China's refining sector to slowdown and reconfigure for energy transition

Structural overcapacity in refining: Slowdown and rationalisation on the cards

Refinery capacity is expected to continue growing in the medium term, but the pace of growth is expected to slow down considerably. Capacity additions are mainly from  crude-to-chemicals projects, which aim to maximise naphtha production to meet the increasing petrochemical feedstock demand.

Slower capacity addition in China is driven by a combination of capacity closures in the independent ('teapot') refining sector and a slower oil demand growth outlook for China. The independent refiners are disadvantaged by the limited access to domestic retail markets.

Combined with stringent environmental inspections, we expect 600,000 b/d of refinery capacity from the independent sector to be closed between 2019 and 2025.     

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Shifts in refining configurations and product yields required

China is expected to remain self-sufficient in gasoline and middle-distillates in the medium term, but it will be short of light products – LPG and naphtha. Naphtha yields from refining is further reduced by the huge amount of new reforming capacity in the next few years to support low olefins specification for China VI gasoline.

Therefore, future refinery investments and configurations will need to be aligned to meet these shortages in petrochemical feedstocks rather than transport fuels.

Refinery yields in the past have been weighted towards middle distillates (jet fuel and diesel). Gasoline to diesel demand ratio in China will rise from 0.75 in 2015 to more than 1.0 by 2035. To manage the surplus in middle-distillates and to support the rising ratio of gasoline to diesel demand ratio, we expect China to shift yields in the refining system towards light distillates.   

Shifts in China's crude slate aligns with the shortages of light distillates. Light crude (API ≥ 38) share in China's crude slate is expected to increase from 7% in 2017 to 13% by 2025 because of more processing of US light oil. Lighter crude slate leads to higher light-distillate yields. China’s crude slate lightening of 6% results in up to 1% increase in light-distillate yields over a period of next 5-6 years.

Rui will be speaking at the upcoming China Energy Week in Beijing, March 20-22.