Petrochemical Industry Faced with Challenges

More than 80% of crude oil in China is used in oil processing,
chemical fiber manufacturing and chemical raw material
production. Sufficient oil supply is the basis for the sustained
development of these sectors. The lasting supply deficit of oil
resources in China has placed severe challenges before the
future development of the petrochemical industry.

Petrochemical industry has acquired foundation for accelerated
development

The oil refining industry and the ethylene industry are major
energy and basic raw material sectors of the national economy.
They are important indicators of the social and economic
development level and the comprehensive strength.  After more
than 50 years' development, the refining industry in China has
already acquired considerable scale and foundation. The scale
of production and the level of technology and equipment in
refineries have improved further through institutional
reformation, investment orientation readjustment and technical
renovation enhancement during the Ninth Five-year Plan period
(1996-2000) and the Tenth Five-year Plan period (2001-2005). A
relatively complete refining industry system has been formed and
China has become one of the leading refining countries in the
world. In 2005, the processing capacity of crude oil in China
reached 328 million t/a and China produced 175 million tons of
oil products (gasoline, kerosene and diesel). The output of oil
products in China increased by 44.6% during the Tenth Five-year
Plan period with an average annual growth of 7.6%.
   Taking the refining industry as the base, the ethylene
industry in China has acquired considerable industrial
foundation after nearly 50 years' construction and development.
Through institutional reformation and technical renovation
enhancement during the Ninth Five-year Plan period and Tenth
Five-year Plan period, in particular, the scale of production
and the level of technology and equipment in ethylene producers
have reached a new high. The capacity of ethylene in China was
7.68 million t/a in 2005 and the output reached 7.555 million
tons. Compared with 2000, the output of ethylene in 2005
increased by 60.7% with an average annual growth of 10%.
   Despite the accelerated development of the ethylene industry
in China during the Tenth Five-year Plan period (2001-2005), the
self-sufficiency rate of domestic products is relatively low,
being only 40.3% in 2005. Although it was 5.7 percentage points
higher than the rate of 34.6% in 2004, it was 5.3 percentage
points lower than the rate of 45.6% in 2000.
   With the sustained and rapid expansion of the polyester and
polyester fiber industrial chain in recent years, China has
become the largest producer of polyester series products in the
world. The brisk demand of raw material PTA (purified
terephthalic acid) has promoted the construction of a group of
PTA units and also increased the market demand of p-xylene. The
capacity of p-xylene in China was 2.3 million t/a in 2004 and
the output was 1.88 million tons. Compared with 1999, the output
of p-xylene increased by 54.7% with an average annual growth of
9.1%. The output growth was much lower than the demand growth.
The capacity of p-xylene was 3.16 million t/a in 2005.
   As the petrochemical industry has been regarded as a pillar
sector in China, it needs accelerated development. Ethylene is
the lead of the petrochemical industry. Only when it gains the
development priority and maintains a considerable
self-sufficiency rate can the safety of the petrochemical
industry be guaranteed. Refining is an important component of
the petrochemical industry in China and leads the downstream
industrial chain. It also needs moderate development.

Development trend for the integration of refining and chemical
production has become more prominent

The development trend of large scale and intensive operation has
become more prominent in the global petrochemical industry. The
integration of refining and chemical production, in particular,
can help improve the comprehensive utilization of resources,
energies and public facilities, reduce the construction
investment and operating cost and enhance the market competitive
edge and risk-withstanding ability in firms. Besides, in the
transitional period after the WTO accession the petrochemical
industry is all the more faced with market internationalization.
To strengthen international competitive edge, the petrochemical
industry in China must adapt itself to the international
competition situation and quickly form a group of production
bases integrating refining and chemical production. The two
specific programs for refining and ethylene production recently
approved by the state have clearly defined that petrochemical
industry should take on the road of integrating refining and
chemical production to achieve the scale of economics, increase
the concentration of industry and improve the comprehensive
utilization of resources. The development trend for the
integration of refining and chemical production in China will
therefore become more prominent in future.
   Yangzi Petrochemical Company Ltd. and Shanghai Petrochemical
Company Ltd. formed production bases with the integration of
refining and chemical production rather early. Yangzi
Petrochemical Company Ltd. already owns a capacity of 8.0
million t/a refining, 650 thousand t/a ethylene and 800 thousand
t/a p-xylene. When the 600 thousand t/a ethylene in BASF-YPC Co.,
Ltd. is added, Yangzi Petrochemical Company Ltd. has become the
first 1.0 million t/a ethylene production base in China.
Shanghai Petrochemical Company Ltd. has already formed a
capacity of 14.0 million t/a oil refining, 850 thousand t/a
ethylene and 230 thousand t/a p-xylene. The capacity of ethylene
and the capacity of p-xylene in the company will be expanded to
1.3 million t/a and 830 thousand t/a respectively during the
Eleventh Five-year Program period (2006-2010). Owing to the
brisk demand and the price rise of petrochemical products in both
domestic and overseas markets in recent years, these two
corporations have both accomplished satisfactory economic
benefits.
   The 10.0 million t/a oil refining renovation project and the
1.0 million t/a ethylene renovation project in Xinjiang Dushanzi
Petrochemical Company Ltd. to match China-Kazakhstan crude oil
transmission project are in full swing today. It is expected that
the refining renovation project will complete in the first half
of 2007 and the ethylene renovation project will complete in the
first half of 2008.
   Besides, large refining and chemical production integration
bases in Fujian Refining & Chemical Co., Ltd., Tianjin
Petrochemical Company Ltd., Zhenhai Refining & Chemical Co., Ltd.
and Fushun Petrochemical Company Ltd. are also being
constructed.

Oil consumption in China urgently needs optimization and
readjustment

As a non-regenerative fossil energy, oil is both an important
energy and an important chemical raw material. Around 60% of
crude oil in China is used in the production of oil products
(gasoline, kerosene and diesel). Around 75% of oil products are
used in communication and transportation. The consumption of oil
products in China was increased by 53.9% during the Tenth
Five-year Plan period with an average annual growth of 9%.
(2001-2005) With the developmen