--Clyde Russell is a Reuters columnist. The views expressed
are his own.--
By Clyde Russell
LAUNCESTON, Australia, April 30 First it was oil
refining and now it's petrochemicals getting a reality check in
The decision by top Asian refiner Sinopec Corp to
scale back billions of dollars in petrochemical plants is
belated recognition that the days of unfettered expansion are
over, and not just because of the U.S. shale gas revolution.
In recent months China has seen a slew of delays and
cancellations to oil refinery and petrochemical projects, as the
full impact of slower economic growth, pollution concerns and
foreign competition hits home.
Sinopec has delayed plans to build a $3.1 billion ethylene
plant in Qingdao city, Reuters reported on April 28, citing a
This means Sinopec has delayed or shelved projects with an
annual capacity of nearly 4 million tonnes of ethylene, one of
the key components for making plastics and synthetic fibres.
China's other large state-controlled refiner, PetroChina
, has also scaled back plans, delaying a $13 billion
joint venture with Royal Dutch Shell in east China and
another in Guangdong with Petroleos de Venezuela SA.
The suspensions or delays to petrochemical plants follow a
similar process in oil refining, where PetroChina has put off
until later two new refinery projects and the expansion of an
There are different dynamics at work in oil refining and
petrochemicals, but the overall message is the same: Projects
will now be decided on their economics, and only those that can
compete both domestically and globally will get the go-ahead.
In oil refining, the rush to build plants has been halted by
the realisation that fuel demand has stopped growing as fast as
had been expected.
China has around 12.5 million barrels per day (bpd) of
refining capacity, with almost 600,000 bpd more slated to come
on line in 2014 and plans for another 3 million bpd by 2020.
Problem is that oil demand was 9.96 million bpd in the first
quarter of 2014, down 0.6 percent from a year ago.
While the pullback is likely to be temporary, the days of
double-digit demand growth appear long gone, with the rise in
consumption not likely to exceed 4 percent a year for the
This means China will continue to have excess refining
capacity, which if fully utilised would result in rising fuel
China, the world's second-largest crude consumer, turned to
a net exporter of refined products in March, something that last
happened in January 2010 and has only occurred on three
occasions since data started in 2004, according to a Citibank
It's still too early to say a trend has been established,
but it does appear more likely than not that China will become a
sustained exporter of fuels.
In this China is becoming like the United States, which has
also dramatically increased exports of refined products,
although for different reasons.
GAS TO CHEMICALS
The boom in domestic oil production, mainly from shale
wells, has lowered U.S. oil prices relative to the rest of the
world and provided a competitive advantage to U.S. refiners.
Given that crude cannot be exported from the U.S. due to
legislation, refiners have turned to exporting fuels,
particularly diesel and liquefied petroleum gas.
The corresponding surge in shale gas output hasn't yet
resulted in exports of liquefied natural gas from the United
States, although these are coming.
What it has done is improve the economics of U.S.
petrochemical plants to the point where they can make ethylene
from natural gas at about half the cost of a naphtha-based plant
While U.S. natural gas prices have gained about 14
percent so far this year, they are still about a quarter of
their 2005 peak and roughly half of the 10-year average prior to
the shale revolution boosting production.
This has prompted a major expansion of gas-based chemical
capacity in the United States, with Barclays listing at least 30
projects scheduled for completion by 2017.
HOSTAGE TO OIL
These new chemical plants will provide cheaper plastics and
synthetic fibres to U.S. industry, meaning it will become more
competitive globally, but especially with China and other Asian
countries still reliant on oil-based naphtha for petrochemicals.
Effectively, Chinese and other Asian petrochemical makers
are hostage to the price of crude oil.
Crude also looks to have more upside potential over the
longer term than U.S. natural gas prices, given rising oil
demand in the developing world and the near-constant threat of
supply disruptions from conflicts in, or near, major producers
in the Middle East, Africa and the former Soviet Union.
It is possible that naphtha prices will decline relative to
crude, but so far this isn't happening, with the premium for
naphtha in Singapore over Brent remaining in a relatively narrow
band over the past 18 months.
The crack NAF-SIN-CRK was $149.75 a tonne on April 29,
down from its peak so far this year of $172.80, but up from the
trough of $113.95.
Demand has been strong for naphtha in several Asian
countries, such as South Korea, in recent weeks, even as Chinese
imports have slipped.
In the first quarter China imported a net 158,042 tonnes a
month, down from a net 265,639 tonnes a month in 2013 and
239,536 tonnes a month in 2012.
Part of this is that additional Chinese refining capacity
means more domestically produced naphtha, while part is related
to slower economic growth, particularly in plastic-intensive
While a stronger economy may fuel Chinese naphtha buying in
coming months, the longer-term outlook should be for
considerably slower demand growth and lower prices.
But even lower naphtha prices are unlikely to make new
petrochemical plants cost competitive with those in the United
(Editing by Tom Hogue)