Lagniappe

 

 

 

Global Insight: Shell looks to
broaden downstream position in China

Royal Dutch/Shell is looking to ride the wave of oil product demand in China and the IOC's downstream position looks promising, with upbeat reports on the proposed joint refinery venture with the Kuwait Petroleum Corp. and an improved operational schedule for its Nanhai cracker in Guangdong.

Global Insight Perspective


Significance

The visit by Rob Routs, Shell's executive downstream director, to China has underscored the importance of Asia's largest emerging fuel market to the IOC's future growth.

Implications

Routs sounded an optimistic note over Shell's proposed joint venture with the Kuwait Petroleum Corp. (KPC), and also stated that performance at the IOC's Nanhai facility would be above nameplate capacity this year. The upside represented in the Chinese market has been seen to outweigh the losses that domestic fuel price caps will bring in the short term.

Outlook

It remains to be seen whether the KPC venture comes to fruition, but in any case Shell will continue to pursue a broader refining presence in China to support its longer-term fuel marketing ambitions there.

Centre of Attention

Shell has its eyes firmly focused on the retail sales opportunities that are on offer in Asia's emerging fuel markets and is positioning itself to take full advantage. Rob Routs, the IOC's executive director downstream, has been speaking on his visit to China today and offered a clear statement of intent: "China is one of our key markets for the future".

With demand growth slowing in traditional Atlantic Basin markets across Europe and North America, there are few global downstream opportunities that can compete with the upside represented in Asia's newest and potentially largest fuel-sales battlefield. Indeed, while China's downstream fuel sector remains restricted by state-owned incumbents and fuel price caps, Routs sees the market opening up, saying that "we need to position ourselves at this point until the market liberalisation is set true". For Shell, which already has a considerable network of retail fuel outlets in China, a greater refining position is required. Here, Routs offered two optimistic reports.

Still in the Running

Firstly, he stated that Shell was still in discussions with the Kuwait Petroleum Corp. (KPC) over a US$5-billion greenfield refinery build in Guangdong. Routs stated that Shell was not giving up on talks, despite the reports earlier in the month that indicated that KPC, and its local partner Sinopec, were intent on dropping the IOC from the venture. Routs did not offer any further details, but the memorandum of understanding that Shell holds with KPC would provide a channel for greater discussions. His statement that "we are not giving up at all, we continue to work with them" indicates the importance assigned to the venture by the IOC.

Improved Performance

Still, whatever the fate of Shell's participation in that project, it is important to remember that the company already has a downstream foothold in China. Routs stated that the naphtha cracker that Shell operates alongside the China National Offshore Oil Corp. (CNOOC) in Nanhai has been running at 94% for the first nine months of this year. That is a substantial improvement on the 85% utilisation seen last year. As a result, Routs expects the cracker to meet or surpass its designated capacity of 800,000 tonnes of petrochemical feedstock output this year. Similarly strong performance is forecast for next year.

Outlook and Implications

There has been no comment from KPC or Sinopec on Shell's status, but this is unlikely to hold back the IOC one way or another. As Routs himself stated: "We are pursuing a lot of options to make sure we have a position in the country". It is a position that will not be paying off for some time, but loss-leading strategies appear common enough in Asia's heavily subsidised fuel markets. The margins may well be better in the short term elsewhere, but IOCs like Shell have an eye on the longer term. They foresee fuel price reform, more competitive markets, and fewer preferential policies for NOCs alongside further growth in demand. In the context of that bright future, today's losses are a necessary evil.

As Routs himself stated: "When you go into a market like China or Indonesia...you have to establish a beachhead and that you have to see as an investment, more than as a loss-making enterprise…Getting the brand positioned and showing customers what we have to offer in terms of our retailing business is extremely important for us, that's the big driver". Shell has already been largely successful in this regard by virtue of its marketing partnership with Sinopec, and with the clear commitment to broaden its local downstream capacity—either alone or in concert with other foreign investors—greater earnings are to be expected from its Chinese investments in the future.

By Steven Knell an energy analyst for Global Insight International.
(44 20 7452 5048). Global Insight's Energy Group provides independent, comprehensive analysis, forecasts, data, and of the worldwide energy marketsplace. Petroleumworld does not necessarily share these views.

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Petroleumworld News 11/01/07

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