Oil and Petrochemical Investments

Oil and Petrochemical Investments: The $6 Billion Refinery
Asian Demand for Fuel Sparks Massive International Joint Ventures
A Taipan Publishing Group Strategy Report
by S. R. Nunnally, Editor, Taipan Publishing Group
December 17 , 2007

In Guangdong province, China, there has been an explosive growth in the number of vehicles on the road. At the turn of the century, there were 1.9 million cars. Now, there are over 5.7 million cars.

That’s an amazing growth of 20% every year!

This growth actually accounts for 80% of the growth in oil consumption in Guangdong province, and oil consumption has increased at an annual rate of 8% in the same time frame. That means oil consumption has jumped from 8.7 million tons to 16 million tons.

Now, while Chinese oil consumption growth as a whole has been averaging 7% a year for the past 10 years, Chinese domestic oil production has only grown 1.7% a year.

China’s facing a great supply gap, and it needs to import oil and refined products to keep up with demand. In fact, Sinopec (SHI:NYSE) has just imported 900,000 tons of diesel to meet demand, and this comes just one month after Sinopec imported 600,000 tons of gasoline.

This explanation from Industrial Information Resources sums it up nicely: “According to industry insiders, the recent international crude oil price hike has forced many small and medium Chinese refineries to stop production; however, China’s domestic oil consumption is entering its peak season. Therefore, the gap between refined oil supply and demand has been widening.”

Oil and Petrochemical Investments: You Can’t Stop a Train

With China’s GDP growth continuing to soar, and with the Chinese middle class growing by leaps and bounds, oil demand is like a train barreling down the tracks: You just can’t stop it.

Without an increase in domestic production, China will continue to import oil and fuel alike, particularly if oil prices remain high. I’ll talk more about China’s domestic production in this month’s “Natural Resource Zone,” but in the meantime, where’s all this fuel going to come from?

A five-part joint venture worth $6 billion has just been established to build an oil refinery and petrochemical complex in Vizag, India. The five partners are Hindustan Petroleum, Mittal Investments, Total (TOT:NYSE), GAIL (India’s state-owned gas utility) and Oil India.

This $6 billion oil refinery and petrochemical complex will produce 1 million tons of petrochemicals a year.

Compared to world-class refineries, like those of Valero (VLO:NYSE), this one’s big. VLO’s largest refinery complex in Corpus Christi refines about 340,000 barrels a day. The Vizag complex will refine the equivalent of 310,000 barrels a day.

Oil and Petrochemical Investments: A Great Market

These fuels will be shipped to Southeast Asia and the Middle East, according to the five partners. Additionally, the refinery will be built to process heavy, sour crude, which is cheaper than light, sweet crude because it’s more plentiful and harder to refine.

This is a great move. As demand and prices for sweeter crudes continue to rise, the ability for a refinery to process this heavier crude means much wider profit margins.

If you recall, our premier Material Profits issue talked about this very topic, and we recommended Frontier Oil Corp. (FTO:NYSE) and Valero because of their heavy crude refining capabilities.

I think this will be a trend for future refineries around the world. Or it should be, at any rate.

In the meantime, this partnership is in the middle of a feasibility study, after which will come the divvying up of interest in the project. There’s already been 2,500 acres of land set aside for the complex, though no schedule has been set for construction.

And, this is just one of three planned partnerships in the petrochemical industry. GAIL is also looking for partners for two further chemical projects, each a 1 million tons-per-annum ethylene plant. Oil India, Reliance Industries, and Hindustan Petroleum are already in talks with GAIL about these two projects worth a total of $4 billion.

Oil and Petrochemical Investments: India’s a Growing Consumer, Too

With all this talk of Asian oil consumption growth, it’s easy to just think about China. But India’s consumption is on the rise, too. And that’s attracting other foreign companies to come set up shop.

Sasol (SSL:NYSE) is one such company.

Known for its coal-to-liquid (CTL) technology, SSL is considering setting up a $6-8 billion project that would produce 80,000 barrels of fuel a day. This fuel would boost domestic supplies to gas stations.

Though not nearly as plentiful as China’s coal supplies, India’s got about 248 billion tons of reserves. Only 93 billion are proven reserves, but here’s something interesting…

With the right quality of coal, a CTL plant that produces 80,000 barrels a day over 25 years would need only 1.5 billion tons of coal. And, according to Industrial Info Resources, that same plant could produce 500-1,000 MW of electrical power.

In fact, five of those plants would be able to cut India’s fuel imports by 20% by 2020!

Fuel from CTL conversion burns cleaner than natural gas, too.

Looks like India’s the next hot spot for refining fuels of every nature, from clean diesel to liquefied petroleum gas. And India’s not opposed to foreign partnerships, which gives investors a new market to keep their eye on.

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