By Wan Zhihong (China Daily)
Updated: 2008-01-08 11:31

China National Offshore Oil Corp (CNOOC), the nation's third largest oil producer, plans to buy small refineries in Shandong province to expand its oil processing business.

The company has signed a framework agreement with the Shandong provincial government, company spokesman Liu Junshan told China Daily yesterday.

"CNOOC will cooperate further with the refineries in the province and boost its investment there," said Liu, without disclosing details.

The company also signed cooperation agreements with other provinces such as Hebei and Liaoning, he said, adding that it will focus on the coastal areas.

Analysts said the move is part of CNOOC's efforts to widen its focus on offshore oil and gas exploration to become an integrated oil firm with a strong presence in the downstream sector.

Now is a good time for State-owned companies to buy so-called teapot refineries, said Han Xiaoping, senior vice-president of Beijing Falcon Pioneer Technology Co Ltd. Shandong and Guangdong provinces are home to many teapot refineries that account for around 10 percent of the country's total refining capacity.

These refineries are losing money from record-high crude costs, as the price of refined oil products is controlled by the government.

According to company officials, CNOOC's first oil refinery is on track to start operating in October and it plans to add more refining facilities to meet fast-growing demand for fuel.

The plant, located in Huizhou in Guangdong province, is key to CNOOC's plans to become a fully integrated oil firm. The 21.8-billion-yuan ($2.99 billion) project has an annual refining capacity of 12 million tons of crude oil.

Other Chinese oil companies have also quickened their pace in Shandong. China National Petroleum Corp (CNPC), the nation's largest oil producer, plans to build a refinery in the province to boost its capacity.

The company has signed an agreement with the provincial government. "CNPC will have all-round cooperation with Shandong on large projects and an oil and natural gas sales network," the company said.

CNPC will build the Shandong project in the coastal city of Weihai, a company source earlier told China Daily.

The CNPC source said that apart from Shandong, it recently signed cooperation agreements with other provinces such as Shandong, Henan and Gansu.

The company's listed arm, PetroChina, is poised to increase its oil refining volume by nearly 12 percent in 2007, reaching some 120 million tons, Liu Hongbin with PetroChina told China Daily earlier.

China's largest refiner Sinopec Group is also building a 12.5 billion yuan refinery in Shandong's Qingdao. The project is designed to process 10 million tons of crude annually. It will produce 7.6 million tons of refined oil per year, a source with Sinopec said.

The plant's annual sales revenue is expected to exceed 30 billion yuan, the source said.