DUBAI, United Arab Emirates - Saudi Aramco and China National Petroleum Corp (CNPC) agreed to build a 200,000 barrel-a-day refinery in southern China as producers seek to meet rising fuel demand in the world's fastest-growing economy.

The state oil company of Saudi Arabia signed a Memorandum of Understanding on Thursday with CNPC's PetroChina unit to build the facility in Yunnan province, Aramco said in a statement on its website on Monday. It's the second refinery partnership Aramco has announced with a Chinese company in the last week.

Aramco is participating in oil-processing and storage projects in Asia to improve access to markets there amid the region's increasing consumption of fuel and crude. China may increase refining capacity by one-third to more than 12 million barrels a day by 2015 to feed economic growth, the US Energy Information Administration said on its website.

"Saudi Arabia is looking at demand dynamics," John Sfakianakis, chief economist at Banque Saudi Fransi in Riyadh, said on Monday. "Asia, including China, is a very strategic and important demand driver. Aramco is aware that China and Asia are the markets that drive demand given the macro fundamentals."

Fuel demand is rising in China, spurred by economic and population expansion. Car sales gained 16.2 percent from a year earlier to 1.53 million units in January, according to the China Association of Automobile Manufacturers. The nation's rural incomes last year rose the most in a quarter of a century, a statistics bureau report showed. The planned 200,000 barrel-a-day refinery in Yunnan province will process Arabian crude into products including low-sulfur gasoline and diesel, Aramco said in the statement. Aramco will supply the refinery with crude through a long-term contract, and PetroChina will market the refined products.

Aramco didn't give an exact location for the plant or say how much the facility would cost. The proposed refinery will be in a southwestern area of China linked by a $2 billion oil and natural-gas pipeline project from Myanmar. Shipping oil through the pipeline from Myanmar would cut sailing times needed to reach the Chinese coast from the Persian Gulf.

CNPC, China's largest oil company, said in September that it had started building the Chinese section of the oil and gas pipelines linking the country to Myanmar. It also said it had begun building an oil refinery there. The September statement didn't give the refinery's capacity. The pipelines and refinery are set to be completed in 2013, CNPC said.

The pipeline would be able to supply 22 million tons of crude oil to Yunnan province each year, more than twice the 10 million-ton annual crude-processing capacity the Aramco-PetroChina refinery is set to have. That facility will be a "grassroots" plant, Aramco said, and it was unclear whether the facility announced on Monday is the same as the one CNPC said it had started building in September.

"This agreement is a significant step forward in our expanding relationship with CNPC and in our global downstream strategy," Aramco Chief Executive Officer Khalid Al-Falih said in the statement. "We don't consider ourselves simply sellers of oil to China, but rather strategic partners whose many relationships in that important country are founded on mutual respect, interdependence and mutual benefit."

Aramco exported less crude oil to the US and Europe as a percentage of total shipments in 2009, the last year for which data is available, as the worst recession in a half-century cut demand. Crude exports to Asia increased that year as a proportion of the total as China bought on average more than 1 million barrels of Saudi crude a day last year, Aramco said in its 2009 annual review.

The announcement follows a separate agreement Aramco reached last week with China Petroleum and Chemical Corp, known as Sinopec, for construction of a fuel-processing plant at Yanbu on the Kingdom's Red Sea coast. Aramco is expanding refining capacity at home to satisfy demand for gasoline and other products in Saudi Arabia.

Domestically, Aramco aims to integrate fuel processing with petrochemicals at its domestic refineries. The company is building a joint-venture refinery at Jubail on the Persian Gulf and another at Jazan in southwestern Saudi Arabia.

The Jubail venture with Total SA is set for completion in 2013, with the Yanbu refinery following in 2014 and Jazan a year later, Khalid Al-Buainain, Aramco's senior vice president for downstream, said on March 8.

Bloomberg News

(China Daily 03/22/2011 page16)