and reached 50% in Shanghai," said an official with Sinopec, adding that their company's gasoline sales in Shanghai have been challenged.

Although the small independent refineries have been infamous for their short-sightedness, they have to strategize and invest in future in order to avoid getting

during the current restructuring and upgrade campaign in the refining industry.

Led by the state-owned giants Sinopec and PetroChina, investing in petrochemical products is the way to go for most of these independent refineries.

Independent refineries launched their new petrochemical units one after another. The Lihuayi Group, which has shifted to petrochemical-oriented, invested its annual capex of around Yuan 5 billion ($688 million) in recent years in petrochemicals. The Chambroad Holding Group has also targeted cutting its gasoline and gasoil to 20% from the current about 30%, while its new petrochemical units are gradually online.

Luqing Petrochemical and Dongming Petrochemical commissioned their ethane cracking unit to produce olefin, while Hongrun Petrochemical and Fuhai Group launched their paraxylene and purified terephthalic acid facilities.

Energy focus

"We keep our business centered around automobiles, fuels, and energy, leading with high quality. So we are not even involved in real estate like other [independent] refineries," a senior official with Haike said.

Hence, Haike has invested in Shandong's first SAF plant, which will be the fourth operational SAF producer in China with the biggest processing capacity of 500,000 mt/year in the country once it is commissioned.

SAF projects in China

* China's State Power Investment Corp

Source: S&P Global Commodity Insights

More importantly, the plant will be converted from Haike's existing gasoil hydrotreater to become an SAF unit as it mothballed a 2.2 million mt/year crude distillate unit in 2022 amid Shandong's refining capacity consolidation campaign.

"The move will enable Haike to benefit as an early bird in the emerging SAF market, and refinery conversion will help it save more than half of the investment of a greenfield plant," said Harry Liu, a downstream consulting director with S&P Global Commodity Insights.

"SAF is probably the most promising barrel among the low-carbon transportation fuels in the net-zero journey, as it is the only feasible solution for decarbonizing aviation at scale. While electrification is the go-to solution for decarbonizing ground transportation, mainly cars, especially in China, leaving limited room for ethanol gasoline and biodiesel here," Liu added.

The Civil Aviation Administration of China in July drafted a fuel standard for the sector to require sustainability of alternative fuels.

Global SAF consumption is estimated to reach 2.1 million b/d by 2050, displacing almost 24% of worldwide jet fuel demand, while the annual global production of the fuel was seen at 2.24 million mt (48,500 b/d) in 2023 with output from China at 298,000 mt (6,500 b/d), according to S&P Global's latest reports and data released in August and September.

Over the coming decade, much of the demand for SAF will be met by hydroprocessed esters and fatty acids (HEFA)-based SAF production, S&P Global said, which Haike is going to produce with the vegan technology provided by Axens.

"When we announced the project in March, it attracted buying interest from international trading houses to sell to overseas," the official with Haike said, but added the biggest challenge was to secure stable feedstock supplies which may limit the plant's utilization.

The official said it is difficult to source used cooking oil (UCO), leading the plant to rely more on palm acid oil.

It is the same challenge facing Sinopec's flagship Zhenhai Petrochemical's 100,000 mt/year SAF unit, which was completed in 2020 and commissioned in May 2022 as the first existing unit of its kind in China. Due to unstable supplies, Zhenhai runs the unit occasionally and supplied just a few barrels to two domestic flights this year, according to sources with knowledge of the matter.

"UCO has been collected in China for some time, but converting it to SAF on an industrial scale remains in the early stages of development. The UCO industry faces challenges in scaling up," Liu said.

Battery materials

For land transportation, Haike Group has been a leading producer of different battery materials, including single-layer graphene, wet process diaphragm, and electrolytic solvent, contributing to China's recent EV boom.

"To better serve EV makers and battery manufacturers, we stepped out of Shandong and built factories and research arms in Anhui, Jiangsu, and Hubei," the senior official said.

Anhui and Jiangsu provinces are close to the EV production base in Shanghai, while Hubei province is a battery base in China.

Among Haike's subsidiaries for battery materials production, Hi-tech Spring Chemical stands out as it took 35% of the electrolytic solvent global market share in H1 2023, according to Gaogong Industrial Institute.

China's top EV producer BYD relies on Hi-tech Spring Chemical for 70% of its electrolytic solvent. Hi-tech Spring Chemical was listed on the ChiNext, a NASDAQ-style unit of the Shenzhen Stock Exchange in July this year.

In fact, during S&P Global's first visit to Haike in 2014, the group had correctly predicted that gasoline would be the driver of China's oil demand growth and that gasoil consumption would stagnate as economic growth slowed.

It was not surprising that the group was willing to mothball one of the CDUs, leaving the relatively new 2.3 million mt/year running with a higher gasoline yield at about 25% compared to its peers in Shandong, and moving towards the battery material business.

However, sources with Haike remain proud that they were the first batch of refineries to produce National Phase 5 gasoline and gasoil in the country, and were involved in drafting National Phase 6 standard.