Shell says oil refinery key to success in China

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BEIJING, Oct 29 (Reuters) Royal Dutch Shell is pushing for an oil refinery deal in China despite setbacks on two projects, because it is vital to the company's long-term success in a key market, its top downstream official said on Monday.

Rob Routs, Shell Group Executive Director Downstream, said the company was still in talks with Kuwait Petroleum Corp (KPC) about a billion plant in Guangdong despite reports the Kuwaiti firm wanted to drop it as a partner, and was exploring other projects.

''We are pursuing a lot of options to make sure we have a position in the country,'' Routs told a small group of reporters during a visit to China.

''This is going to be one of our key markets for the future, and if you want to have a downstream presence in China we need a refining position. Now, we have always made that very clear.'' Shell, the world's fourth-largest listed oil company by market value, has invested more than billion in China and built up its brand with retail, petrochemicals, lubricants and bitumen ventures. But a refinery deal has eluded it.

The major ended talks last year with China National Offshore Oil Corp (CNOOC) about a BEIJING, Oct 29 (Reuters) Royal Dutch Shell is pushing for an oil refinery deal in China despite setbacks on two projects, because it is vital to the company's long-term success in a key market, its top downstream official said on Monday.

Rob Routs, Shell Group Executive Director Downstream, said the company was still in talks with Kuwait Petroleum Corp (KPC) about a $5 billion plant in Guangdong despite reports the Kuwaiti firm wanted to drop it as a partner, and was exploring other projects.

''We are pursuing a lot of options to make sure we have a position in the country,'' Routs told a small group of reporters during a visit to China.

''This is going to be one of our key markets for the future, and if you want to have a downstream presence in China we need a refining position. Now, we have always made that very clear.'' Shell, the world's fourth-largest listed oil company by market value, has invested more than $4 billion in China and built up its brand with retail, petrochemicals, lubricants and bitumen ventures. But a refinery deal has eluded it.

The major ended talks last year with China National Offshore Oil Corp (CNOOC) about a $2.5 billion refinery in southern China, and Kuwaiti news agency KUNA said in September that state-owned KPC no longer wanted Shell as a partner on a separate refinery.

But Routs said talks about the KPC refinery were still on, under a global memorandum of understanding covering downstream cooperation between the two companies.

''We are not giving up at all, we continue to work with them,'' he said when asked about the KUNA report. He declined comment on the agency's report, quoting Chinese sources, that Beijing had asked KPC to drop Shell as a prospective partner.

NO DEMAND HIT Routs said record oil prices had not had an impact on fuel demand, except in Europe where weaker growth might be due to pressure for ''greener'' policy on issues such as fuel efficiency and transport.

''The only place we are seeing it is Europe, and I am not so sure if that is price-related or environmentally related,'' he said when asked if record prices -- which climbed to above $93 for the first time ever on Monday -- were denting demand.

He did not rule out a slowdown but said the U.S. dependence on cars should support the market in the world's top consumer.

''At some point I would expect an impact on demand. On the other hand, all the switch capacity in terms of industry and power from fuels to coal has pretty well been done,'' he said.

''The only thing you are looking at in the end is alternatives for mobility, and although that is very possible in Europe, in the U.S. ...people are very much dependent on their cars.'' In China and many other Asian countries, price controls have insulated consumers from market rises.

Beijing has not increased diesel or gasoline prices since May 2006, even though oil prices are nearly $30 per barrel above the level at which most Chinese refiners say they can break-even.

But foreign majors are still fighting for a foothold in the loss-making downstream market, because the world's number-two oil consumer has pledged to eventually free up prices.

''When you go into a market like China or Indonesia... you have to establish a beachhead and that you have to see as an investment, more than as a loss-making enterprise,'' Routs said.

''Getting the brand positioned and showing customers what we have to offer in terms of our retailing business is extremely important for us, that's the big driver.'' The firm's largest China project, an 800,000 tonnes per year naphtha cracker, is performing well and should meet or surpass its nameplate capacity this year and next, Routs said.

The Nanhai cracker in southern Guangdong province operated at 94 percent of capacity in the first nine months of this year, up from 85 percent last year, he added.

REUTERS KR DS1418 .5 billion refinery in southern China, and Kuwaiti news agency KUNA said in September that state-owned KPC no longer wanted Shell as a partner on a separate refinery.

But Routs said talks about the KPC refinery were still on, under a global memorandum of understanding covering downstream cooperation between the two companies.

''We are not giving up at all, we continue to work with them,'' he said when asked about the KUNA report. He declined comment on the agency's report, quoting Chinese sources, that Beijing had asked KPC to drop Shell as a prospective partner.

NO DEMAND HIT Routs said record oil prices had not had an impact on fuel demand, except in Europe where weaker growth might be due to pressure for ''greener'' policy on issues such as fuel efficiency and transport.

''The only place we are seeing it is Europe, and I am not so sure if that is price-related or environmentally related,'' he said when asked if record prices -- which climbed to above for the first time ever on Monday -- were denting demand.

He did not rule out a slowdown but said the U.S. dependence on cars should support the market in the world's top consumer.

''At some point I would expect an impact on demand. On the other hand, all the switch capacity in terms of industry and power from fuels to coal has pretty well been done,'' he said.

''The only thing you are looking at in the end is alternatives for mobility, and although that is very possible in Europe, in the U.S. ...people are very much dependent on their cars.'' In China and many other Asian countries, price controls have insulated consumers from market rises.

Beijing has not increased diesel or gasoline prices since May 2006, even though oil prices are nearly per barrel above the level at which most Chinese refiners say they can break-even.

But foreign majors are still fighting for a foothold in the loss-making downstream market, because the world's number-two oil consumer has pledged to eventually free up prices.

''When you go into a market like China or Indonesia... you have to establish a beachhead and that you have to see as an investment, more than as a loss-making enterprise,'' Routs said.

''Getting the brand positioned and showing customers what we have to offer in terms of our retailing business is extremely important for us, that's the big driver.'' The firm's largest China project, an 800,000 tonnes per year naphtha cracker, is performing well and should meet or surpass its nameplate capacity this year and next, Routs said.

The Nanhai cracker in southern Guangdong province operated at 94 percent of capacity in the first nine months of this year, up from 85 percent last year, he added.

REUTERS KR DS1418

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