• 4 minutes China 2019 - Orwell was 35 years out
  • 7 minutes Wonders of US Shale: US Shale Benefits: The U.S. leads global petroleum and natural gas production with record growth in 2018
  • 11 minutes Trump will capitulate on the trade war
  • 14 minutes Glory to Hong Kong
  • 1 hour Bloomberg: shale slowing. Third wave of shale coming.
  • 3 hours ABC of Brexit, economy wise, where to find sites, links to articles ?
  • 3 hours Boring! See Ya Clowns, And Have Fun In Germany
  • 3 hours Crazy Stories From Round The World
  • 4 hours USA Carried Out Secret Cyber Strike On Iran In Wake Of Saudi Oil Attack
  • 6 hours Shale Magic: SABIC, ExxonMobil break ground on US Gulf Coast petrochemical project
  • 6 hours Yesterday Angela Merkel stopped Trump technology war on China – the moral of the story is do not eavesdrop on ladies with high ethical standards
  • 4 hours 5 Tweets That Change The World?
  • 1 hour the future
  • 26 mins China's Blueprint For Global Power
  • 7 hours PETROLEUM for humanity 
  • 3 hours Climate Protesters Blocking Roads etc...
  • 8 hours How The US Quietly Lost The 1st Amendment
Ross McCracken

Ross McCracken

Ross is an energy analyst, writer and consultant who was previously the Managing Editor of Platts Energy Economist

More Info

How China’s Oil And EV Policies Combine


China’s continued expansion of its oil refining sector and its environmental policies often appear contradictory. On the one hand, it is the world’s leader in electric vehicle (EV) manufacturing and deployment, but on the other it continues to invest heavily in domestic refining capacity to produce the fuels that power EVs’ internal engine combustion competitors. China’s push into EVs risks stranding assets built today well before the end of their natural lifespans.

But there is method in the apparent madness. The policies are in fact complimentary. Both are part of the government’s approach to energy security, which is itself bound up with key industrial goals.

Nowhere else but China does the development of climate change solutions have such immediacy, owing to local air pollution and traffic congestion, resulting from the country’s rapid urbanisation and dependence on coal-fired power generation. Nowhere else is as well positioned to take advantage, owing to its powerful manufacturing base, increasing capacity to innovate and need to move into higher-value industries.

The significance of firms like Huawei and Xiaomi is not the security concerns they may or may not represent, but the technological challenge they pose. Most worryingly for many Western observers, they have emerged from a state-led economy in which innovation is not supposed to thrive.

They serve to emphasis the stark differences between laissez faire and state-led approaches to industrial policy. In the US, EVs so far have largely been the idiosyncratic brain children of innovative companies like Tesla with a large appetite for risk. The car majors have followed rather than led.

The expansion of US shale and lack of federal interest in climate change policy under the current administration have reinforced the economic benefits of combined oil production and oil-based transportation. Oil is no longer an energy security problem and industrial policy is largely concentrated around the defence sector.

China is different. It is the US pre-shale, where the reality of high and growing oil import dependency provides a serious incentive to find new paths of development. Even more so as it does not have the US’ international reach to protect its supply chains, relying instead on soft power. Nor does it have the backstop of expanding its own domestic oil sector, where output has fallen in recent years as the industry struggles to sustain output in the face of the aging decline of its largest fields.

As a result, Beijing has employed two strategies in order to weaken its dependence on imported oil. The first is conventional, the second highly disruptive.

The first route has been to invest abroad and build good relations with oil producing countries, in general taking on a higher level of risk than western oil majors would be prepared to. This is a state- backed policy taken to extremes with the high level of debt afforded to Venezuela in return for oil.

Domestically, the aim has been to grab at least some of the oil value chain by hugely expanding domestic refining capacity, which by nameplate at least already exceeds domestic oil product demand by some margin. Constantly rising demand has made this a continual process in which expansion has been overcome by the need for modernisation as the product slate demanded by the domestic economy changes and older refining assets reach redundancy.

This year China will bring on-stream three new refineries totalling 1 million b/d of new capacity, all of which are coastal, integrated petrochemicals developments, two of which are privately owned -- Hengli Group’s 400,000 b/d complex at Dalian in Liaoning province and Zhejiang Petrochemical Corp.’s 400,000 b/d project in Zhejiang province. The remaining 200,000 b/d will be added by Zhanjiang Petrochemical, part of state oil and chemicals groups Sinopec.

They are expected to be followed by more integrated petrochemicals developments built on the country’s east coast over the next five years by Chinese state and private companies, as well as foreign investors such as US major ExxonMobil and Germany’s BASF.

This will add a new layer of complexity to US/Chinese energy trade and competition. While US petrochemicals have targeted ethane as their feedstock, a by-product of natural gas processing, Chinese importers will seek light, sweet US crude to supplement Middle Eastern grades, using naphtha as the main feedstock for petrochemicals production. Each will use the fruits of US shale in different ways, yet all will target growing Asian petrochemicals demand.

The second strategy is potentially much more significant and combines heavy investment in a number of areas such as EVs, artificial intelligence and telecommunications.

A key area of manufacturing that has eluded China is foreign car exports, where it has had to compete against well-established brands with strong technological leads. Its experience in the emergent solar industry was far different. Here it has become the world’s dominant force, and companies such as Trina Solar have shown the capacity to lead not just in terms of manufacturing but in new product innovation.

EVs offer the same opportunity. China has the manufacturing capacity and high levels of state and provincial government support for industries deemed strategic. It has the possibility to establish a technological lead in an emergent industry where brand loyalties are weak backed by the industrial scale provided by state-supported domestic demand.

Its branding capacity in rapidly evolving sectors have been proven by Huawei and Xiaomi. Its ability to establish a sufficient technological lead and combine it with low manufacturing costs to capture foreign markets has been demonstrated by its successful export of electric buses.

There is a significant departure from China’s solar success, which was built first on subsidised European demand and foreign innovation then supported by the domestic market. EVs are progressing the other way around, based on domestically-developed technology and demand with the aim of then exporting, which suggests growing domestic confidence in China’s innovative capacities.

The impact on oil markets of these strategies can already be seen in terms of rising Chinese oil product exports, which benefit from both dampened domestic demand growth as a result of EVs displacing oil product demand and surplus refining capacity – the two strategies combining to offset the crude oil import bill.

China’s crude imports will rise strongly this year, owing to the start up of the new refinery complexes, but so too will diesel and gasoline exports, albeit from low levels. CNPC’s Research Institute of Economics and Technology (ETRI) forecasts a 32.8% rise in diesel exports in 2019 to 23.1 million tons and a 15.0% jump in gasoline exports to 14.6 million tons.

In the longer term, the first strategy limits China’s dependence on crude oil imports as far as is possible into the future. The second strategy seeks to turn oil dependency on its head by providing and benefiting from an alternative. Both seek to address China’s weakness in energy security and are thus complimentary rather than contradictory.

Oilprice - The No. 1 Source for Oil & Energy News