China Approves $20B Mega Petrochemical Complex in Shandong Oil Hub

China is reviving a $20 billion petrochemical project in eastern Shandong province as part of efforts to dial up infrastructure spending to support an economy struggling with the impact of the coronavirus pandemic, two China-based industry sources said.

The 400,000 barrel-per-day (bpd) refinery and 3 million tonne-per-year ethylene plant in Yantai, Shandong, the country’s hub for independent oil refineries, was proposed years ago, but approval has been slowing in coming because of China’s struggle with excess refining capacity.

China’s state planner, the National Development & Reform Commission (NDRC), gave initial approval on Monday for the project, allowing Shandong province to start planning for construction, said the sources with knowledge of the approval.

The investment in the project will be nearly 140 billion yuan ($20 billion), according to one of the sources. China business registration data seen by Reuters showed Shandong Nanshan Group, a private aluminium smelter based in Yantai, will be the venture’s lead investor, and other investors include chemical group Wanhua and the Shandong provincial government.

A representative for the project, Shandong Yulong Petrochemical, did not immediately comment. The NDRC did not immediately respond to a Reuters’ request for comment.

The two sources declined to be named as they are not authorised to speak to the media.

The project could help cut China’s petrochemical imports, but would likely worsen its surplus of refined fuel products.

Analysts expect the massive project to be operational around end of 2024, with revenue underpinned by petrochemicals, demand for which is more resilient than for transportation fuels that has been hit hard by the coronavirus.

“2024 is a good market entry point for Yulong as the global petrochemical industry starts to rebound from a downcycle resulting from previous overbuilds,” said Harry Liu, consultant for downstream business for IHS Markit.

The Yulong project will be the latest addition to China's recent wave of petrochemical investments, which have been led by the private sector and drawn global giants like BASF and Exxon Mobil to build complexes in the world's top petrochemical consumer and importer. 

A newcomer in the field of oil refining and petrochemicals, Yulong hired in 2018 Luo Qiang, a refinery veteran previously with state giant Sinopec, as its general manager who now heads a project team of over 500 staff, said the source.

Last month Yulong also awarded Sinopec Engineering a 170 million yuan contract for overall design for the complex, the two sources added. Sinopec Engineering declined to comment.

Yulong costs billions more than similar-sized plants, as some 20 billion yuan of the total cost will go to fund closures of small, inefficient plants Shandong province aims to mothball over the next few years to make room for Yulong, said the source.

The Shandong provincial government did not respond to requests for comment.

Shandong - home to more than 60 small plants known as “teapots” and more than one-fifth in China’s total crude oil imports - has become less competitive in recent years after the start-up of large integrated petrochemical projects like Hengli Petrochemical’s Dalian plant and Zhejiang Petrochemical Corp’s Zhoushan complex.

The giant Yulong project too faces headwinds.

“Yulong faces a tremendous challenge of disposing transport fuels... and that challenge could intensify if consolidation does not take place or falls short of expectation,” said IHS’ Liu.

(Reporting by Chen Aizhu; Additional Reporting by Muyu Xu and Beijing Newsroom; Editing by Tom Hogue and Muralikumar Anantharaman)