Huizhou Refinery Approval Boosts Venezuela and Petrochina's Strategy

The Chinese Cabinet's approval of a 400,000b/d refinery - to be built by Petrochina and PdVSA in Guangdong province - will be welcomed by both partners. Indeed, BMI views this project as a crucial pawn in Petrochina's regional diversification strategy; it also presents Venezuela with a huge opportunity to expand crude exports to China and meet the targets established under an oil-for-loans deal signed by the two countries.

On April 15 2012, China's State Council, the country's cabinet, officially approved a proposed joint venture (JV) refinery project in the south of the country that will be operated by state-run PetroChina, a subsidiary of the China National Petroleum Corporation (CNPC), and Venezuelan national oil company (NOC) Petróleos de Venezuela (PdVSA). The two partners are expected to invest RMB58.5bn (US$9.29bn) to build a 400,000 barrels a day (b/d) plant in the city of Huizhou in the Guangdong province. Environmental approval was granted in January 2011.

In addition to the refinery, the project also includes a crude oil import terminal, an oil products export terminal, a transit pipeline and a tank farm. CNPC will hold a 60% stake in the project, leaving PdVSA with the remaining 40%. Capacity at the complex will eventually be expanded to reach 1,000,000b/d.

Another Pawn In CNPC's Southern March

China has an estimated total refining capacity of 10.2mn b/d - dominated by CNPC and the China Petroleum and Chemical Corporation (Sinopec), which together account for 80%. The province of Guangdong, which holds more than 10% of the country's total capacity, is already a large downstream hub. However, plans to significantly expand facilities in the area are already underway:

State-run China National Offshore Oil Corporation (CNC) is looking to double capacity at its 240,000b/d refinery in Huizhou, which was only brought onstream in 2009; andAnother JV comprising state-run Kuwait Petroleum Corporation (KPC - 40%), Sinopec (50%) and France's Total (10%) plans to build a 300,000b/d plant on Donghai island by 2014-2015, which will then be expanded to 500,000b/d two years later.

Refining in South Central China (Zhōngnán) is dominated by Sinopec, which owns three of Guangdong's four refineries, although CNC ended its rival's de facto monopoly in 2009 after its Huizhou plant came online. In contrast, the majority of CNPC's refineries are located in west (Xīběi) and north-east (Dōngběi) China. The company started making inroads into the wider Zhōngnán region by opening the Qinzhou refinery in the Guangdong's neighbouring Guangxi province in 2010.

Nonetheless, CNPC, which is keen to diversify its downstream operations geographically, has identified Guangdong as a key province. Indeed, the area is one of China's most developed and rapidly growing industrial regions, and it already benefits from a huge population. The proposed JV will strengthen southern China's oil products market.

PdVSA Finds An Opening On The Pacific Front

Foreign participation in Guangdong's refinery projects is noteworthy given oil producers want to ensure they are locked into long-term supply contracts with China. This is particularly true for KPC and PdVSA. Consequently, the JV refinery is of high strategic importance not only for CNPC, but also for PdVSA, as it provides Venezuela with a secure route to the booming Chinese market.

The refinery project signifies growing cooperation between Venezuela and China in the energy sector, and is another step towards PetroChina's regional downstream diversification. Venezuelan crude oil exports to China have long been on the rise. According to the Energy Information Administration (EIA), exports rose from only 39,000b/d in 2005 to 120,000b/d in 2008. In December 2010, oil minister Rafael Ramírez said Venezuela was exporting 362,000b/d to China, making the country one of China's largest oil suppliers. Underlying the increase is a US$20bn oil-for-loans deal signed in April 2010. That deal requires Venezuela to export up to 700,000b/d by 2015 in order to repay the loan, and volumes could rise even higher, with the Venezuelan government aiming to export 1mn b/d to China by the mid-2010s.

As the refinery will be designed to process heavy crude, it appears highly likely that PdVSA will supply all or most of the feedstock, while the bulk of the investment will likely come from PetroChina. As a result, the plant will help Venezuela double its current crude exports to China and should thus help it comfortably meet the 2015 target agreed under the oil-for-loans deal.