Improving Transport Fuel Quality in China Implications for the Refining Sector Final Report August 2002 Trans-Energy Research Associates, Seattle, WA China Petrochemical Consulting Corporation, Beijing Lawrence Berkeley National Laboratory, Berkeley, CA i Table of Contents 1. Background 1 1.1. China’s Oil Industry.1 1.1.1. Refinery Capacity and Production .2 1.1.2. Pricing 4 1.1.3. Trade 5 1.1.4. Consumption8 1.1.5. Transport Fuels Gasoline and Diesel9 1.1.6. Product Specifications .11 1.2. Current Challenges .13 1.3. What is the Question 16 2. ology16 2.1. Basics of Linear Programming 16 2.2. Linear Programming and Petroleum Refining .18 2.3. What LPs Can Tell You and What They Cannot Tell You .20 2.4. Gasoline and Diesel Reulation Issues and CHREF220 3. Model Assumptions and Results22 3.1. Summary of the Scenarios .22 3.2. Model Assumptions .24 3.2.1. Refinery Configuration 24 3.2.2. Crude Oil Supply .25 3.2.3. Pricing 26 3.2.4. Capital Costs 28 3.2.5. Transport Costs 29 3.2.6. How to Read and Interpret the Results Issues to Keep in Mind.30 3.3. Model Results 31 3.3.1. Baseline Calibration.31 3.3.2. Demand by Scenario 34 3.3.3. Scenario 1 2000 Base Case.35 3.3.4. Scenario 2 2005, EURO2 standards Base Case .37 3.3.5. Scenario 3 2005, EURO2 65 and EURO3 35 38 3.3.6. Scenario 4 2005, EURO3 standards, all China .39 3.3.7. Scenario 5 2005, EURO2 65 and EURO4 35 40 3.3.8. Scenario 6 2008, EURO3 85 and EURO4 15 41 3.3.9. Scenario 7 2010, EURO3 standards Base Case .42 3.3.10. Scenario 8 2010, EURO3 85 and EURO4 15 43 3.3.11. Scenario 9 2010, EURO3 60 and EURO4 40 44 3.3.12. Scenario 10 2010, EURO3 85 and EURO5 15 45 3.3.13. Reulating Gasoline and Diesel Blendstocks and Quality Tradeoffs 47 3.3.14. Comparison of Blending Pools 49 3.3.15. Comparison of Crude Slates 53 3.3.16. Product Trade Patterns.56 3.4. Capital Investment in Chinese Refining Current Plans and Additional Model Expansions .58 ii 3.4.1. 2005 Expansions Underway, and Additional Model Expansions by Scenario, 2005, 2008 and 201058 3.4.2. Types of Capital Investment by Scenario 61 3.4.3. Calculating Capital Costs and Apportioning to Gasoline and Diesel63 4. Conclusions 66 Addendum I. Supplemental Scenarios 11 and 12 Error Bookmark not defined. iii List of Tables and Figures Tables Table 1. Refining Capacity in China, 19993 Table 2. Output and Yields of Petroleum Products in China .4 Table 3. China Oil Trade 6 Table 4. Crude Imports by Source, 1993, 1999 .7 Table 5. Total Oil Consumption 8 Table 6. Gasoline and Diesel Transportation Use .10 Table 7. Recent Developments in Chinese Gasoline and Diesel Specifications .11 Table 8 Quality Issues Related to China’s Current Processing Configuration.14 Table 9. LP Model Scenarios Of Chinese Gasoline and Diesel Quality .22 Table 10 Current Refinery Configuration in China .24 Table 1127 Table 1228 Table 1329 Table 14 Unit Conversion Factors Used in China Refining Study 31 Table 1533 Table 1635 Table 17 . Summary of Blend Pool by Fuel and Scenario .47 Table 1848 Table 1949 Table 2055 Table 2158 Table 2259 Table 2360 Table 2460 Table 2564 Table 2664 Table 2765 Figures Figure 1. Price Indices of Energy Products in China, 1980-1999 .5 Figure 2 2000 Baseline Gasoline Pool.36 Figure 3 2000 Baseline Pool, ADO .36 Figure 4 2005 Gasoline Pool, Scenario 2 Euro 237 Figure 5 2005 ADO Pool, Scenario 2 Euro 2 .38 Figure 6 2005 Gasoline Pool, Scenario 3 Euro 2 15 Euro 339 Figure 7 2005 ADO Pool, Scenario 3 Euro 2 15 Euro 339 Figure 8 2005 Gasoline Pool, Scenario 4 Euro 340 Figure 9 2005 ADO Pool, Scenario 440 Figure 10 2005 Gasoline Pool, Scenario 5 Euro 2 35 Euro 4 41 Figure 11 2005 ADO Pool, Scenario 5 Euro 2 35 Euro 441 Figure 12 2008 Gasoline Pool, Scenario 6 Euro 3 15 Euro 4 42 ivFigure 13 2008 ADO Pool, Scenario 6 Euro 3 15 Euro 4 .42 Figure 14 2010 Gasoline Pool, Scenario 7 Euro 343 Figure 15 2010 ADO Pool, Scenario 7 Euro 3 .43 Figure 16 2010 Gasoline Pool, Scenario 8 Euro 3 15 Euro 4 44 Figure 17 2010 ADO Pool, Scenario 8 Euro 3 15 Euro 444 Figure 18 2010 Gasoline Pool, Scenario 9 Euro 3 40 Euro 4 45 Figure 19 2010 ADO Pool, Scenario 9 Euro 3 40 Euro 445 Figure 20 2010 Gasoline Pool, Scenario 10 Euro 3 15 Euro 5 46 Figure 21 2010 ADO Pool, Scenario 10 Euro 3 15 Euro 546 Figure 22 Trends in Chinese Gasoline Pool by Scenario 51 Figure 23 Trends in Chinese Gasoline Blending by Scenario 51 Figure 24 Trends in Chinese Diesel Pool by Scenario .53 Figure 25 Changes in Chinese Crude Slate by Scenario54 Figure 26 Trend in Chinese Product Trade by Scenario 57 Figure 27 Model Results Gasoline-Oriented Investments by Scenario 62 Figure 28 Chinese Refinery Expansions by Scenario Sulfur-Removal Related.63 Figure 29 Model Results Apportioned Costs of Gasoline and Diesel Reulation65 1 1. Background 1.1. China’s Oil Industry In the half-century since the establishment of the People’s Republic, China has become the fifth largest oil producer in the world. The discovery of numerous large oil fields in succession during the 1960s and 1970s gave rise to expectations in China that reserves, and output, might one day rival those of the Middle East. As a result, oil quickly became a pr eferred and inexpensive boiler fuel for industry, supplementing or replacing coal in areas where local coal resources were lacking. By 1980, China directly burned five out of every 10 barrels of oil produced. Contrary to earlier expectations of continued rapid growth in production, in the early 1980s China’s oil output peaked and declined for a period while the industry reconsoli-dated and adopted new production plans consistent with the economic re program begun in 1979. As the economy began to grow rapidly in the 1980s, the slowdown in oil production growth led to increasing calls to reassess of the use of China’s oil resources. Until 1986, the government had limited domestic supply of oil products in favor of crude oil exports, earning as a result substantial foreign exchange income during a period of high prices following the 1979 Iranian Revolution. The collapse of oil prices in 1986, the year after China briefly held the title of largest oil exporter in Asia, accelerated this reas-sessment. With growing new demand for transport fuels and petrochemical feedstocks, it was felt that the export of this resource at low post-1986 prices could no longer be sus-tained. At the same time, the widespread direct burning of both crude and fuel oil was viewed as wasteful compared to the higher value -added applications in transport and pet-rochemicals. This shift in development strategy had a direct and major impact on the refining sector. For years largely oriented to production of heavy fuel oil, 0-degree pour-point diesel and low octane gasoline, refineries now had to respond both to higher demand and to demand for new types and qualities of products. A new jet fleet required high-quality jet kero-sene; new automobiles required higher-octane gasoline; expanded ethylene production required larger volumes of naphtha, while environmental concerns argued for the phase-out of lead in gasoline and reductions in sulfur content. Growth in demand, however, was not matched by growth in domestic crude oil produc-tion. China bega n limited crude oil imports in 1988, favoring low-sulfur heavy waxy cru-des from Indonesia and elsewhere similar to its domestic grades that were suited to China’s existing refinery configuration. As demand continued to grow, China itself be-came a net oil importer in 1993 and a net crude oil importer in 1996. This dramatic shift in external dependency presented China with yet another challenge as import demand continued to soar, and the import bill for low -sulfur crudes mounted, China needed to de-velop domestic capacity to process the cheaper higher-sulfur crudes of greater interna-tional availability. Acknowledging that its domestic oil industry is no longer capable of self-sufficiency, China has moved to modernize its refineries, expand domestic produc-2 tion of oil products, increase quality, and integrate its oil sector more extensively with the international industry. 1.1.1. Refinery Capacity and Production At about 270 million tonnes of capacity, China’s refining system is now the world’s third largest after the United States and Russia. Developed initially in the late 1950s with So-viet assistance, it evolved largely on indigenous efforts after the Sino-Soviet split and China’s subsequent self-imposed isolation. The technical foundation of the industry was adapted to handle the quality of Chinese crude, most of which is heavy, low-sulfur and waxy, and to the need to provide substantial quantities of fuel oil to industry. At the time, higher-value products, such as gasoline, diesel, and jet kerosene, were secondary in the output slate, and little upgrading was available to increase production of these fuels. Moreover, the quality of the transport fuels was low the specification for gasoline octane was 66 MON [Motor Octane Number], and the cetane of diesel 35. In comparison, most international gasolines have MON ratings in the 80s, and most automotive diesels have cetane numbers in the 40s or above. With the initiation of economic re after 1979, China undertook widespread re in the oil industry, consolidating crude oil production under the China National Petroleum Corporation CNPC, refining under the China National Petrochemical Corporation Sinopec, and offshore exploration and production under the China National Offshore Oil Corporation CNOOC. Production at oil fields was rationalized and some fields closed; in 1981, crude oil production fell for the first time since the disruptions of the Cultural Revolution in 1967. A national output quota of 100 million tonnes 2 million barrels/day was established and multiple-tiered pricing implemented. At the same time, the government consolidated the growing refining sector, which heretofore had been ad-ministered by numerous government ministries based upon the ultimate use of the oil products; in addition to the Ministry of Petroleum, the Ministry of Textiles, Ministry of Agriculture, and Ministry of Chemical Industries, among others, all operated refineries geared to their own sectors. The establishment of the China Petrochemical Corporation in 1982 consolidated the majority of China’s major refining assets into one company, which henceforth would be responsible for optimizing production plans and supplying both oil products and oil-based petrochemicals to the entire economy. The government placed higher value on its oil resources, and invested heavily into a program of substituting coal for oil in industrial uses. Sinopec invested in technologies primarily fluid catalytic cracking to support the upgrading of a greater percentage of the crude to transport fuels. Between 1980 and 1990, the volume of refinery processing went up by 43, whereas production of gasoline increased nearly 100, while fuel oil output remained flat. Diesel fuel production rose 38 over this period, hampered by the rapid increase in demand for feedstocks for petrochemical production. In China, ethylene crackers were traditionally designed to run gasoil, and output of such feedstocks rose 170 between 1980 and 1990. Ethylene is the essential “building block” for many basic petrochemicals. China’s oil industry entered a new era in the 1990s as accelerating domestic demand for oil eroded the exportable surpluses of the 1980s. By 1993, China had become a net oil importer. The refining capacity shortages of the 1980s, however, disappeared, as a sus-3 tained building program of the late 1980s and early 1990s raised capacity by over 50 and added a substantial volume of secondary upgrading capacity. By 1999, total nominal distillation capacity1 had reached 276 million tonnes Table 1. The refining system had also become fairly sophisticated in terms of the variety and volume of equipment such as catalytic cracking, hydrocracking, and coking for use in upgrading heavier oil frac-tions to more valuable lighter fractions. Seen from a simple ratio of total cracking capa c-ity to distillation capacity, China in 1999 ranked second only to the US in terms of refin-ery sophistication, and it greatly outpaced Japan. The cracking-to-distillation ratio for China in 1999 reached 49 compared to 55 in the US, and only 21 in Japan. This ratio, however, does not address the issue of product quality; in both the US and Japan, where product quality specifications are strict, hydrotreating and hydrofining capa cityused to reduce impur ities such as sulfur and improve product quality greatly exceeds that in China. In 1999, the ratio of hydrotreating and hydrofining capacity to distillation in the US was 65, 86 in Japan, but just 12 in China.2 Table 1. Refining Capacity in China, 1999 Capacity million tonnes Atmospheric/Vacuum Distillation 276.0 Cracking Units Fluid Catalytic Cracking including resid, deep 92.6 Hydrocracking 12.9 Coking 20.6 Thermal/Visbreaker 8.7 Total Cracking Capacity 134.9 Source Sinopec During the 1990s, China experienced a significant improvement in yield patterns, with the production of light products such as gasoline, kerosene, diesel, and petrochemical feedstocks rising significantly as a proportion of the total. In 1990, the output of these four products totaled 54 of throughput in that year; by 1999, the yield of these products rose to 68. The most dramatic increase over this period has been in the yield of diesel fuel, which rose from 24 of throughput in 1990 to 34 in 1999. The expansion of cata-lytic cracking in particular including residual catalytic cracking and deep catalytic crack-ing allowed an increasing proportion of heavy feedstocks to be upgraded to lighter frac-tions. Given the more rapid growth in diesel demand compared to gasoline, refiners sig-nificantly expanded the pool of diesel blendstock materials by favoring operating modes of catalytic crackers maximizing diesel blendstock production. The decline in fuel oil output mirrored the increases in production of light products. In 1990, fuel oil production including refinery use totaled 32.2 million tonnes, a 30 yield 1 Traditionally, atmospheric distillation capacity and vacuum distillation capacity figures are not separated in Ch inese statistics as is the norm internationally. 2 China statistics from Sinopec; international statistics from the Oil by 1999, 61 was jet fuel a 20 per year rate of increase. In contrast, lamp kerosene consumption re-mained fairly stable, growing at only 2.4 per year between 1990 and 1999 as a result of increased industrial use, while residential use continued its decline and further displace-ment by other fuels. The third fastest growing product was diesel, averaging nearly 10 a year growth during the 1990s. Diesel has four key applications in China as an industrial fuel