From Nation page 9, issue no. 345, Dec 12th 2007
Original article: [Chinese]

In early December, Sinopec rushed 500,000 tons of emergency crude oil to Shandong province. It is the first time that Sinopec had shipped extra crude oil to local refinery plants outside of the established supply framework, and comes just one week after the National Development and Reform Commission (NDRC) commanded it and PetroChina to do more to alleviate the oil product supply crisis.

During the oil shortage of recent months, local refineries have been operating below production capacity, sometimes going so far as to halt production. Although this latest measure will relieve the oil shortage in Shandong province temporarily, it cannot quench local refineries’ thirsty for crude oil in the long term. Conservative estimates put local refineries’ productivity at 40 million tons per year, double what Sinopec can supply Shandong province.

Sparing Some Crude

This is the first time that, with the government’s urging, Sinopec and local refineries have cooperated to face off the shortage.

Before, many local refineries has no choice but to resort to importing fuel oil from Southeast Asia as their refinery materials. Fuel oil is the remnant of crude oil after the first round of refining. Refining oil products from fuel oil is not only technically challenging, excessively energy-consuming and expensive, but both quantity and quality of the output are inferior. It is estimated that the output from fuel oil is just 60 percent of that from crude oil.

In the past, when repurchasing oil processed by refineries that it supplies, Sinopec used to demand a 50 yuan sales charges. Facing increasing opposition to the policy by refineries, Sinopec recently canceled this policy.

As a result of the supply bailout and other cooperation, the shortage has been eased in certain areas. According to several gas stations the reporter visited, diesel oil is no longer sold by quotas, and the long queues at petrol stations have become scarcer.

The move can be attributed to the NDRC. At the end of November, the body pushed cooperation between Sinopec and local refineries in the Dongbei region, Shandong, Shanxi, and Sichuan provinces.

“The oil shortages stemmed from Sinopec’s insufficient production capacity. This led to local refineries running under production capacity because of a crude oil shortage. Thereafter, the NDRC adopted administrative measures requiring Sinopec to distribute emergency crude oil to local refineries.” said Sha Xiangzhang, secretary-general of Shandong chamber of commerce for petroleum industry.

Sinopec has four refinery plants in Shandong province, respectively located in Zibo, Jinan, Qingdao and Dongying, with total production capacity of 20 million tons. “At present, those Sinopec refineries have reached full production. Even so, the output is not meeting market demands,” says Liang.

At the end of 1998, the government reorganized the local refinery industry and the remaining 82 plants-- 21 of them located in Shandong province. This was spearheaded by the State Development Planning Commission (SDPC)-- now called NDRC. Through a decade of development, that number has grown to 27. According to authorities, these local refineries can produce 40 million tons of oil products, double Sinopec.

Early on, the government allocated 1.8 million tons crude oil a year to Shandong's non-Sinopec refineries-- a quota that has never increased. Nevertheless, Sinopec’s supply of crude oil to its Shandong branch refineries has increased 15 percent each year. “The huge gap between the limited oil quota and increased production capacity of Sinopec has forced these local refineries’ to produce at one-third of their capabilities,” Sha Xiangzhang said.

Not Enough to go Around

But not every local refinery can enjoy a portion of the 500 thousand tons of bailout crude. Sinopec distributed the crude oil to fourteen large-scale refineries with hydrocarbon processing equipment, all of which supplied areas that were going through a severe oil shortage.

Due to its proximity to Hebei province, which is also suffering a serious oil shortage, Dezhou Hengyuan Petroleum and Chemical Company received 40 thousand tons of crude oil. One manager there says that company’s processing capacity has reached 1,000,000 tons-- far greater than the 140,000 tons it receives every year under the quota system. He says that with this in mind, the additional 40,000 tons is utterly inadequate.

Changyi Petroleum and Chemical Company’s production capacity has reached three million tons, while it only has access to 100,000 tons a year-- only 3 percent of its production capacity. But because the oil shortage is not serious where it delivers its oil products, it was only given 10,000 tons of the bailout.

The relationship between Sinopec and local refineries is very subtle. They are rivals in the market, but Sinopec also plays the role of industry administrator. Sinopec is their only legal crude oil supplier, and simultaneously in charge of their sales.

The source of this arrangement is in the crude oil supply plan drawn up in 1998. In the beginning of oil price reform, domestic oil prices, as set by the SDPC, were still lower than international ones. But while Sinopec sold crude oil at international prices ranging from 1,200 to 1,700 yuan a ton to other local refineries, its subsidiary ones only paid the domestic rate of 905 yuan per ton.

As a result, local refineries became non-cooperative: they didn’t offer sufficient processed oil to Sinopec as per the plan's stipulations. In response, Sinopec cut down its oil supply to local refineries. On August 14th, 2002, Sinopec issued a memo saying that, due to local refineries' low supply levels to Sinopec in July, and their uncooperative attitudes in August, Sinopec would cut down crude oil supply to six local refineries’ in September, including Shandong Befar Group, Shandong Guangrao Petroleum and Chemical Group, Shandong Kenli Petrochemical Company, and Great Wall Refinery.

On October 15th 2004, Sinopec issued another memo claimed that local refineries in the Dongying area of Shandong didn’t make their processed oil requirements-- they only processed 9,600 tons, much lower than the 21,200 tons expected of it. The memo also mentions Kenli Petrochemical Company's use of the 50 yuan sale charges as grounds to refuse to deliver oil to Sinopec, and also encouraged other refineries to boycott the current repurchasing policy. Sinopec thus suggested cutting down Kenli's September crude oil supply 11,700 tons.

A Broken System

Says one Dongying refinery manager, “The local refineries have many complaints about the current oil monopoly. Whenever there's an oil shortage, the refineries bear higher cost and suffer greater profit risk. They regularly operate under undue pressure and shut down their refinery equipment. In turn, the shortage becomes much worse.”

But the relief offered by this oil bailout will not be permanent, say industry insiders. They say that the root cause is the monopoly, and the lack of access by local refineries to crude oil imports. This, they say, combined with the fact that the two oil giant’s productivity can’t meet the market demands guarantees that another shortage will come again.

It seems that Shandong's struggling local oil refineries have already seen a glimmer of hope. This year, in October and November, the NDRC initiated two investigations in Shandong, opening dialog with local refineries to research their plight from their angle, and actively explore solutions to challenges facing the industry.

It is said that NDRC is preparing a plan to distribute crude oil directly to local refineries, not via the two oil giants. Details on the distribution amount, price, and related issues is under consideration now.