China's reshaping of refining sector in line with new green development guidelines

China's refining sector is being reshaped in line with new guidelines for the industry on green development, which was released by the National Development and Reform Commission Oct. 25, refining sources and analysts told S&P Global Commodity Insights Oct. 26.

The top planner's latest guidelines, which included more details, essentially summarized related action plans and targets released since September 2021 which looked to upgrade and restructure the refining sector by 2030 and 2025, the sources and analysts said, adding that key rules have been implemented.

"The guideline is more likely to emphasize existing policies, to urge the industry to meet the requirements rather than raise new targets," a Beijing-based analyst said.

For example, the key target of the guidelines -- keeping the country's primary refining capacity for crude oil to below 1 billion mt/year (20 million b/d) by 2025 -- was introduced in October 2021 as part of China's action plan to peak carbon emissions by 2030.

"Though China still plans to add over 1 million b/d of refining capacity in the future, there's a high possibility that China will manage its total refining capacity to around 20 million b/d by 2025," Fenglei Shi, a research and analysis director with S&P Global Commodity Insights, said.

"This could be achieved by considering the potential to phase out smaller refineries and outdated capacities, for which the government has introduced measures that seem more feasible than previous ones," Shi added.

The expansion of China's refining sector accelerated in the last decade to meet its fast-growing domestic demand, with a few inefficient, polluting, less valuable capacities still in place. In order to have a healthy and green development in the future, the industry will need to upgrade and restructure, analysts said.

Currently, the country's refining capacity stands at more than 18.29 million b/d, surging by more than 50% from around 12 million b/d in 2022. In comparison, the US' crude distillation capacity is at about 18.23 million b/d in the third quarter, S&P Global data showed.

The latest guideline targets to have the facilities with capacities over 200,000 b/d to make up 55% of China's total refining capacity.

"Enhancing economies of scale is also a key objective, as the current ratio is roughly 52%. With the planned new capacities, it's plausible that this percentage will approach 55% in the future, aligning with governmental aspirations," Shi added.

Progress in track

To meet these targets, the guidelines require all newly built crude distillate units to have capacities no less than 200,000 b/d, while the expansion or new construction of a refining project is strictly prohibited. It is also illegal for refineries to apply to build new capacity in the name of deep processing heavy oil, feedstock pre-treatment, asphalt or chemical production when its actual purpose is that of a CDU.

Meanwhile, CDUs with capacities of no more than 40,000 b/d are required to be mothballed, while those that fail to meet emission standards by 2025 have to shut down.

"All these policies have been in place for a few years, stopping teapots [small independent refineries] from expanding as we failed to get approvals," a Shandong-based refining source said.

Shandong province, home to China's independent refineries with capacities of less than 200,000 b/d, was a pioneer and demonstrated the refining sector's consolidation and upgrade as it has been taking action on a series of policies.

The province mothballed around 31.8 million mt/year of capacity at 23 refineries since 2018. Ten of these refineries uninstalled a combined 27.8 million mt/year of CDUs which was subsequently consolidated into a 400,000 b/d greenfield integrated complex, namely the Yulong Petrochemical.

This effort was reflected in the decline in the proportion of Shandong independent refiners' crude import quotas. They accounted for 34% of quotas for 2023, compared with 67% in 2017 as their shares were swallowed by bigger private integrated complexes with more than 320,000 b/d of capacity. The annual import quota allocated to these refineries fell to 61.16 million mt this year, from 95.54 million mt for 2020, S&P Global data showed.

Moreover, the latest guidelines encourage hydrogen production, especially green hydrogen, so as to lower carbon emissions in the refining industry.

Sinopec, the world's top refiner by capacity, has been leading the sector to invest Yuan 30 billion ($4.1 billion) through 2025 as it targets to become China's top hydrogen supplier. The company launched in July a pilot project in Xinjiang to demonstrate an entire value chain for green hydrogen -- from renewable power generation, hydrogen production from water electrolysis, hydrogen storage, transmission and utilization by the refining facilities.