Sinopec, Asia's largest oil refiner, yesterday launched a subsidiary company, Sinopec Qingdao Refinery and Chemical Company, to construct and operate a US$1.2 billion refinery in Qingdao, East China's Shandong Province.

The refinery, which was first initiated 12 years ago, is an important move for Sinopec to complete its refinery deployment along the coast line to cash in on rapid market growth and better handle imports of crude oil.

The refinery, one of the largest of its kind in China, will be able to process 10 million tons of imported crude oil, and produce 7.6 million tons of oil products annually upon its completion in 2007.

Construction will start in the first half of next year.

Sinopec expects the project will be world class one in terms of technology and management, and hopes it can contribute sales revenue of 20 billion yuan (US$2.4 billion) a year.

Saudi Arabian oil giant Saudi Aramco is negotiating with Sinopec to take a share in the refinery project.

"They are very interested in the project," said Wang Jiming, vice-general manager of Sinopec Group. "The negotiations are proceeding smoothly."

Analysts said the participation of Saudi Aramco, if finalized, could help secure crude oil supply and reduce risks for the refinery.

The establishment of the Qinghao refinery will complete Sinopec's refinery chain on the coast line.

The company is redeploying its refineries, scaling down small inefficient refineries in hinterlands, while expanding refinery capacity in coastal areas such as Jiangsu, Guangdong, Fujian and Zhejiang provinces, and Shanghai.

The coastal areas enjoy geological advantages in handling imported crude. And the areas are the most fast growing markets for oil products.

"Plus Qilu and Jinan refineries, the total refinery capacity of Shandong could reach 25 to 30 million tons a year," said Wang.

Most of the products of Qingdao refinery will supply Shandong Province and neighbouring areas such as Henan, Anhui and Jiangsu provinces. The demands in East China areas accounts for one third of the total consumption in China.

To cut down on transportation costs, Sinopec is constructing a 500-kilometre refined oil pipeline from Shandong to Anhui Province.

Products could even be transported to Guangdong Province in the south where the demands are growing rapidly.

To avoid a market glut, local government in Shandong is working on shutting down 21 local small refineries which are polluting the environment and less efficient. The small refineries have a capacity of 9 million tons a year.

Most of them are expected to be shut down before 2006.

Hu Shaojun, the deputy mayor of Qingdao, said the establishment of the refinery will help optimize the city's industrial structure, and establish a world-class petroleum and petrochemical industrial zone in Shandong.

(China Daily November 19, 2004)