By RONNIE LIM
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CHINA Aviation Oil Singapore (CAOS) has managed to carve out opportunities from challenges.
The company - whose jet fuel supply business to China's airports in Shanghai, Beijing and Guangzhou is encountering slowing demand growth - had cautioned that its exports there this year would be further hit by new Chinese refining capacity as well as domestic Chinese fuel policies.
In other words, more domestically- produced jet fuel will become available from new refineries and thus dampen CAOS sales there.
To counter this, jet fuel trader CAOS's strategy is clearly now a case of 'if you can't sell coal to Newcastle, then it's time to start buying from there instead'.
In that light, CAOS's deal struck last month with the upcoming Huizhou refinery owned by China National Offshore Oil Corporation (CNOOC) - one of China's largest state-owned oil companies and its biggest offshore oil and gas producer - is a 'win-win'. Under the deal - valid till end-2012 - CAOS will purchase a 'substantial portion' of the 'export quota' of the jet fuel produced by the new 240,000 barrels per day refinery in Guangdong which starts operations this month, to sell to markets outside China.
This comes under a move by Beijing to set refined fuel export quotas from this year under crude processing deals, a form of trade that allows Chinese refiners to import crude and export fuels, both free from a 17 per cent value-added tax.
Additionally, under the same CNOOC deal, CAOS's parent (China National Aviation Fuel Holding) will also purchase a portion of jet fuel produced by the Hui- zhou refinery for domestic airlines, Chinese reports said.
What seems surprising is that CNOOC is not marketing the 'export quota' jet fuel in overseas markets itself, although observers note that this is because it is more an upstream exploration and production player. In that context, its overseas marketing collaboration with CAOS for Huizhou - its first major downstream project - has given the Chinese oil giant a useful overseas conduit for its products, tapping on CAOS's established trading links.
Huizhou is expected to start producing jet fuel this month to the tune of about 2.11 million tonnes per annum (tpa) - which is quite substantial, as this represents about 40 per cent of the 5.2 million tpa which CAOS exported to Chinese airports last year.
For CAOS, the CNOOC deal also opens the door to 'more collaboration opportunities' to not only grow its own jet fuel supply business, but also to sell other oil and petrochemical products internationally.
This potentially includes other products from the Huizhou refinery, like liquefied petroleum gas, gasoline, diesel and fuel oil. Furthermore, CAOS apparently also hopes to clinch similar marketing deals with CNOOC's petrochemical ventures.
This is in line with CAOS's aim to start trading of other oil products this year - albeit with proper risk management procedures in place this time (with management clearly mindful of its derivatives trading scandal in 2004).
To help it kick-start the process, CAOS with the help of an experienced team inherited from its substantial (20 per cent) shareholder British Petroleum, had already embarked on some petrochemicals trading late last year.
And beyond its latest deal with CNOOC's Huizhou refinery, CAOS - given its parent's connections - could also well seek more such opportunities with other groups or refineries in China. In other words, despite hitting some headwind, this jet fuel supplier is set to take off in new directions.
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