TNAG-0947-FCO40-1166-Oil-developments-in-and-around-Hong-Kong-1980 — Page 60

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PROJECT PUNCH

HONG KONG

Introduction

A preliminary review has been made of the proposition to build an economically sized refinery in Hong Kong. A number of assumptions have had to be made, due to lack of specific information. Nevertheless it has been possible to arrive at certain tentative conclusions.

Philosophy

It is assumed that, notwithstanding the strategic advantage of providing the Territory with security of supply of petroleum products, a refinery in Hong Kong would have to be a sound commercial proposition.

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In an ideal world the substantial, long term investment represented by an oil refinery ought to be supported by a long term contract for supply of the crude oil feedstock necessary to operate the plant and ensure the flow of products to the target market. Today, however, it is most unlikely that any such long term contract could be obtained, and so the element,, of risk to the refiners, represented by the increased gap between the term of any given crude, oil supply contract and the payback period for refinery investment, is considerably greater. Indeed, in today's, world, a guaranteed term supply of crude oil is unlikely to materialise from any source unless the buyer is prepared to offer the producer a better return, or other more attractive benefits, than he can obtain elsewhere. Thus, there is inevitable conflict between achieving security of supply and holding down market prices, if the latter is also a serious objective.

On the basic assumptions made in this report about forecast petroleum product demand (see Appendix 1), the market for petroleum products (demand barrel) in Hong Kong requires an unusually high proportion of fuel oil compared to the middle and light distillates. Straight run distillation of the current Chinese export grade crude oil would, therefore, match the Hong Kong demand barrel very well. Although the characteristics of Chinese crude make it a good match physically, there are problems economically. Market prices for fuel oil are low relative to middle and light distillates and are likely to remain so, and, in short, it is difficult for any refinery concentrating largely on the manufacture of fuel oil to get an economic return.

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