China scales back downstream energy projects

plastic polymer granules
Source: DollarPhotoClub

With recent news about the falling costs of U.S. manufacturing approaching those in China, it now seems that cheap U.S.-produced petrochemicals and plastics are forcing China to scale back its oil refinery and petrochemical projects.

In recent months, Sinopec and Petrochina – two Chinese state-owned oil and gas companies – have delayed or shelved projects worth billions of dollars. This included Sinopec delaying plans to build a $3.1 billion ethylene plant in Qingdao city, and Petrochina delaying two huge ventures – one with Royal Dutch Shell in east China and another in Guangdong with Petroleos de Venezuela SA.

The easy availability and low price of American gas and oil – coupled with legislation that bars crude from being exported from the U.S. – has created a slew of new chemical plants providing refined fuels as well as cheaper plastics and synthetic fibres to U.S. industry and for export.

Unlike in the U.S., Chinese petrochemical industry relies on naphtha, a distillation product from petroleum. In comparison to petrochemical plants in the U.S., Chinese naphtha-produced ethylene is about twice as expensive as American ethylene produced from natural gas.

It is possible that the current relatively high prices of naphtha will decline, yet even with lower prices of naphtha, Chinese petrochemical plants are not likely to be able to compete with the U.S. output. It is this realisation that is most likely behind the recent slew of cancellations and delays in the Chinese petrochemical projects.

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