CHINA INDEPENDENT OIL REFINERIES: Shandong faces stalled and sunk investments

This feature is the third 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.

The next feature will be published on Sept. 20.

Oil infrastructure investment in China's Shandong province, home to its independent refineries, has all but stalled in the wake of Beijing's shift towards consolidating and streamlining the sector.

In 2016, to expand its oil refining industry and inject dynamism and competition into it, Beijing allowed independent refiners to import crude oil as a feedstock and export refined products. Before that, only state-owned refiners were allowed to import crude oil and independent refiners relied on fuel oil for feedstock. This led to a need for associated infrastructure, including pipelines and storage tanks, as landlocked refineries needed access to imported crude oil and billions of dollars were invested in these facilities.

Fast forward to 2023 and the scene is quite different. Several pipeline projects have been shelved, international trading firms have exited their investments, and a crude and a product pipelines lie idle with not a drop of oil transmitted through it since they was completed in 2021.

The Yuan 3.97 billion ($545 million) crude oil pipeline connecting Rizhao port to refineries in Zibo & Binzhou, known as the Rijing crude pipeline, has been a white elephant since its completion in autumn of 2021.

Rizhao port was the last of four ports in Shandong to connect VLCC berths via pipelines to the heart of the province. The 428-kilometer pipeline has a transmission capacity of 300,000 b/d and was constructed to connect the port to seven independent refineries in Binzhou and Zibo. These refineries included Chambroad Petrochemical, Wonfull Petrochemical, Chengda New Energy, Jincheng Petrochemical, Xintai Petrochemical, Zhonghai Asphalt and Zhonghai Fine Chemical.

But not a single drop of crude oil has passed through the pipeline yet, sources at three of these refineries said.

The unexpected drop in the number of users as the business environment changed led to the pipeline, which does not have a pump, not being chosen by the refiners.

Chambroad was reluctant to use the pipeline and cut its stake from about 30% to just over 10%. "It is a pipeline without a single pump, which means it needs one VLCC cargo after another to push a barrel to the destination 428 km away from the starting point. Even if Chambroad is willing to use it, the plant will not get the barrels until another cargo of VLCC is pushed in," a source close to the refinery said.

Wonfull, which holds 15% stake in the pipeline, has not imported crude oil since end-2021. It was removed from the list of refiners given crude oil import quotas in the second half of 2021, sources with knowledge of the matter said.

Zhonghai Fine Chemical and Chengda New Energy have also stopped importing crude oil as they permanently shut their crude distillation units and transferred their crude import quotas to the upcoming integrated Yulong Petrochemical.

Jincheng prefers to use the 400,000 b/d Yantai-Zibo (Yanzi) pipeline which was designed to ship heavy oil from Yantai Port more than 560 km away.

"Certainly, the Yanzi pipeline and the Yanzi parallel pipeline are favorable as they are also connected to the Laizhou port which can take Aframaxes and have pumps and heaters that enable it to transmit heavy crude oil," a Zibo-based refining source said.

Refineries in Dongying, meanwhile, preferred to use the Dongjiakou-Weifang (Dongwei) pipeline and Huangdao-Weifang (Huangwei) pipeline, which offer more bonded storage choices in Qingdao, Weifang and Dongying based on an agreement signed by Qingdao Port Group. Dongwei has more branches reaching the refineries, making it the most popular one in the independent sector in Shandong.

Two pipelines currently under construction -- Dongbin and Dongdong -- connecting Dongying port to refineries in Dongying and Binzhou have been welcomed, refiners in Dongying said.

"As around 50% of the independent refining capacity is concentrated in Dongying, which is far away from the VLCC ports in the east, Dongying port and the pipelines will help to shorten transportation and cut costs," one refinery source said.

Besides these, no other crude pipelines are likely to be built, sources said.

For example, Hongrun Petrochemical's 800,000 b/d pipeline project connecting Qingdao port with Hongrun's storage in Weifang -- the Huangwei parallel pipeline -- has been awaiting construction approval for more than a year without any updates. Market sources said the project is less likely to start up as the current Huangwei and Dongwei pipelines are able to meet the refiner's needs.

Ports and refineries also had plans to build five shared oil product pipelines with a combined length of 1,840 km and capacity of 740,000 b/d by 2020, according to the Shandong provincial government's pipeline network plan (2016-2020). But most of the projects, except the 510-km oil product pipeline parallel to the Rijing crude pipeline, have not started construction as the independent refineries failed to gain any oil product export quota since 2017.

"The Rijing oil product pipeline is not in use yet although the construction has been completed. And we do not have any need to send our products to the ports as petrochemical mega complexes have gradually taken over our market share along the coast since 2019," a Binzhou-based refining source said.

Crude supermarket plan shelved

As the Rijing pipeline has been idled, some affiliated storage tanks have also gathered dust since completing construction. These include the 800,000 cu m of bonded crude tanks in Guangrao county of Dongying.

To serve the hungry independent refineries, Shandong's Qingdao, Yantai, Dongjiakou, Rizhao, Dongying, Laizhou and Longkou almost doubled their combined storage capacity from about 9.3 million cu m in 2018 to about 18.3 million cu m currently, according to local information provider JLC.

Qingdao Port Group, owner of the most tanks in Qingdao and Dongjiakou, in 2019 announced plans to turn them into a hub to blend crudes to meet specific slates of each independent refinery, mirroring a "crude supermarket" project initiated by Hongrun Petrochemical.

A crude supermarket was an idea to set up a platform with ample storage tanks to store, blend and trade different grades of crude in small parcels to meet the needs from the small independent refineries with about 60,000 b/d capacity.

But these projects have been shelved as their targeted customers rely on sanctioned crudes, which are safer to blend overseas.

Meanwhile, international companies have also pulled out of infrastructure projects in Shandong.

In December 2018, Brazil's Petrobras leased its first crude oil storage facility in China, four tanks of 100,000 cu m each in Dongjiakou port, to offer better services to the independent refining sector by selling crude in smaller volumes on relatively easier financing terms. But as these refiners' needs shrunk, the company withdrew from the lease in 2020.

The Swiss trading house Mercuria is also in the process to withdraw its 8.1% stake from the Qingdao Haiye Mercuria Logistic Ltd., which owns 2.6 million cu m of crude storage in Dongjiakou port, to keep away from business related to sanctioned crudes, two sources with knowledge of the matter told S&P Global.

Crude facilities shared by Shandong independent refineries

Note: *Connects to Yanzi, Yanzi parallel pipelines

Source: S&P Global Commodity Insights, JLC

Oil product pipelines for Shandong independent refineries

Source: S&P Global Commodity Insights, government plan

Read the other features of this series:

CHINA INDEPENDENT OIL REFINERIES: Refiners' shift to sanctioned Iranian crude gives world breathing space

CHINA INDEPENDENT OIL REFINERIES: Refiners succumb to vagaries in Chinese policymaking