China’s largest integrated oil company PetroChina (PTR) began an expansion program for its Liaoyang refinery. The initiative has been taken by the company to process more imported crude from Russia.

Liaoyang — an important refinery of PetroChina — is engaged in processing Russian and Venezuelan crude. The company operates 26 refineries located in eight provinces, four autonomous regions and one municipality.

The Liaoyang plant’s existing annual processing capacity of Russian crude is 5.5 million tons. The expansion program will add one hydrocracking unit with an annual capacity of 1 million tons and a hydrorefining unit with an annual capacity of 2 million tons. It also comprises a sulfur removing and recovering unit as well as other facilities including reserve tanks.

PetroChina’s decision for the expansion plan follows an oil-for-loan agreement between China and Russia that had taken place in April 2009. As per the agreement, Russia will send approximately 15 million tons of crude oil annually to China from 2011. This is significantly higher than the imported 11.6 million tons of Russian crude in 2008.

We believe that this is a prudent step taken by PetroChina, given the country’s current favorable refining margins. The initiative taken by the Chinese Government by increasing fuel prices thrice year-to-date has been crucial.

While the refinery expansion is a catalyst for PetroChina’s attractive downstream-centric assets base, its upstream operations are heavily exposed in mature oil fields. The company’s efforts to sustain volumes from these mature fields are showing up in its increasing cost base. As such, we reiterate our Hold recommendation.
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