The future of China’s multi-billion dollar investment in an oil terminal and transshipment pipeline in Burma may be in doubt, after a major processing refinery project in China was delayed.
The controversial refinery in the Yunnan Province capital of Kunming, which sparked angry street protests last year over pollution worries, will not now be built before 2016 at the earliest, according to Chinese energy industry reports.
The huge 200,000-barrels-per-day complex—developed by state-owned China National Petroleum Corporation (CNPC)—had been expected to begin operations sometime this year. But it is one of a number of new oil processing projects across China being shelved because of overcapacity as the Chinese economy slow down.
Nearly half of the 22 million tonnes a year of crude oil from the Middle East and Africa which is scheduled be transshipped through Kyaukphyu, Arakan State, was intended for the refinery at Anning, just outside Kunming, to produce gasoline and diesel and to feed an adjacent new petrochemicals plant.
CNPC’s 900-kilometer oil pipeline through Burma, with transmission capacity of 440,000 barrels per day, is still being constructed—amid much controversy over safety and land grabbing allegations.
“The shelving of the large refinery in Kunming is now part of a wide-ranging cutback in energy developments in China. It is one of a number of major refineries and petrochemical projects being delayed or canceled,” Collin Reynolds, an independent energy industries consultant and analyst told The Irrawaddy.
“Of course, China is still a huge consumer of oil and gas and that
isn’t going to change overnight, all the same the slowdown means that the multi-billion dollar pipeline and port developments in Burma are certainly not so important now, and yet the pace at which CNPC has been building its pipelines there has been frenetic.
“China’s economy has been slowing down for the past two years but during that time the big state-owned energy enterprises have been expanding like it was the 1990s,” Reynolds said.
Gasoline and diesel consumption in China grew at its slowest annual rate for 20 years in 2013, according to Reuters. “While the fuel market cooled, construction of refineries continued apace, leaving a capacity glut that hurt processing margins and led to a rapid rise in Chinese fuel exports in 2013,” Reuters said.
A recent survey by Bloomberg business news agency concluded that the growth of China’s petrol and diesel exports will have a detrimental effect of Asian refining margins this year.
Bloomberg estimated that refining profits in the region, outside China, will fall by an average of 11 percent in 2014. The profit margin for refining in Singapore already dropped by as much as 16 percent in 2013, to an average of US$4.84, it said.
Without cutbacks, China’s refinery construction and plant expansions will result in a surplus of 140 million tonnes of gasoline and diesel by 2015, said a study published by the China Petroleum and Chemical Industry Federation.
CNPC’s oil pipeline through Burma is behind schedule, but is believed to be 75 percent completed, according to the energy analysts Platts in Singapore. But it has been mired in controversy along its route, with allegations by human rights NGOs that land has been taken without adequate compensation and local people forced to move.
The sister natural gas pipeline running alongside the oil conduit is already in operation, carrying fuel from the Shwe offshore field in the Bay of Bengal. But only this month there were allegations in the Burmese Parliament of safety problems with the gas pipeline, including cracks.
CNPC is building oil storage tanks at its Kyaukphyu transshipment terminal. There will be 12 tanks each with a capacity of 100,000 cubic meters. That would provide storage for up to 7.5 million barrels, or the equivalent of 17 days operation of the pipeline at full capacity.
“In theory CNPC could just ship the oil coming through the pipeline on to other destinations in southwest China,” Reynolds said. “The problem with that is that pipeline infrastructure within Yunnan is still limited.
“Unless CNPC can quickly shift oil pumped through the Myanmar pipeline there could well be a logistics backlog at its coastal terminal,” he said.
The Kyaukphyu oil terminal is at the heart of a proposed special economic zone for the coastal area.
One of the main reasons why the Kunming refinery was ordered to be built was because the isolated Chinese province suffered regular oil fuel shortages.
There are also plans by CNPC and the other Chinese state national oil companies to build more pipelines connecting Yunnan with the rest of China, but whether this infrastructure will be in place to handle the oil coming through Kyaukphyu is unclear.
“While [China] will no doubt continue to build refineries, the pace is likely to slow over the next few years, and new units will have to compete with other projects to secure funding,” said Hong Kong’s South China Morning Post. “This means refining economics will have to improve to justify the expense of building and operating costly plants.”