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EV push contradicts China’s downstream agenda

China is not only supporting the wider adoption of EVs but is also investing in new oil refining capacity

China’s sustained investment in new domestic refining capacity seems to contradict a new state-led campaign to try to wean the country off oil-driven vehicles, which are now being blamed as much as coal for the severe smog afflicting most major Chinese cities.

Scientific studies have shown that vehicle emissions are adding to urban air pollution at roughly the same rate that government-led efforts to reduce industrial and residential coal burning have lowered emissions. The surge in China’s natural gas consumption has been driven by widespread curbs on coal consumption.

The central government is now moving to focus on promoting the use of electric vehicles (EVs) instead of internal combustion engine (ICE) transportation and is throwing funds at technological research into improving battery efficiency, widening the appeal of EVs to would-be car buyers.

Changing habits
Although China has been a key driver of global oil demand growth over the last two decades, Beijing’s EV promotion will lead to the country’s oil consumption peaking in 2025, eight years earlier than anticipated by some analysts, Bloomberg reported last week.

In the short term, fuel demand will continue to rise, albeit at a lower rate. China’s refineries in 2018 processed an average of 12.07 million bpd, up 6.8% year on year. This year the average processing rate could climb 4.6% to 12.68 million bpd, China National Petroleum Corp.’s (CNPC) research office has said.

That growth rate, however, might be partly driven by strong demand for marine fuels rather than gasoline and diesel. Gasoline and diesel demand will peak and begin to decline after 2025 because of personal transport trends already emerging in China, a Morgan Stanley study has revealed. While other developing economies have seen a steady growth in ICE car ownership, China’s EV push and a burgeoning high-speed electric railway system are changing people’s habits, it added.

Morgan Stanley forecast that China’s “refiners and petroleum stations are the largest potential losers, while the battery companies are likely to become the key winners”. EVs will capture 6.4% of the domestic market by the end of 2020 and reach 80% by 2040, it said. The change could happen quicker with steady strong government support in the form of generous subsidies to battery developers.

It is perhaps no great surprise, then, that one Chinese province has already declared a total ban on ICE vehicles by 2030.

Hainan ban
The government of Hainan, the country’s only island province, announced the new policy last week and added that all new public service vehicles entering service by 2020 would be required to run on clean energy. All mass transit in the province must eliminate fossil fuels usage by 2025. A network of vehicle-charging stations will be constructed across the island over the next three to five years to meet expected demand increases.

Hainan is China’s most progressive province when it comes to environmental protection, the official Sixth Tone news website said last week, noting that the provincial government had decided in February to ban all single-use non-biodegradable plastics by 2025 – another China first.

Hainan, in the deep south-west, is China’s least polluted province with its clean beaches and summer tropical weather making tourism one of its main industries.

Other provinces are looking at time frames for restricting or banning oil fuel vehicles, the US-based international environment non-governmental organisation (NGO) National Resources Defence Council told Sixth Tone.

“The main causes of air pollution in urban areas of China are shifting from coal burning toward vehicle emissions,” said the council’s Yang Fuqiang, who is based in Beijing. “In big cities like Beijing, the pollution basically comes from exhaust fumes.”

At the other end of the country, however, in far northeast Liaoning Province, plans are already underway to build the country’s next major refinery.

Downstream optimism
In February, Saudi Aramco agreed to invest US$10 billion in building a 300,000 bpd refinery and petrochemical facility at Panjin in partnership with state-owned military equipment manufacturer China North Industries Corp. (Norinco). The refinery is scheduled for completion in 2024.

Panjin, which is at the heart of the winter smog that envelops many northern cities, lies about 200 km north of the urban sprawl of Beijing and the major port of Tianjin.

China was the biggest oil consumer behind the US in 2017, consuming 13.22 million bpd, International Energy Agency (IEA) figures show. Demand has increased by 5 million bpd over the last 10 years, more than any other country, although on a per capita basis China remains far behind US consumption levels.

And not everyone would agree with Morgan Stanley’s prophesy that China’s oil consumption will peak as early as 2025.

The IEA has forecast that China’s crude consumption will continue expanding until 2040. CNPC thinks the peak will be in 2030, but has suggested that oil product demand could begin waning from 2025. The state major’s vice president, Hou Qijun, said EVs were not anticipated to become a large-scale replacement for ICE vehicles until 2030.

What next
China has 12 new refineries scheduled to be built and begin operations between now and 2023, GlobalData said in January. They will be in addition to 179 refineries already operating around the country. As such, China is expected to drive the majority of growth in Asia’s refining industry up to 2023, by which date the country will be own 44% of the region’s overall refining capacity.

At the end of 2018, Chinese refineries had a combined capacity of slightly less than 16 million bpd, GlobalData said. By 2023, this will have increased to 20 million bpd.

China’s new refineries are becoming bigger and even the industry’s smaller private so-called teapot refiners are expanding capacity to stay in business and compete with the national oil companies (NOCs). For example, Zhejiang Petrochemical intends to expand its brand new 20 million tpy (400,000 bpd) refinery, built on an island off Zhoushan City, to 40 million tpy (800,000 bpd).

If the central government continues to promote mass EV production and more provincial authorities follow Hainan’s example, a lot of this capacity could become redundant by the late 2020s. It suggests that Beijing will have to lift the export licence restrictions it currently places on refiners. If that happens, China will flood the foreign market with fuel products, driving prices down not just across the Asia-Pacific region but also at a global level.

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