The company has signed an agreement with the provincial government on building a 10-million-ton-a-year refinery, in what some analysts said may also aim to compete with rival PetroChina, the nation's second largest refiner in the province.

The agreement, still pending approval from the central government, also includes a gas-fuelled power plant, two chemical complexes and a natural gas pipeline network in Shandong.

The refinery, worth 8 billion yuan (US$967.3 million), is expected to be built in coastal city Qingdao, and to commence operation by 2005, said an official with the development planning commission of the province.

"It is somewhat a surprise to build a large refinery when the market is oversupplied," said a Beijing-based energy analyst. "But it is understood that the company aims to shut down remote low efficient refineries and expand large refineries in booming markets along the coastal line."

Over half of Sinopec's refineries has a capacity less than 5 million tons, which is the bottom line for a refinery to make economic sense.

Sinopec has earlier said it will "very strictly rein back its refinery expansion" by 2005, except the existing four biggest refineries with a capacity of over 10 million tons each, including the Zhenhai, Maoming, and Guangzhou refineries.

The company has said its planned annual capacity of 12 million tons before 2005 is reserved for these big four.

It is still unclear why the plan has been revised, but what is clear is that Sinopec's capacity expansion will be located in coastal cities to accommodate imported oil.

Half of Sinopec's yet-to-be refined oil is imported.

The energy analyst said Sinopec's construction of a big refinery also aims to compete with rival PetroChina, which has plans to enlarge its refinery in Dalian, just miles away from Qingdao across the Bohai Bay.

"Shandong is a very important market with strong demand, and is also adjacent to markets in Central China, where the two companies have been dumping their products," said the analyst.

In 2000, Sinopec acquired the 3 million-ton-a-year Qingdao Refinery from local Qingdao authorities. Sinopec now owns three major refineries in Shandong with a combined refining capacity of 15 million tons.

PetroChina now holds one-third of the market for refined oil products in Shandong, while Sinopec and local companies make up the majority.

A PetroChina sales manager in Shandong admitted that the establishment of rival Sinopec's refinery would be "pressure" for PetroChina.

"If they have a refiner in Shandong, instead of transporting from other areas, they could lower their production costs," said the manager.

Sinopec Chairman Li Yizhong said local governments and Sinopec would work hard to crack down on illegal small refineries in the province to restore the market.

(China Daily August 16, 2002)