By Chen Aizhu and Muyu Xu
SINGAPORE/BEIJING (Reuters) - China's oil hub Shandong has embarked on a plan to shut down capacity of half a million barrels per day shared among small, independent refiners to make way for a giant complex that should spur economic recovery from the coronavirus crisis.
Reuters exclusively reported last week that China, the world's largest oil consumer after the United States, was going ahead with the $20 billion Yulong Petrochemical complex.
The planned 400,000 barrel-per-day (bpd) refinery and 3 million tonne-per-year ethylene plant in Yantai, Shandong, the country's hub for independent refineries, sometimes referred to as teapot refineries, had long failed to get approval as China struggled with excess refining capacity.
The drop in demand because of coronavirus lockdowns, as well as expectations climate concerns will reduce conventional motor fuel use, is likely to increase over-supply in the near term.
But state approval was granted last week for a new mega refining complex, weighted towards petrochemical production whose demand is expected to be relatively robust.
That has prompted Shandong to accelerate a plan dating from 2018 to close 500,000 bpd in capacity over the next two-to-three years, Shandong-based industry officials and consultancies said.
That amounts to 20% of Shandong's capacity, made up of more than 60 small plants.
The Shandong government, which has yet to make public any details of the restructuring, did not respond to Reuters' requests for comment.
GRAPHIC: Teapot refineries in China's Shandong province - https://fingfx.thomsonreuters.com/gfx/ce/ygdvzqjlnpw/teapot%20SD.jpg
'DEAD SERIOUS'
Wang Zhao, senior analyst with consultancy Sublime Information Group, said Shandong will first target plants of less than 60,000 bpd, especially those with financial losses, out of about a dozen that have shown interest in compensation.
"The government is dead serious about restructuring, but its execution hinges on how smoothly the relevant parties reach a deal on compensation," said Wang, who is based in Shandong's Zibo city.
The first closures would include Binyang Ranhua, Zhonghai Jingxi Chemical, Yuhuang Chemical and Jinshi Asphalt, with combined crude distillation capacity of just over 200,000 bpd, Wang said. A separate Shandong oil source, who asked not to be named, shared the view.
The semi-official China Chemical News reported last week the Shandong government has asked creditors of the targeted plants, mostly state-run banks, to stop chasing debt repayments and urged compensation to be prioritised for relocating workers and investing in new projects.
Jinshi Asphalt, a bitumen-producing unit with capacity to refine 20,000 bpd of crude, based in Binzhou, northern Shandong, is expected to start closing imminently.
"We've received the first payment as compensation to shut down our crude oil unit," a manager, who declined to be named because of company policy, told Reuters. "Dismantling will start soon."
He did not specify the amount of compensation.
Shandong sources said the government had proposed last year a fee of 800 yuan for each tonne of capacity, taking the total expense to 20 billion yuan ($2.82 billion) for closing 500,000-bpd.
Binyang Ranhua, also based in Binzhou, has agreed to dismantle its 88,000 bpd unit, and will channel the funding into new chemical units, a plant executive said.
Of the others expected to be among the first to close, Zhonghai Jingxi Chemical declined to comment and Yuhuang Chemical could not be reached for comment.
NOT ALL KEEN TO TAKE THE CASH
Some refiners are reluctant to shut capacity.
"We were all legal entities when we started, and our plant is running well. Why should we close down?" said an executive with a refiner based in Dongying on Shandong's northern coast.
Shandong in any case is expected to proceed with caution.
"The main preoccupation for local authorities is likely to be employment and tax revenue, so protecting these through the consolidation process will be the top priority," Michal Meidan, director of the China Energy Programme at the Oxford Institute for Energy Studies, said.
GRAPHIC: China's mega-sized oil refineries with annual refining capacity over 10 million tonnes - https://fingfx.thomsonreuters.com/gfx/ce/xegvbybgdpq/China's%20mega-sized%20refineries.jpg
GRAPHIC: Utilisation rates at Chinese oil refineries in 2012-2019 - https://fingfx.thomsonreuters.com/gfx/ce/qzjvqjylapx/utilisation%20rate%20at%20Chinese%20refineries.JPG
