Shell, Dow eye China's refining sector

Lured by huge opportunities in the Chinese oil product market, Shell has come back to the country's refining sector through its participation in the Nansha greenfield refinery, a refining branch of China Petroleum and Chemical Corp's (Sinopec) Guangzhou Petrochemical.

Dow Chemical, a global chemical giant, has followed Shell's move. Of interest at the Nansha greenfield refinery is a soon-to-be-constructed ethylene plant with an annual capacity of 1 million tonnes.

With bigger ambitions, Shell is planning to enter both the refining sector and the chemical sector as they offer huge potential, even though the Chinese central government still controls oil product pricing rights.

China National Offshore Oil Corp's (CNOOC) Nanhai ethylene plant, with a capacity of 800,000 tonnes a year and now under operation, is the first attempt by Shell to enter the country's ethylene sector.

Shell hopes to develop the Nansha greenfield refinery as its first foothold in the country's refining sector, though the company withdrew from CNOOC's Huizhou greenfield refinery in late 2006. It is believed that Shell has now become optimistic over the prospect of China's refining industry and reform of the oil product pricing system.

A senior manager of Sinopec told China Oil Gas and Petrochemicals that both Shell and Dow Chemical had intentions to participate in the Nansha refining project. But it is not Sinopec but Kuwait Petroleum Company (KPC), the agreed partner of the refining project, that has invited Shell and Dow Chemical to invest in the project.

The manager said that negotiations over the Nansha refining project could become more complicated, but fortunately Sinopec will not conduct direct negotiations with Shell and Dow Chemical. It is KPC that carries out direct negotiations with the two foreign partners, but any results between the three parties will be handed to Sinopec for approval.

Insiders also believe that it is not necessary for Sinopec to invite any other foreign oil players to participate in the Nansha refining project if the crude oil supplier is settled. But it seems that Sinopec finds it hard to reject KPC's invitation, for Sinopec has to rely on the Middle East company to ensure crude oil supplies for the Nansha project.

Oil companies from the Middle East have been actively participating in China's refining projects in recent years. They have found a large, stable market for their crude exports and relatively convenient access to China's refining and oil product distribution sectors.

The key reason for Kuwait to ask Shell and Dow Chemical to enter is that Shell and Dow Chemical are so powerful in refining and chemical production. Their involvement should ensure the normal completion and operation of the Nansha project and reduce risks.

Apart from Shell and Dow Chemical's involvement, the joint venture of the Fujian refining/ethylene complex project between Sinopec, ExxonMobil and Saudi Aramco will help Sinopec accumulate expertise in building and operating a large-scale refining and ethylene project.

Besides the Fujian project, the Nansha project, with an estimated investment of US$5 billion, will be the second one involving both refining and petrochemicals, but this will be the largest Sino-foreign joint venture of its kind. If successful, the Nansha refinery will help Shell explore the country's wholesale oil product market.

Sinopec's manager said that negotiations were underway, but he was not clear when they would be finished and a joint venture would be established.