2009 Overview
After reviewing China's oil and gas markets in the year 2009, C1 summarizes the industry with ten key words, which include distillates price-hike, export, gas shortage, acquisition, low-carbon economy, oil reserves, futures, consumption mix, pricing mechanism, and petrochemical stimulus package.
Distillates Price Adjustment
China's distillates prices were adjusted more frequently in 2009. The gasoil and gasoline retail ceiling prices were adjusted eight times in the year, thrice downward and five times upward.
The retail ceiling price for 90-Ron gasoline was revised up Yuan 1,520/mt accumulatively in 2009, up 24% compared with the level in end 2008.
In 2006-2008, the prices were adjusted merely twice each year.
Oil Products Exports
In 2009, China's distillates exports volume surged. Gasoline exports went up 96% year-on-year to about 4-mil mt. Gasoil exports skyrocketed 615% year-on-year to 4.5-mil mt, from 0.63-mil mt in 2008. Kerosene exports gained 7% to 5.7-mil mt.
Gasoline net imports increased. China turned into a net exporter of gasoil and kerosene.
In December, domestic media analyzed that Chinese oil majors underselled distillates to overseas market. They pointed out that China's oil products exporting prices were at Yuan 2.4 per liter on average in January-August, but the retail prices of 93-Ron gasoline were at Yuan 6.66/liter in Beijing market in November.
C1 dismissed it as wrong, considering the following reasons.
Firstly, the two prices were for different time period. As domestic oil products prices climbed up along with stronger crude throughout 2009, the average prices for January-August were definitely lower than the price in November.
Secondly, the prices were for different specifications of gasoline products. The Yuan 2.4 per liter was the average price of various refined oils, including gasoline, as well as other cheaper products like gasoil and fuel oil. Meanwhile, the Yuan 6.66/liter referred to the price of GB IV 93-Ron gasoline in Beijing market, which was normally higher than the prices in other areas due to higher specifications.
Thirdly, The Yuan 2.4/liter of export price is tax-excluded. It did not include the consumption tax and value-added tax (VAT). However, the Yuan 6.66/liter included consumption taxes and VAT, which accounted for about 20-30% of the domestic retail price.
Pricing Mechanism
China reformed its distillates pricing mechanism in 2009. The government came up with the Oil Price Management Methods (Trial) early of the year.
According to the new mechanism, the necessary but insufficient condition for domestic distillates price adjustment is that the 22-working-day moving average price of the international crude basket (Dubai, Brent, Cinta) fluctuates up or down over 4%;
In addition, the new mechanism guarantees margins for refineries and retailers.
As for natural gas, the market was frequently rumored of reform on natural gas prices. There were two rumored schemes:
The first is to use the weighted average price of domestically-produced and imported gas, and the second is to link gas price to alternative fuels (like crude, LPG, coal or distillates). However, there was no officially-confirmed version yet.
Oil Consumption Mix
China's oil consumption mix recorded a few new changes in 2009, such as, higher shares for gasoline, naphtha and kerosene, while lower shares for gasoil and fuel oil in the consumption pie.
The special economic environment in 2009 also triggered change in the consumption mix. For example, bitumen demand surged and LPG consumption rose sharply in the year.
Natural Gas Shortage
Snowy and stormy weather led to nationwide gas supply crunch in late 2009.
In early November, Wuhan, Xi'an, Taiyuan, Chengdu, Chongqing and Nanjing areas were plagued by unprecedented supply shortage of natural gas, with daily supply gap at 0.2-0.5-mil cu m. Gas filling stations were forced to suspend or ration sales. Supplies to many industrial and commercial end-users were suspended while supply of natural gas for residential-use was also caught short. Wholesale price of natural gas jumped up 20% on average.
It is urgent for a reform on domestic natural gas market mechanism, considering low natural gas storage capacity and obstacles for gas allocation between major pipeline networks.
Acquisition
In 2009, state-run oil majors speed up overseas oil and gas buyings.
Many foreign companies were hit by the global financial crisis, which led to lower costs for acquiring oil and gas assets. Chinese oil companies sped up buyings of oil and gas assets abroad.
Overseas acquisition can not only bring economic benefits but also secure the country's energy supply.
In 2009, Chinese state-run oil majors have finished or were negotiating on 14 overseas oil and gas acquisition cases.
Apart from acquisition, the Chinese government also gave loans for oil, with total sum at over US$46-bil.
So far, China inked such loans worthy of US$25-bil with Russia, US$10-bil with Brazil, US$4-bil with Venezuela, US$1-bil with Angola, US$5-bil with Kazakhstan, and US$1-bil with Ecuador.
Oil & Gas Reserves
China has begun construction of Strategic petroleum reserves (SPR).
The Phase I with 16.4-mil cu m has been filled with oil.
The government was planning on the Phase II and III, each with 26.8-mil cu m of storage capacity. Thus, China will have totally 70-mil cu m of SPR capacity for three phases.
By 2020, SPR will cover three months of crude oil imports, on parity with the level suggested by IEA.
It is stated in the Petrochemical Stimulus Program that China should take the opportunity to set up strategic oil products reserves. It requires to set up 3-mil mt of reserves in 2009, 6-mil mt in 2010, and 10-mil mt before the end of 2011.
PetroChina and Sinopec have been preparing for building distillates reserves.
Establishing of natural gas reserves has been put on working agenda after the burst of supply tightness in 2009.
Oil Futures
In 2009, more players in fuel oil spot market opened positions in Shanghai Futures Exchange (SHFE) in view of laggard price trend and sluggish sales in spot market.
Fuel oil futures at SHFE became the third largest energy futures contract in the world, with trading volume next only to NYMEX's WTI and ICE's Brent crude futures.
Crude & distillates futures were in R&D stage. They are expected to launch in Twelfth Five-Year Program.
There is also some paper trading with similar functions with futures. For instance, the forward contracts of spot fuel oil trading at Shanghai Petroleum Exchange. Bohai Commodity Exchange launched spot crude and coke continuous trading contracts on Dec 18, 2009.
Low-Carbon
The notion of "low-carbon economy" was in spot light in 2009 during the Copenhagen Climate Conference, which was hold in Dec 7-18, 2009.
Before that, the State Council announced on Nov 26, 2009 that China will cut the release of CO2 by per unit of GDP by 40-50% by 2020 compared with the level in 2005.
In the long-term, low-carbon economy will drag down China's energy consumption growth and change its energy consumption mix.
Petrochemical Stimulus Package
In May 2009, the State Council announced China Petrochemical Industry Adjustment and Revitalization Plan, which was recognized as the development guidance of the country’s petrochemical industry in the coming three to five years.
Main Contents:
Production and output targets: By 2011, crude throughput to hit 405-mil mt, output of refined oil to reach 247.5-mil mt, and ethylene products to total 15.5-mil mt.
Industrial layout to be more rational: By 2011, the situation of "North-to-South oil diversion" will change. The Yangtze River Delta, the Pearl River Delta, the Bohai Sea region will further enhance the degree of industrial clustering by building three to four 20-mil-mt/yr grade oil refineries and 2-mil-mt/yr grade ethylene production bases. Pell-mell development of coal chemical industry will be curbed.
Product mix will improve significantly.
Technological progress will speed up.
Achievements will be made in energy-saving and emission reduction.
2010 Outlook
C1 forecasts that in 2010, China's oil and gas markets will record further increase in oil consumption, expansion in refining capacity, growth in oil exports, more frequent adjustment of domestic distillates prices, and higher oil prices.
Oil Consumption to Increase Further
Economy will recover further in 2010 amid the Yuan 4-tril bailout funds. Thanks to that, China is expected to see continual rises in oil and gas consumption in the year.
In 2010, China's oil consumption is estimated to hit nearly 397-mil TCE, up 4.3% year-on-year. Growth rate was higher than the 3.16% in 2009. Natural gas consumption is to increase 17.5% from the 89.1-bil cu m in 2009, to 104.7-bil cu m in 2010.
Refining Capacity to Expand Further
China is to add 27-28-mil-mt/yr of refinery capacity in 2010. The major rise will come from the launch of CNPC Qinzhou refining project.
In 2011-2015, China has 280-320-mil-mt/yr of refining projects on the way or pending approval, which means over 60-mil-mt/yr of new capacity each year on average. Totally about 163-mil-mt/yr will come on stream before 2013, or averagely 54-mil-mt/yr each year.
Exports of Refined Oil to Keep Rising
Amid continual refinery expansion and expected slower domestic oil consumption on economic restructuring, it is estimated that China will export more oil products in 2010 and the coming years. The country may swing into an oil products net exporter.
Gasoline exports from China will keep rising steadily in the next five years, as overseas demand is expected to warm up amid recovering global economy in 2010-2014. Exports will reach 4.98-mil mt, 6.7-mil mt, 7.58-mil mt, 8.37-mil mt and 9.01-mil mt in the years, respectively. Exports were about 4-mil mt in 2009.
Gasoil exports via third-party processing and bonded trade will increase in the coming few years, due to continuous oversupply in domestic market. Ministry of Commerce also increases the gasoil export quotas for Sinopec and PetroChina. C1 believes China will export 3.5-4.5-mil mt of gasoil each year in these years.
As for fuel oil, by virtue of booming bonded bunker market and growing "re-export" business, fuel oil exports will keep increasing.
Distillates Price Adjustment to Remain Often
In 2010, international crude oil prices would remain volatile, amid fluctuating stock and gold markets, tight geopolitics, wavy US dollar and changes in major economic entities. Based on current distillates pricing mechanism, adjustments of the domestic oil products prices would keep often in the year.
It was rumored that the Chinese government is mulling over adjusting the present oil products pricing mechanism. It may cut the interval for price-adjustments to less than 22 working days. If true, distillates prices would be adjusted more frequently in 2010.
Oil Prices May Go Up Further
Major economies, such as US, Europe and Japan, are expected to recover in 2010. Emerging economies would likely grow further in the year.
IEA forecasted that global oil demand would reach 86.3-mil bbl per day in 2010, up 1.5-mil bbl compared with 2009.
Thus, most international agencies believed that international oil prices would be higher than the levels in 2009.
