Royal Dutch Shell Plc is negotiating with China National Offshore Oil Corp (CNOOC) to participate in the latter's Huizhou refinery's second-phase project, which will require more than 50 billion yuan ($7.5 billion) in investment and become operational in 2014, CNOOC officials said.

Shell, which holds 50 percent of CNOOC and Shell Petrochemical Co Ltd (CSPC), based in Daya Bay in the city of Huizhou, Guangdong province, has shown strong interest in becoming involved in CNOOC's refinery sector by participating in the planned second-phase plant, said Zhu Mingcai, the CSPC's deputy chief executive officer. He added that several other international petrochemical companies have shown similar interest.

CSPC was founded in November 2005 with a registered capital of 12.1 billion yuan and is one of the largest Sino-foreign joint ventures in China. It was the first move in CNOOC's expansion into mid- and downstream businesses. But the refining business is excluded from the joint venture, a decision agreed on by the two cooperators after more than a decade of negotiation.

"Until now, the idea has been that CNOOC will shoulder the whole investment and be the sole operator of the second phase, and it has yet to decide on whether to introduce a new foreign investor," said Zhu, formerly the general manager of CNOOC International Ltd.

"The second phase, which is expected to get a green light from the government in the first half of 2011, is to have a refining capacity of 10 million tons and ethylene production of 1 million tons annually. It will cover an area of 4.4 square kilometers," said Dong Xiaoli, general manager of the CNOOC Huizhou refinery, currently the major investor in the plant.

Shell is offering to relinquish about 20 percent of its stake in CSPC to gain about a 30 percent stake in the planned refining plant, several CNOOC officials said without elaborating.

"Even if CNOOC agrees to let Shell participate, it won't get as high a stake as the 50 percent it has in CSPC because CNOOC is not short on the capital or the technologies needed to build the new plant," said Diao Guotao, secretary of the Communist Party of China Committee of CNOOC Huizhou district.

Li Lusha, a spokeswoman for Shell (China) Ltd, told China Daily the company would not comment on market speculation.

"The cooperation with Shell has brought state-of-the-art technologies and management experience to CNOOC," Zhu said.

CNOOC's Huizhou refinery, which is adjacent to CSPC's, went into operation in 2009. In 2010, it processed 11.28 million tons of crude oil and realized 57.4 billion yuan in sales and a profit of 2.7 billion yuan.

Most of its products are sold in Southern China, which includes Guangdong province, the country's major consumer of petrochemical products.

Under the local government's 11th Five-Year Plan (2006-2010), the province's petrochemical output value was to increase an average of 20 percent annually.

The refining capacity would reach 73 million tons in 2010, compared with 20.45 million tons in 2003, and the ethylene output would increase by 2010 to approximately seven times the 4.4 million tons in 2003.

The second-phase plant is intended to put CNOOC's refining capacity on a larger scale. However, during the 12th Five-Year Plan (2011-2015), Guangdong's refining capacity is expected to surpass 100 million tons, outstripping the expected consumption of 26 million tons of finished oil products, Dong said.

The Huizhou refinery plans to tap into the Hong Kong market to sell aviation oil through China National Aviation Fuel Group Corporation this year, according to Dong. He added that the company is also looking at Southeast Asia for further development to comply with CNOOC's strategy to allow its downstream industry to go abroad.