Better Domestic Connectivity To Ease Import Needs

BMI View: The Lanzhou to Changsha oil products pipeline, running from west China to central China, will see oil products flow from the resource-rich west to growing demand centres in central and eastern China. Better infrastructure linking production to demand centres such as this pipeline would not only support an increase in refined product output in the west, but would also decrease east China's reliance on imports to meet its oil consumption needs.

China National Petroleum Corporation (CNPC) announced that it brought China's largest oil products pipeline online on November 1. The pipeline runs from the Lanzhou city in the northwestern province of Gansu, through to Changsha city in Hunan province, central China. According to the firm, the pipeline (also known as Lan-Zheng-Chang) has a design throughput of 15mn tonnes per annum (tpa) - or 301,232 barrels per day (b/d).

This pipeline is part of China's grand oil pipeline infrastructure plan. It has a strategy targeted to achieve the following goals: directing oil from the north - where some of China's largest crude oil fields such as Daqing are located at - to other parts of the country, and sending oil from west China to the east. The Lan-Zheng-Chang pipeline serves the latter goal.

Spreading Production To Population Needs
China's Population Distribution, 2011 (LHS) & Refining Capacity, 2013 (RHS) - By Region

BMI View: The Lanzhou to Changsha oil products pipeline, running from west China to central China, will see oil products flow from the resource-rich west to growing demand centres in central and eastern China. Better infrastructure linking production to demand centres such as this pipeline would not only support an increase in refined product output in the west, but would also decrease east China's reliance on imports to meet its oil consumption needs.

China National Petroleum Corporation (CNPC) announced that it brought China's largest oil products pipeline online on November 1. The pipeline runs from the Lanzhou city in the northwestern province of Gansu, through to Changsha city in Hunan province, central China. According to the firm, the pipeline (also known as Lan-Zheng-Chang) has a design throughput of 15mn tonnes per annum (tpa) - or 301,232 barrels per day (b/d).

This pipeline is part of China's grand oil pipeline infrastructure plan. It has a strategy targeted to achieve the following goals: directing oil from the north - where some of China's largest crude oil fields such as Daqing are located at - to other parts of the country, and sending oil from west China to the east. The Lan-Zheng-Chang pipeline serves the latter goal.

Maximising Its Refining Potential

West China is another large source of domestic crude oil and contains at least two of four major fields where crude production is still expanding or remains steady:

  • Tarim oilfield: Located in the Xinjiang Uighur Autonomous Region, PetroChina (the listed arm of CNPC) expects the field to produce 1mn barrels of oil equivalent per day (boe/d) by 2020;

  • Xinjiang oilfield: PetroChina expects the deployment of improved oil recovery techniques to boost ultra heavy oil production, particularly from the Fengcheng sub-field.

In addition, west China is also the destination point of crude oil deliveries from Kazakhstan into China. The amount of crude oil available from Kazakhstan is set to increase following the ratification of a deal by the Kazakh government that would see it boost crude oil exports (delivered via the Atasu-Alashankou pipeline) to China by more than 66%.

This has supported west China's development into one of the country's refining hubs despite its smaller population relative to other regions in China. Collectively known as Xibei (North West), the region has a total refining capacity of about 1.36mn b/d - about 12.5% of China's total capacity, according to our Downstream Projects Database. Gansu province, where the Lan-Zheng-Chang pipeline begins, alone can support 320,945b/d in crude input.

The destination point of the pipeline is to Hunan, which is located within the wider Zhongnan region. Although the chart below shows that Zhongnan has refining capacity commensurate with its population size (of about 28%), in reality many of the capacity is concentrated in mega-refineries located in the Guangdong province, and not the Hebei, Hubei and Hunan provinces the new oil product pipeline serves. Therefore, it would help meet oil consumption needs of these growing demand centres in central China.

Spreading Production To Population Needs
China's Population Distribution, 2011 (LHS) & Refining Capacity, 2013 (RHS) - By Region

Oil Product Imports To Fall

Better infrastructure connectivity within China would help find markets from production in the less densely-populated but resource-rich western regions to consuming heartlands to the east. It helps support the profitability of downstream investment made in this region to capitalise on easily-accessible crude oil sources.

More importantly is the implication of better connectivity on China's oil product imports. With more demand certainty, refineries in west China can ramp up utilisation rates. Given China's large expansion in its refining capacity that is growing nearly at tandem with its oil consumption, higher utilisation rates would translate into higher oil product output, thereby decreasing the country's oil product import requirement.

This is a theme we have consistently highlighted with our Commodities team in BMI's monthly China oil imports outlook. We have seen China's imports of oil products fall in the past two years as its downstream capacity increases, even as the rate of domestic oil consumption falls ( see 'China Imports: Short-Term Strength For Industrials', October 28). The chart below shows in particular the steep decline in diesel import growth between 2012 and September 2013.

Domestic Production, Better Infrastructure To See Diesel Import Requirement Fall
China - % Y-o-Y Change In Diesel Imports, Production & Inventory Levels

As more domestic oil product pipelines come online to support downstream production growth, they will facilitate domestic refiners' ability to meet local needs. Therefore, while this would increase China's total crude oil import demand, the effect of an increase in crude oil imports would be partially mitigated by a fall in its oil product imports.

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Sector: Oil & Gas
Geography: China
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