Research Paper

1. 617
China's Petroleum Market in the 1990s:
Review and Challenges to Its Refining Industry
Frank C. Tang
Program on Resources: Energy and Minerals, East-West Center, Honolulu, Hawaii, USA
ABSTRACT
On the basis of reviewing China's petroleum market in the early 1990s, this paper examines
some critical issues facing the country's refining industry. China's crude oil production has
stagnated in recent years, whereas oil demand and oil imports have increased rapidly since the
early 1990s. For the first time since 1960s, China became a net oil importer in 1993. Although
the total capacity of China's refining industry is impressive, the overall refinery utilization rate
has been considerably low owing to the inherited dispersed and poorly coordinated refining sys-
tem, and inadequate domestic crude oil supply. 1n addition. the industry is confronting several
major critical challenges, mainly, changing demand pattern, worsening crude quality, and
tightening product specifications.
OVERVIEW OF CHINA'S CRUDE OIL PRODUCTION
The development of China's modem oil industry dates from the late 1950s when the
Daqing oil field was discovered in the Songliao basin of Northeast China. For nearly
20 years, the industry achieved annual growth in output averaging 20% despite the use
of largely obsolete technologies. However, the limits to technologies were reached in
the late 1970s when peaking of production at Daqing and other large oil fields led to
overall stagnation in the industry during the period from 1978 to 1983. Following the
introduction of higher crude prices and infusion of foreign technology for enhanced
recovery, the growth of output resumed in the second half of 1980s. Since 1990, the
growth of China's crude oil production has slowed down again. Crude oil production
increased from 2.77 million barrels per day (bid) in 1990 to 2.92 million bid in 1994,
representing an average annual growth rate of only 1.3 percent.
An overwhelming share of China's crude oil produced onshore. Offshore produc-
tion accounts for only a small share, but has been increasing rapidly. The share of off-
shore production in the country's total crude output increased from 1.0 percent In 1990
to 4.4 percent in 1994 (129 thousand bid being produced offshore in 1994). About
two-thirds of the country's incremental output in this period came from offshore.
Daqing oil field, in the Songliao basin of Heilongjiang Province, is by far the largest
oil field in China. For many years, its output has amounted over I million bid and
accounted for around 40 percent of the country's total production. The second largest
*Most of 1994 data were derived from Frank C. Tang and Fereidun Fesharaki, "A Short Note on China's
Oil Market in 1994: Myths, Reality, and a Search for the Truth," China Energy Short Memos, No.7.
February 1995, Program on Resources, East-West Center.

2. 618 China's Petroleum Market in the 1990s
oil field in China is Shengli oil field in Shandong Province. Shengli's output increased
rapidly for most of the 1980s, but production has declined slightly in recent years.
Shengli's production of 620 thousand bid of crude oil in 1994 was 21.2 percent of the
country's total production. Liaohe oil field in Liaoning Province became China's third
largest oil field when it surpassed Huabei oil field (in Hebei Province) in 1986.
Liaohe's production of 300 thousand bid of crude oil in 1994 was 10.3 percent of the
national total. All the three oilfields are located in northeast part of China. The total
output from the above three oilfields in 1994 accounted for 70% of national total, but
production from these oilfields has been stagnated. In fact, all of China's incremental
onshore production from 1990 to 1994 came from Xinjiang Autonomous Region in the
West, which has oil fields in the three basins: Jungger, Tarim, and Turpan-Hami.'
Crude output from the three basins increased from 139 thousand bid in 1990 to 225
thousand bid in 1994. China's major onshore oilfields is illustrated in Figure 1.
ECONOMIC GROWTH, OIL DEMAND AND OIL TRADE
From 1964 to 1994, China achieved average annual growth rate of 8.4% in GDP. The
manufacture sector has exhibited similar growth; its share in GDP increased from less
than 30% in 1964 to over 50% in 1994. The rapid rate of economic growth in China
during the last three decades has been associated with rapid growth in oil demand. In
the same period, the average annual growth rate for oil consumption was 10.0%. Final
oil consumption (petroleum products and a small amount of crude direct burning)
reached 2.9 million bid in 1994. Figure 2 shows China's historical economic growth,
crude oil production, refining capacity and oil consumption from 1964 to 1994. Note
that in the figure all indicators are normalized to indexes (1964= 100). It can be seen
from Figure 2 that China enjoyed even more spectacular economic growth in the past
10 years. GDP increased 9.7% per annum for 1984 to 1994. However, the corre-
sponding average annual growth rate of oil consumption over the same period was
only 6.3%. The main reasons for this are that the growth of China's crude oil produc-
tion has slowed down since the late 1970s and that oil imports were restricted before
the late 1980s.
China's oil trade has been closely related to the development of the oil industry.
China has remained one of the important oil exporters and importers in the Asia-
Pacific region since 1973 when China first exported crude to Japan. The government
policy before 1986 (when international oil prices plummeted) was to maximize oil
exports. Crude oil exports increased steadily in this period and reached a all-time high
of 700 thousand bid in 1985, accounting for nearly 30% of that year's oil production.
Since the collapse of international oil markets in 1986, China's oil trade policy has
evolved from one of solely maximizing exports to a more rationalized program of
imports and exports. While oil exports decreased only slightly, oil imports (especially
oil products) surged in 1989, 1992, and 1993. Product import surge in 1992 made
China become a net product importer for the first time since the mid 1960s. China has
I According to China's official statistics, the classification Xinjiang Oil Field refers to all the oil fields in the
Jungger basin; Tarim Oil Field refers to all the oil fields in the Tarim basin; and Turpan-Hami Oil Field
refers to all the oil fields in the Turpan-Hami basin.

3. China's Petroleum Market in the 1990s
~I-
Junggar BaSin
619
Xinjiang
.:
;;.
Tarim BasIn
Tibet
r : '.
1Gansu'-r-;
.
500 Km
Figure 1. China's major oil fields and provinces .
become a net oil importer since the 1993 product import surge, although it is still a net
crude oil exporter. Because of the import surges, China 's oil consumption has picked
up considerably since the early 1990s; oil consumption increased 8.9% per annum
from 1990 to 1994 on average.
THE DEVELOPMENT OF CHINA'S REFINING INDUSTRY
China's refining industry has experienced three periods of rapid expansion since the
early 1960s after large domestic oilfields were discovered and developed. The first
occurred in the late 1960s, when a number of large-scale refineries were brought on
stream to run Daqing, Shengli, Huabei, Liaohe crudes. Total refining capacity (distil-
lation capacity) increased from 250 thousand bid in 1964 to 880 thousand bid in 1970.
In this period, refinery expansion was largely planned in tandem with the growth in
crude oil output, and almost all refineries were constructed in the northern crude oil
producing areas.
The second period occurred in the mid-1970s. The capacity growth in this period
was particularly boosted by the expansion of the crude pipeline network which per-
mitted the expansion of existing refineries in the southern coastal region and the con-
struction of grass-roots coastal refineries . As a result, the share of refining capacity in
the main consumption centers had moderate increase. Total refinery capacity reached

4. 620 China's Petroleum Market in the 1990s
(Index (1964= I00)
1,800
... ...):. . . Crude Production
1,600
.. Oil Consumption
A
1,400
---+- Refining Capacity
-- - -.>- - . GOP
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800
600
400
200
1,000
1,200
o
1964 66 68 70 72 74 76 78 80 82 84 86 88 90 92 94
Sources: China Statistical Publishing House, StatisticalYearbook of China, various years.
Figure 2. Indexes of China's Historical GDP, crude production, oil consumption and refining
capacity: 1964-94 (1964=100).
1,860 thousand bid by 1978. Much of the expansion of capacity during this period,
however, came in the form of new distillation units with few upgrading facilities.
Cracking capability in 1978 was only about 21% of distillation capacity.? Therefore,
the average yield from refineries became heavier, with fuel oil yields reaching nearly
50%. Moreover, many of these refineries were poorly planned and located; their effi-
ciency was fairly low.
2Cracking capability is defined in this paper as percentage on distillation capacity of four major processes:
fluid catalytic cracking (FCC) and residue catalytic cracking. hydrocracking (HDC), thermal cracking, and
coking.

5. China's Petroleum Market in the 1990s 621
In 1983, Sinopec (China National Petrochemical Corporation) was established as a
national refining company to consolidate all major refineries in the country. Since its
establishment, Sinopec invested heavily in the upgrading of the entire system and
worked to rationalize the distribution of crude and operations of individual refineries.'
These developments set the stage for the third major period of refining capacity expan-
sion, which started at 1988 when China's refining capacity totalled a little over 2.3
million bid. Within six years, refining capacity has expanded by more than one mil-
lion bid; all but 50 thousand bid of this amount has come from the expansion of the
existing refineries. The rapid growth of distillation capacity has associated an even
more rapid growth in upgrading units in this period. As a result, the overall yields of
heavy ends reduced from 50% in 1978 to 21% in 1994.
Table I presents China's refinery configurations in 1994. China's refining industry
is, by all counts, impressive. With 3.4 million bid of crude distillation capacity cur-
rently, it is second only to Japan in the Asia-Pacific region, and the fifth largest in the
world. China also boasts a significant amount of cracking capacity which at 45% of
the distillation capacity, is more than twice that of the other Asia-Pacific countries
(excluding China) and just slightly lower that of the United States. Among China's
upgrading categories, however, FCC/RCC far outweighs the others; the ratio of
FCC/RCC capacity to crude is 30%, a figure second only to the United States. This is
attributed to (1) the relative success with which China has developed its domestic cat-
alytic cracking technology and (2) the incentive for producers to maximize gasoline
production, owing to the product pricing system in China, which has historically
priced gasoline at a significant premium over diesel. However, the capacity of other
secondary units has not attained much significance. The current ratio of hydrocrack-
ing (HDC) to crude capacity is only 3.3%. China has not been as successful in devel-
oping its domestic HDC technology as it was with FCC. The lack of sufficient hydro-
gen (partly due to the low catalytic reforming capacity in the country) and the massive
investment requirements of HDC has also been contributed to the low HDC capacity
in China. The relatively low capacity of catalytic reforming (only around 4.4% of dis-
tillation capacity) is, in tum, attributable to the fact that China's domestic crudes con-
tain only a small fraction of naphtha and to the fact that a large quantity of naphtha is
consumed as ethylene plant feedstock. While delayed coking is the most widely used
process in China for the upgrading of resid, its total capacity is only about 5.8% of dis-
tillation capacity. A major factor that has restricted the development of coking capac-
ity is the limited market for refinery coke.
While China's refining capacity has experienced rapid growth since early 1960s,
refinery utilization rates has remained low for most of the time. This is mainly because
China's inherited dispersed and poorly coordinated refining system, national policy of
maximizing crude oil exports (from 1974 to 1985), and domestic crude production
stagnation since the late 1980s. Some of upgrading units, notably FCC, have also been
under-utilized. As a gasoline-producing technology, FCC is apparently not commen-
surate with the country's increasing demand for middle distillates. China's refining
3Currently, Sinopec controls about 88% of China's refining capacity. The rest is under the jurisdiction of
the CNPC (China National Petroleum Corporation) and the local governments.

6. 622 China's Petroleum Market in the 1990s
capacity, throughput, and refinery untilization from 1964 to 1994 is presented in
Figure 3.
TABLE I
Refinery Configurations in China, Japan, and the Asia-Pacific Region: 1994
China Japan Asia-Pacific Region
('000 bid) % of CDU ('000 bid) % of CDU ('000 bid) % of CDU
Distillation Capacity (CDU)
Coking
Thermal Cracking
FCCIRCC
Hydrocracking
Catalytic Reforming
Alkylation
3,417.0
199.0
195.0
1,014.7
114.2
151.6
27.3
100.0%
5.8%
5.7%
29.7%
3.3%
4.4%
0.8%
4,701.0
102.0
55.0
819.0
258.0
739.0
71.0
15,381.10
2.2%
1.2%
17.4%
5.5%
15.7%
1.5%
100.0%
413.7
638.5
2,423.9
506.7
1,677.1
158.9
2.7%
4.2%
15.8%
3.3%
10.9%
1.0%
Note: Asia-Pacific region is defined as East Asia, Southeast Asia, South Asia, and Australasia.
Sources: East-West Center Database.
CHALLENGES TO THE REFINING INDUSTRY
The rapid economic development and unleashed oil demand since the early 1990s
have indicated that China's refining industry is at a critical crossroads. Despite the
huge capacities, China's refining industry is finding it increasingly difficult to meet
the domestic demand for petroleum products. Apart from the refineries' low utiliza-
tion rates and poor distribution network, the industry is confronting several major
challenges, such as changing demand pattern, worsening crude quality, and tightening
product specifications.
Changing Product Demand Pattern
Since the early 1980s, the growth rate of petroleum product consumption in China was
moderate compared with its rapid economic growth. Inthe eight years of period from
1984 to 1992, GDP grew at 9.0% per annum on average, whereas aggregated oil con-
sumption increased only 5.8% annually in this period. However, consumption of
lighter products (mainly gasoline and diesel) increased more rapidly than average,
owing to the expansion of motor transportation. From 1984 to 1992, the passenger-
mileage and freight ton-mileage of motor transportation increased at average annual
rates of 11.5% and 11.8%, respectively. In the same period, gasoline and diesel con-
sumption was growing at respective rates of 9.7% and 8.5% annually. Inother words,
the consumption of products other than gasoline and diesel was increasing rather slow-
ly, at an average rate of only3.1% from 1984 to 1992. The consumption of fuel oil as
a percentage in the total oil consumption decreased from 33% in 1984 to 25% in 1992.

7. China's Petroleum Market in the 1990s 623
8~.
7~
•
90%
50%
' j
•
•
- - Utilization Rate
_ Refining Capacity
c==J Crude Run
40%
1.500
30%
1.000
20%
500
1~.
('000 bid)
3.500
2.500
3.000
2.000
o
1964 66 68 70 72 74 76 78 80 82 84 86 88 90 92 94
Sources: China Statistical Publishing House, Energy Statistical Yearbook of China, various years.
Figure 3. China's refining capacity, throughput and utilization rate: 1964-1994.
China's GDP and petroleum consumption grew, respectively, at 12% and 8.0%
annually from 1992 to 1994. Many believe that such growth rates will not be sustained
in the future. China's GDP is projected to increase 8.0% per annum on average for the
six years period from 1994 to 2000, and petroleum product demand is projected to
increase to 3.9 million bId in 2000 at an average rate of 5.0% per annum in this peri-
od. Product demand will continue to slant toward lighter products, owing to the rapid
expansion of the country's motor transportation. Among the major petroleum prod-
ucts, gasoline will continue to lead the growth rate 8.5% per annum, followed by diesel
at 7.4%. Fuel oil demand (mainly low sulfur fuel oil) is expected to increase 20%

8. 624 China's Petroleum Market in the 1990s
annually. Table II presents China's petroleum product demand in 1984, 1992 and 2000
by major product. The product demand pattern is expected to change significantly.
Figure 4 shows the 1992 product demand pattern compared with the incremental
demand pattern for the period through 2000. Transport fuel (gasoline, keroljet, and
diesel) accounted for 54.5% the 1992 product demand, and it is expected to increase
to 62.5% by 2000. Although jet fuel will increase rapidly, the demand for kerosene in
the countryside is expected to decline considerably because of the availability of elec-
tricity. As a result, about 76% of the incremental product demand from 1992 to 2000
will be in the form of gasoline and diesel
TABLE II
Petroleum Product Demand, 1984-2000 ('000 bId)
Product
Gasoline
Kero/jet
Diesel
Fuel Oil
Other*
Total
1984 1992 2000
278 581 1,116
82 89 101
360 693 1,227
528 619 736
351 501 720
1,600 2,483 3,900
*Including LPG, naphtha, gasoil-range chemical feedstock, and direct burning of crude oil.
Sources of Historical Data: China Statistical Publishing House, Energy Statistical Yearbook of China, var-
ious years.
The current product yield patterns of China's refining industry apparently can not
match the changing demand patterns; diesel is in particular short. Therefore, the indus-
try need not only capacity expansion to keep pace with the rapid growth in product
demand, but also additions of expensive, sophisticated upgrading technologies to
match the changing demand patterns.
Crude Oil Supply and Quality
As discussed above, crude oil production in China has stagnated since the early 1990,
averaging only a little over 1% in recent years. No big boost in crude production is
expected before 2000 on an overall basis, although output from some areas (such as
offshore) is likely to show substantial increase. Daqing oil field has maintained an out-
put level of over 1.0 million bId for eighteen years; production gain from the mature
field is getting more and more difficult. Although China has been seeking foreign
investment to enhance oil recovery, output from the field can be maintained at the cur-
rent level only until 2000 at the best. Crude output from Shengli, China's second
largest oilfield after Daqing, has stagnated and no production gains are expected.
Production from two other major oil fields - Huabei and Zhongyuan - has been declin-

9. China's Petroleum Market in the 1990s 625
• Other
o Gasoline
IIllD KeroIjet
o Diesel
• Fue1Oi1
100"1.
900/.
80%
700/0
600/.
50%
40%
30%
20%
10%
W.
1992
Demand
2000
IDI:nmenIal
Demaad
Figure 4. Current and incremental demand patterns, 1992-2000.
ing. Among China's major eastern oilfields, only Liaohe oilfield, the third largest, is
expected to show a slight growth, but this growth can only barely offset production
losses from Huabei and Zhongyuan. China's incremental crude production up to 2000
will mainly come from offshore and the remote western oilfields in Xinjiang (notably
oilfields in Tarim basin). Offshore production is expected to increase from 129 thou-
sand bId in 1994 to 240 thousand bId in 2000, and production from the oilfields in
Xinjiang is expected to rise to 400 thousand bId.
It is projected that China's crude production will be 3.2 million bId in 2000. The
historical and projected production by major field is shown in Figure 5. Production
could be lower if Daqing production decreases significantly after the exhaustion of
EOR options and if output from Shengli declines. On the other hand, if Liaohe shows

10. 626 China 's Petroleum Market in the 1990s
substantial production gains and additional offshore discoveries are made, China's
crude production will be higher.
'000 bid
2.500
2.000
1.500
1.000
500
,.
~ w u ~ ~ " ~ ~ ~ % ~ ~
I ODaqi", . Sbeo&li I!uIbel .LiaoIle . XiIljIOll& OOllihore . Othen
Sources: China Statistical Publishing House, Energy Statistical Yearbook of China, various years.
Figure 5. Historical and projected crude production, 1978-2000.
Chinese crudes are known for their low sulfur and high wax content. The average
API gravity is estimated at 30.0 in 1994. The only crude which is considered some-
what high in sulfur is Gudao crude produced in Shengli oilfield. The average sulfur
level is around 0.37 wt.% and is expected to decline slightly because Gudao produc-
tion will be stagnant.
The crude slate as a whole, however, is consisted of an increasing portion of crude
imports from the Middle East. In 1994, China imported 247 thousand bid of crudes,
accounting for almost 10% of the country's crude slate (crude import was 313 thou-
sand bid in 1993). Oman and Indonesia together provided over 80% of the total
imports. With the tightening of the Asia-Pacific crudes, an increasing proportion of
China's imports are expected to come from the Middle East. If China's refining indus-
try is going to meet the country's all-product demand, net crude import will grow to
1.0 million bid by 2000, and 85% of crude imports will need to come from the Middle
East. Figure 6 gives the historical and projected average API and sulfur for the coun-
try's refinery slate from 1978 to 2000. In the calculation, it is assumed that China' s
crude exports will decline from 370 thousand bid in 1994 to 200 thousand bid in 2000,
and that all additional crude imports will come from the Middle East (with combina-
tion of two-thirds of Arab Light and one third of Arab Heavy). While the API gravity
is likely to rise slightly in the rest of this decade, the average sulfur content is project-
ed to increase from 0.45% in 1994 to 0.74% in 2000. Although the increase in sulfur
content may not be dramatic, this rising trend is accompanied with an increasing

11. China's Petroleum Market in the 1990s 627
demand for cleaner refined products. This shift from processing entirely low-sulfur
domestic crudes to a mix of domestic and higher-sulfur Middle East crudes presents a
major technical challenge to China's refining industry.
~I S%
31.0
j
0.80
0.70
30.5
0.60
30.0 I'~
~
----....---- 0.40
29.5 -
0.30
0.20
29.0
0.10
28.5 0.00
1978 80 82 84 86 88 90 92 94 96 98 2000
1_~I ---- Sulfur% I
Sources: China Statistical Publishing House, Energy Statistical Yearbook of China, various years and
author's personal data files.
Figure 6. API and sulphur content of China's refinery throughput, 1978-2000.
Product Quality and Specification Trends
As the world moves toward cleaner fuel, China's refining industry is facing the chal-
lenge of improving its refinery configurations for producing high-value light products
which would not only satisfy the product demand pattern but also meet the increas-
ingly restrictive environmental regulations. Although China's current product specifi-

12. 628 China's Petroleum Market in the 1990s
cations are still quite loose, but mounting concern on environmental issues has made
serious action on stricter petroleum product specification more likely in the next few
years. Currently about 50% of gasoline produced in China is still leaded, and about
50% of gasoline still has a rating of MaN 70. As a gasoline component, straight-run
naphtha accounts for about 15% in 1993, whereas the shares of reformates and alky-
lates in gasoline were very low (only 2.5% and 0.8% respectively). Although Sinopec
has been implementing a plan to increase the octane number to an average of RON 90
and to phaseout leaded gasoline by 2000, the ability of Sinopec to reach its goal is in
part dependent on the speed at which additional alkylation, MTBE plants, and other
octane enhancers are built.
Although China's current official sulfur specification on light diesel is 0.2 wt.%,
some refiners running high sulfur crudes do not meet this specification. According to
Sinopec, 0.05 wt.% sulfur specification on light diesel will be imposed by 2000. This
will bevery challenging considering the fact that the shortage of hydrotreating units is
a chronicle problem for China's refining industry. China currently allows up to 3%
sulfur in its heavy fuel oil, but few crudes, aside from Gudao from Shengli oilfield,
produce such a high sulfur level in the residual cuts. On average, fuel oil in China con-
tains about 1% sulfur; this, however, is expected to rise rapidly as larger proportion of
imported high sulfur crudes will be processed.
SUMMARY AND CONCLUSIONS
China's crude oil production increased from 2.77 million bid in 1990 to 2.92 million
bid in 1994, representing an average annual growth rate of only 1.3 per cent. However,
China's oil demand and oil imports have increased rapidly since the early 1990s.
Demand for petroleum products increased from 2.07 million bid in 1990 to 2.91 mil-
lion bid in 1994, averaging 8.9 per cent per annum. For the first time since 1960s,
China became a net oil importer in 1993.
China's refining industry has expanded rapidly since the early 1960s. With 3.4 mil-
lion bid of crude distillation capacity in 1994, China's refining industry is the second
largest in the Asia-Pacific region (after Japan) and the fifth largest in the world. The
overall refinery utilization rate; however, has been considerably low owing to the
inherited dispersed and poorly coordinated refining system, and inadequate domestic
crude oil supply. In addition, the industry is confronting several major critical chal-
lenges, mainly, changing demand pattern, worsening crude quality, and tightening
product specifications.
Product demand is projected to increase 5.0% per annum on average for the rest of
the decade. Product demand pattern will continue to shift to lighter products; about
three quarters of the incremental demand will be in the form of gasoline and diesel.
Stricter specifications on gasoline and diesel quality is expected to be imposed.
Leaded gasoline and products with a rating of MaN 70 will be phased out by 2000;
sulfur specification on diesel is going to change from the current 0.2 wt.% to 0.05
wt.% by 2000. However, the average of sulfur content of the refining throughput is
projected to increase from the current 0.44 wt.% to 0.74 wt.% in 2000.

13. China's Petroleum Market in the 1990s
ABBREVIAnONS
629
FCC:
RCC:
HDC:
EOR:
Kero/jet:
MON:
RON:
MTBE:
fluid catalytic cracking (footnote 2, page 4)
residue catalytic cracking (footnote 2, page 4)
hydrocracking (footnote 2, page 4)
enhanced oil recovery (page 9)
Kerosene and jet fuel oil
motor octane number
research octane number
methyl tertiary butyl ether