Complex China refineries to process more acidic oil

SINGAPORE, June 7 Thu Jun 7, 2007 9:15am EDT

SINGAPORE, June 7 (Reuters) - China will process more acidic crude as the difficult-to-refine oil accounts for most of its new domestic and equity output, while its complex refineries allow it to import the cheaper oil, industry experts said on Thursday.

An additional 538,000 barrels per day (bpd) are expected to come on stream from China during 2005-2010, almost a third of all incremental high-acidic crude in the world, Houston-based Asia Pacific Energy Consulting (APEC) said.

The biggest increase will come from phase two of the ConocoPhillips-(COP.N) operated Peng Lai project, which is expected to rise to some 180,000 bpd by 2009-2010 from 20,000 bpd currently.

"High TAN crude will move from being a niche to being mainstream. China, Angola, Sudan, Brazil are big gainers," Al Troner, the head of APEC, told a high TAN conference, organised by Conference Connection.

High acidic crudes, also called high Total Acid Number (TAN) crudes, have a high volume of naphthenic acids. Crudes with a TAN higher than 1 are usually considered high acidic and can corrode refineries equipment and are often out of the reach of simple refineries.

China, which is struggling to maintain its crude production, will see the share of domestic high TAN crude rise from about 10 percent to 13 percent by 2010, said Paul Wright, project manager, commercial integration team for U.S. major Chevron (CVX.N).

China is also a major player in Sudan, which accounts for 17 percent, or 333,000 bpd, of additional high TAN crude output worldwide between 2005 and 2010, APEC said.

The increase comes notably from the start of the 200,000-bpd Dar Blend field last autumn, in which China National Petroleum Corp. (CNPC) holds a 41 percent interest.

China's domestic high TAN crudes and rising equity output have prompted it to build refineries capable of running such grades, giving it an edge as acidic crudes are usually heavily discounted on the spot market.

The country is planning several refineries that will run on high TAN crude or will be able to dilute them, said Kelvin McConnarchie, principal consultant for Hawaii-based FACTs.

The biggest specially dedicated refinery will be the 240,000-bpd Haizhou refinery owned by CNOOC (0883.HK), which is expected to come on stream next year.

China is also best placed to buy the discounted grades on the spot market, as it is the only Asian country with significant refining capacity capable of running high TAN crude.

It has been absorbing most of Sudan's new Dar Blend output, on top of its equity crude, at discounts of up to $35 a barrel to dated BFO.

The crude was last traded at a stronger $17 discount to BFO this week, marking a strong improvement, but still a bargain, traders said.

China also buys Brazilian Marlim crude on a regular basis and has taken two of the first three cargoes of Angola's latest grade, Dalia, which has a TAN of 1.5, which has been trading at an $8-$9 barrel discount to dated Brent.

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