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China's Shandong Province Bans New Oil Refining Projects

Source: Reuters 2/19/2014, Location: Asia

Eastern China's Shandong province has banned approvals of new oil refining projects, a state oil major said, the latest move to tackle overcapacity in the second largest oil consumer.

The ban comes on the heels of China's fuel consumption rising at its slowest clip in more than 20 years in 2013, the end to a decade of rapid demand growth that helped drive global oil prices to over $100 a barrel.

While the fuel market cooled, construction of refineries continued apace, leaving a capacity glut that hurt processing margins and led to a rapid rise in Chinese fuel exports in 2013.

Shandong - home to a third of China's refining capacity - holds refineries that can process 189 million tonnes of oil per year, or 3.78 million barrels per day (bpd).

Refinery use rates in Shandong, however, stood at just 55 percent in 2012 due to a slowdown in economic growth and a lack of crude for independent refineries, Sinopec's website quoted a Shandong government commission as saying.

"Construction has resulted in a waste of resources, intensified competition, lower prices, falling economic returns and large amount of idle capacity," the Shandong development and reform commission said, as cited by Sinopec.

No state refiners have refinery projects under construction or pending approval in Shandong. It isn't clear how many projects from independent refiners might be affected.

Shandong commission officials were not immediately available for comment. Besides large refineries run by Sinopec such as Qingdao and Jinan, Shandong also contains the largest number of independent refineries, or the so-called teapot refineries for their small size.

Independents teapot refineries in Shandong have been expanding over the past few years to avoid being shutdown by a central government policy aimed at closing down small crude distillation units by end-2013.

Beijing will ban from March the construction of oil refining, steel, cement and thermal power plants, as well as the expansion of existing projects, the city government said last month in a policy document aimed at tackling air pollution.

PetroChina has put off starting up two new refineries - a 400,000-bpd joint venture withVenezuela and a 200,000-bpd plant in potential alliance with Saudi Aramco - and delayed expansion of another to counter the threat of overcapacity as oil demand growth slows.

BP is also dropping plans to invest in a refinery in China, the fourth refining project in recent months to fall foul of a slowdown in growth in the world's second-largest economy.

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