Overview of Oil Industry in China

Due to continuous modernization and urbanization over the past years, China experiences huge energy demand and is one of major oil and petroleum consuming economies in the world. The following figures set out China’s production, consumption and import profile over the 5-year period from 2011 to 2015. While China’s oil production grew at a CAGR of approximately 1.4%, it could not catch up the consumption growth at a CAGR of approximately 5.0% over the same period, resulting in the shortfall being fulfilled by import. In 2015, the oil import in China amounted to approximately 397.5 million tons, which accounted for approximately 72.1% of the total oil consumption volume of approximately 551.6 million tons.

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The value chain of oil industry in China comprises three main segments: (i) upstream exploration and production; (ii) midstream distribution; and (iii) downstream retail and consumer. The upstream exploration and production is generally dominated by the Three State-owned Giants. There are also a few local non-state-owned refineries which engage in production and refinery activities. Although the Three State-owned Giants also participate in midstream and downstream distribution, in particular refined oil products (i.e. gas station operations), their primary business focus is exploring oil resources and refining, research and development of their products. Hence, midstream dealers play an important role in the value chain of the refined and fuel oil industry by fulfilling the market needs not served by the Three State-owned Giants as these dealers have the capital, logistics, storage, processing and network capability to facilitate prompt delivery of refined and fuel oil products, enabling them to bridge the gap between upstream producers and downstream users.

Fuel oil products

Fuel oil is a general term to describe fuel used in furnace and other industrial engines and is a mixture of oil products (distillation residue) produced from crude oil in fractional distillation process. Fuel oil can also be divided into unblended (single grade) and blended (mixed grade)products. Examples of unblended fuel oil products include vacuum residue and slurry oil from oil refineries. Blended fuel oil is primarily used as fuel in large-scale shipping vessels and industrial furnaces. The quality of unblended fuel oil sometimes cannot meet burning requirements of these furnaces (i.e. viscosity).Thus two or more kinds of (usually unblended) fuel oil products are blended to alter their physio-chemical properties for specific engine use. The fuel oil production in China is concentrated in Shandong Province with approximately46.1% market share in terms of production volume in 2016, followed by Jiangsu and Guangdong Provinces respectively. These top three fuel oil producing provinces accounted for approximately 68.1% market share in terms of production volume. The downstream consumption of fuel oil mainly concentrates in the petroleum refining, maritime transportation and chemical industries. These industries took up over 90% of the fuel oil consumption in 2015. According to the China Petroleum and Chemical Industry Federation, Ministry of Transportation of China and National Bureau of Statistics of China, these three major downstream industries of fuel oil have experienced stable growth for the period from 2011 to 2016.From 2011 to 2016, the output volume of petroleum refining industry grew from 447.7 million tons to 541.0 million tons, representing a CAGR of 3.9%. Port container throughput in their increased from 163.7 million TEU in 2011 to 218.0 million TEU in 2016, while the revenue of chemical industry reached RMB 9.2 trillion in 2016 from RMB 6.5 trillion in 2011, representing CAGR of 7.2% for the same period.

Unblended fuel oil

Consumption of unblended fuel oil in China grew at a CAGR of approximately 6.2% and outpaced production at a CAGR of approximately 5.4% for the period from 2011 to 2015. Such consumption growth was driven by the development of major consumption industries (petroleum refining, maritime transportation and chemical).

Blended fuel oil

According to the Ministry of Transportation of China, maritime transportation in China experienced rapid development from 2011 to 2016, which created a momentum for growth in the blended fuel oil market. It drove the growth of consumption of blended fuel oil products in their at a CAGR of approximately 8.7%, with production of the same at similar pace of a CAGR of approximately 7.9% for the same period.