China’s new refineries stoke crude demand for now


China has imported record amounts of crude oil so far in 2019. Can this frenzied pace continue into the second half of the year?

To answer this question, it helps to know the reason behind the surge.

Were the extra barrels needed to satisfy unusually strong refinery demand? A desire to stockpile supply for later consumption? Or perhaps add more cushion to strategic reserves?

Greater imports coupled with red-hot refinery activity means the pace could be sustained as long as refining margins remain attractive.

The other possibility — rising inventories — suggests a different motivation at work that is more difficult to pin down without insider knowledge of Chinese economic policy.

Where we can provide clarity is inventories and the status of new refineries under construction.

We measure floating-top tanks around the world on a weekly basis, including in China, using synthetic aperture radar (SAR).

Also using satellite imagery, we’ve been monitoring a pair of mega-refineries being built in China that would help explain why the appetite for crude is rising.

But first, let’s provide some numbers.

Chinese crude oil imports averaged 9.9 million barrels per day (bpd) during January through June 2019, according to government data.

That’s up from 9.1 million bpd and 8.6 million bpd for the first six months of 2018 and 2017.


Source: National Bureau of Statistics of China

The official data includes pipeline imports, which are significantly smaller and less volatile than waterborne imports.

According to our friends at ClipperData, Chinese waterborne imports averaged 9.1 million bpd during the first six months of 2019, versus 8.17 million bpd in 2018 (Jan-Jun) and 7.86 million bpd in 2017 (Jan-Jun).

Where is the oil going?

Looking at Ursa data, Chinese crude inventories (commercial + strategic petroleum reserve) have increased, but not as much as imports have, suggesting a portion of the increased supply has gone to refineries.

Total inventories rose by an average of ~72,000 bpd during the first six months of 2019, compared with an average draw of ~158,000 bpd from Jan-Jun 2018.


Source: Ursa

In late May, we highlighted this trend in China (high imports, strong runs) and asked whether it would continue.

Apparently so, at least a little while longer.

This is hardly what you would expect when by most accounts the Chinese economy has been bruised by a trade war between Washington and Beijing.

One factor that must be considered is the start-up of new mega-refineries in China.

In Dalian, northeast China, the Hengli Petrochemical refinery reportedly reached full capacity (400,000 bpd) in May.

Around the same time, a similar-sized refinery being built on an island off the coast of Zhoushan began trial runs. That refinery is privately-run and 51% owned by Rongsheng Holdings

These two plants combined should represent 6.4% of total Chinese crude oil throughput, according to Reuters.

We monitored the construction of the Hengli refinery and are doing similar analysis for the Rongsheng refinery, also known as Zhejiang Petrochemical.


Satellite imagery: Planet Labs
Illustration: Ursa

The first phase involving the construction of a 400,000 bpd refinery and integrated petrochemical facility is running behind its scheduled finish date of Q2 2019.

 Contact us here if you want to know when we project the first phase will be complete.

 A second phase to expand the refinery, doubling its capacity to 800,000 bpd, ranking number four on the list of largest refineries in the world, is supposed to be complete by the first quarter of 2021.

 The land for phase 2 sits to the east of the current construction zones, and is undergoing preliminary preparation and leveling.

Satellite imagery: Planet Labs
Illustration: Ursa

Crude distillation trains and ethylene cracker are finished, allowing for trial runs to begin.

Blending and storage tanks, mostly foundations in the first quarter of 2019, are almost all finished.

Pipelines throughout the complex are still in the laying stage. The on-site power plant is nearing completion.

And only one jetty to the southwest is still undergoing the final stages of construction.

The annotated satellite imagery below shows some of these key sections.

Satellite imagery: Planet Labs
Illustration: Ursa

Satellite imagery: Planet Labs
Illustration: Ursa


Satellite imagery: Planet Labs
Illustration: Ursa

Will there be enough refined product demand to absorb this additional supply from Chinese refineries?

There are already reports of Chinese refiners with plans to slash third quarter runs in response to the deluge of supply, a move that would undoubtedly be felt in the global crude market.

What do you think? Is global fuel demand strong enough to support these new mega-refineries?

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