China's Yulong Petrochemical project to raise the COTC stakes

13:29 PM | January 15, 2021 | Kartik Kohli

Crude-oil-to-chemicals (COTC) technology could more than double the profitability derived from a barrel of crude oil, according to a scenario analysis from IHS Markit’s Process Economics Program. 

COTC technology deployment at integrated refinery-petrochemical complexes such as Yulong Petrochemical’s mega-project in Shandong Province, China, will bring refinery-scale volumes to petchems, with integrated players to be better placed due to lower costs of production, economies of scale, and product-slate flexibility, IHS Markit says.

Such projects in China until now have been a matter of back-integrating purified terephthalic acid (PTA) and polyethylene terephthalate into para-xylene (p-xylene), as is the case with Hengli Petrochemical and Zhejiang Petroleum and Chemical (ZPC). However, unlike these two greenfield projects that aim to maximize the production of p-xylene, Yulong Petrochemical’s project is a scrap-and-build initiative, under which independent refineries can sign up to maximize production of olefins and aromatics.

Yulong Petrochemical is a province-led attempt to inject new energy into the scattered refining industry of Shandong, with large capacity to be rationalized to enable the new build, says IHS Markit. In September 2019, Shandong’s government and the city government of Yantai announced plans to merge local independent refineries into a new 800,000-b/d mega-refinery complex on the reclaimed island of Yulong in Yantai. The complex will be constructed in two phases, each with a capacity of 400,000 b/d, with the first phase expected online in late 2022, IHS Markit says. Construction began in October 2020 with the first phase to include two 1.5-million metric tons/year steam crackers.

As part of the project, independent refineries can sign up to have their refining capacities permanently closed in exchange for government compensation. A total of 10 independent refiners with a combined crude distillation capacity of 560,000 b/d have so far expressed preliminary interest in participating in the initiative, with four having already suspended operations by November last year, according to IHS Markit.

Potential points of conflict in the process can include how the government assesses the fair value of each refinery, determines the size and the distribution of the compensation packages, and deals with the resultant layoffs, it says. 

There is a growing consensus worldwide that future refineries will be configured for higher conversion of feedstocks to chemicals than has been the case in the past, says IHS Markit. China’s greenfield refineries built or planned after 2016 are being designed with a considerably high degree of petchem integration, as is the case with Hengli and ZPC.

But now with the proposed Yulong complex and several other government-led integration projects—such as the proposed consolidation and upgrade of refineries in the Daqing, China, oil zone—to potentially join the COTC trend, the paradigm shift is no longer being driven only by the needs of PTA producers to back-integrate into refining, but also by the traditional refining sector as it looks to adapt to China’s fast-evolving demand patterns, according to IHS Markit.

With a minimum transport fuel yield of 18%, Yulong’s planned complex will explore the upper limit of chemicals yield from a refinery processing medium sour crude from Middle East and could mark an important milestone on the road toward increased refinery–chemicals integration, IHS Markit says. 

IHS Markit expects the rise of Yulong to lead China’s independent refining sector toward greater efficiency and competitiveness. The rationalization and consolidation of an industry, however, always comes with growing pains, it says. Whether replacing the old with the new in Shandong’s refining industry will be a success is still uncertain, IHS Markit says. Economic drivers and government policy, as well as the country’s overall industrial planning will be key in determining if other refineries will follow suit, it notes.

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