a journey of a thousand miles

June 1, 2007

Historic investment in China

On March 30, an inauguration ceremony at the Great Hall of the People in Beijing marked the formal approval of a historic partnership: a $5 billion downstream and chemicals venture in China agreed to by ExxonMobil, Sinopec, Saudi Aramco and China's Fujian province. The project, 12 years in the making, will help China meet its growing demand for fuel and chemicals. 

Dave Kingston remembers what southeast China looked like in the early 1980s, when he first started visiting the region. Back then, the economy was agrarian. "And I mean very basic agriculture, with manual irrigation using water buckets," says Kingston, ExxonMobil Refining & Supply's new business development and portfolio manager. 

Today, almost three decades later, Fujian and the other provinces on China's southeast coast are a booming hub of highly productive manufacturing facilities. "I've seen the area just transform," Kingston says.

This transformation has made China one of the world's fastest-growing economies, with energy needs to match. China is the second-largest energy consumer behind the United States, and its energy use is growing at more than double the rate of many nations. Chemicals demand is even more robust; by 2015, China is predicted to account for 25 percent of global demand for key commodity petrochemicals.

ExxonMobil will help meet this demand through its participation in a historic downstream and chemicals project in China's Fujian province, a mountainous region with a diverse ethnic population of more than 35 million people. A joint venture with Sinopec, Saudi Aramco and the Fujian government will expand an existing refinery and add an integrated petrochemical complex in the port city of Quanzhou. A second joint venture will operate a network of service stations and distribution terminals in the province.

It is the first fully integrated refining, petrochemical and fuels marketing project in China with foreign participation, and ExxonMobil's largest investment in the country to date.

The first step
A Chinese proverb says, "A journey of a thousand miles begins with a single step." For the Fujian project, that step came in 1995, when ExxonMobil entered into an agreement with Sinopec to study refining opportunities jointly. Saudi Aramco joined in 1996, and all three agreed to develop a refining-chemicals project in Quanzhou.

Each partner brought something unique to the project. For ExxonMobil, it was experience in designing, constructing and managing large-scale projects; expertise in chemicals and refining; an ability to maximize the value of a project; a commitment to safety and efficiency; and technical and operational know-how. 

Over the next 12 years, the partners worked out a host of complex commercial and technical agreements, while Beijing gradually opened China's energy sector to foreign participation. That process, tied in part to China's 2001 entry into the World Trade Organization, was not completed until last year, when China eased restrictions on the wholesale petroleum business.

PC Tan, ExxonMobil's lead country manager for China and director of the Fujian project, admits negotiations "had ups and downs" over the years. But at the inauguration ceremony in Beijing, Tan was struck by how aligned the partners had become.

"In the past, people would be talking about their own requirements," Tan says. "Over time, we have learned what issues are critical to each partner, and we are better at finding the common ground and moving things forward." Tan attributes the success of the negotiations to "perseverance and staying the course."

Kingston agrees: "The deal commits the partners to a long-term agreement, and it was important that we had the right deal in place to provide a balanced arrangement that will stand the test of time."

The need for integration
All along, ExxonMobil believed that a fully integrated Fujian project, including refining, chemicals and fuels marketing, was a vital ingredient to success. Having access to the entire downstream and chemicals "value chain" provides synergy and helps protect overall profitability. 

Included in the Fujian venture are about 750 retail stations, which will display the Esso brand along with the Sinopec and Saudi Aramco brands. Although Esso is well-known in Hong Kong, its exposure in mainland China currently is limited to 18 stations in Guandong province. 

The project will expand an existing crude processing refinery from 80,000 barrels per day to 240,000 barrels per day. At the same time, the refinery will move from a lower-conversion refinery, processing sweet crude, to a high-conversion refinery, processing primarily sour Arabian crude.

Refinery integration with chemicals was particularly important. The chemicals business in China has been deregulated for a number of years, and the growing manufacturing base in Fujian and other coastal provinces is boosting demand for petrochemicals. Chinese demand for polyolefins, primarily used to make plastics, is expected to grow by more than 7 percent a year.

The Fujian plant will produce polyethylene and polypropylene, most of it to be sent to Chinese manufacturing facilities that produce everything from plastic bottles to packaging materials. It will also produce paraxylene, used to make polyester. China is the world's largest producer of polyester, and its demand for paraxylene is expected to rise by more than 8 percent per year.

Another benefit of integrating refining and chemicals is the synergy of feedstocks. For example, refining streams are used as feedstock in the production of petrochemicals such as ethylene and paraxylene. Byproducts from the chemicals' facilities are sent back to the refinery for conversion to high-value products, like motor fuels. 

"The value comes in integration," says Ed Palkot, senior planning associate in ExxonMobil Chemical's olefins global business unit. "It gives us a great deal of flexibility to optimize products to capture the highest market value."

The Fujian venture is the first time ExxonMobil has built or expanded a refinery and petrochemical complex of this scale simultaneously. "We have built petrochemical complexes, but typically after the refinery is well-established," Palkot says. "That obviously adds to the complexity and scope of the project, but it's also a unique opportunity to optimize between refining and chemicals right from day one."

Combined with other major projects in Saudi Arabia, Qatar and Singapore, the Fujian complex will help ExxonMobil increase its chemicals capacity by about 60 percent in Asia and the Middle East over the next several years to meet growing demand in Asia Pacific and beyond.

Construction under way
Work on the 1,200-acre site has already begun. In 2004, the Fujian partners initiated front-end engineering, while site preparation and underground work also commenced on location. Start-up is expected in 2009, the year after Beijing hosts the Summer Olympics. Senior Vice President Steve Simon, who represented ExxonMobil at the inauguration ceremony in Beijing, said that the Fujian project is expected to achieve best-in-class performance after just a few years of post-expansion operations.

The venture has four strong partners, world-class scale, full integration, a robust transition plan for training and management processes, and proven standards for safety, reliability and efficiency. It also has a long-term, reliable crude supply; Saudi Aramco will supply sour Arabian crude to meet most of the refinery's needs. "The ingredients for success are all there," Tan says. 

And success, it is hoped, will only breed more. Former ExxonMobil Chairman Lee Raymond, who signed the letter of intent with Sinopec in 1995, envisioned Fujian as a showcase for foreign-Sino cooperation, hoping it would lead to bigger and broader partnerships inside and outside China. That vision continues today.

"I think the idea is that if this is a successful venture, it helps build confidence in us as a partner of choice," Tan says. "We hope to see this become a stepping stone to further ExxonMobil's engagement in a rapidly growing Chinese market."

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ExxonMobil in China
ExxonMobil has a long history of doing business in China, dating back to the 1890s, when Standard Oil marketed kerosene for the country's famous "mei foo" lamps. Since the late 1970s, when China re-opened its markets to foreign investment, ExxonMobil affiliates have been establishing operations in the country, including a plasticizer plant in Panyu, a joint venture in Shanghai that manufactures hydrocarbon resins, and an extensive lubricants-marketing business. ExxonMobil affiliates have a total current investment of about $2.7 billion in China, including Hong Kong, where ExxonMobil is the largest U.S. investor.

Learn more about energy demand in our outlook through 2030.