Excess refinery capacity is getting serious in China

Forecasts for excess capacity in Chinese refineries are getting serious. Utilization is expected to fall sharply due to the slowdown of economic growth, and rush of start-up of additional refineries.

Although exact number on the refinery capacity in China is not disclosed, industry sources estimate that nearly 800,000 barrels per day of new capacity was added in 2013. Accumulated refinery capacity in China at the end of 2013 could be 12.3 million bpd. Moreover, 1.1 million bpd capacity is expected to be added in 2014.

A strong increase of energy demand was anticipated in China after 2000 based on the steady economic growth in the country. Actually, Chinese petroleum consumption was accelerated in the later half of 2000s until 2010.
Despite Chinese refineries maintained their utilization rates above 80% at that time, shortages of product supply caused many social disruptions over the nation.

However, the growth of energy demand in China is slowing down rapidly after 2011.
Year-on-year growth of crude oil processing released by the National Bureau of Statistics fell from 14.5% in 2010 to 5.7% in the next year. The growth rate continued to shrink year by year to 3.4% and 2,5%, then slipped to 1.0% decrease in the first two months in 2014.

Even if gasoline production is sustained by steady car sales in the country, a growth of Chinese gasoline outputs fell to 4.9% on year in January-February in 2014 from 9.5% on year in 2013. Outputs of diesel that is the main petroleum product in China fell 2.6% from a year earlier in the first two months of 2014 after recorded a 0.3% on year tiny growth in 2013.

Despite the production is decreasing, commercial diesel inventory in China surged by 53% during the first two months in 2014, according to the Xinhua News. It suggests the current weak industrial activities in the country.

Under the such situation, many new refineries that were planned in the later half of 2000s are starting up.

Average utilization rate of Chinese refineries in 2013 was estimated at mid 70% based on official data provided by the government, but PetroChina sees much lower rate at 67%.

In 2014, the large increase of capacity and a further slump of petroleum demand may reduce the utilization rate to less than 60%.

About energy, Russia more relies on Europe

Europe's energy dependence on Russia is attracting attention again following the tension in the Crimea peninsula.

About 40% of petroleum supply in Europe comes from inside the region in 2012, while 28% is supplied from Russia. The amount of import from Russia is much bigger than 11% from the Middle East and 7.6% from North Africa. The 5.8 million barrels per day of Russian oil supply can not be replaced by the other source easily.

Around 45% of natural gas supply in Europe is also provided by local production. Russian exports are account for 23% of the natural gas supply into Europe.

Data show that dependence of petroleum is relatively larger than natural gas at moment.
Europe's petroleum dependence on Russia was not so large in 1990's, since oil production in the former Soviet Union region shrunk significantly during collapse of the Socialist Empire.

However, European countries have increased petroleum procurements from Russia due to the steady production recovery in the former Soviet region. Geopolitical tensions in the Middle East and competition of procurement with Asia and the United States in the area also encouraged Europe to increase oil imports from Russia.

About distribution of energy, Russia more relies on Europe.
In 2012, about 65% of total natural gas exports by Russia including liquefied natural gas to Asia headed to Europe.

About 67% of petroleum exports by the former Soviet Union area was shipped to Europe. As for only Russia, nearly 90% of its petroleum exports were directed to Europe.

Therefore, Russian economy could be damaged significantly, even if Europe reduces energy procurement slightly.

However, European countries cannot shift natural gas supply sources easily even if Qatar and other Middle Eastern nations already have huge LNG supply capacities. Number of LNG tankers and port unloading facilities are not enough.

On the other hand, petroleum supply could be changed relatively easily if refineries accept inconveniences by the difference of crude oil grades. In a sense, current tensions in Crimea or news reports about that seem like sales promotion for North American crude oil.

China keeps steady crude oil imports

Chinese crude oil imports in February rose 10.9% on year to 6.03 million barrels per day, according to the General Administration of Customs. The country's crude oil imports have increased by two digits from a year ago in three consecutive months.

The February's import figures were 18.1% lower than the previous month when scored the record high of 6.65 million bpd. But still remained above the 6 million bpd level.

The average crude oil imports during January and February rose 11.5% from the same period a year ago to 6.36 million bpd.

In February, China recorded the first trade deficit since March 2013 due to the slump of exports. The amount of processing trades in the month also slipped to the lowest level since February 2011. Those data suggest that industrial activities in China is slowing down.

China, however, maintains steady crude oil procurements. The country seems to be optimistic for the near term energy demand.

On the other hand, commercial crude oil stockpile in China as of the end of January had increased 3.6% from a month ago. It was the first increase since September 2013. It is also possible that the Chinese petroleum industry only began to stockpile toward the summer.