SK Energy bought a 35% stake in state-run Sinopec's 8.5 million mt/y Wuhan refinery in China as the South Korean energy and petrochemical conglomerate moves to widen its footprint in the world's second-largest economy.
The deal marks SK Energy's first major oil refining investment in China and adds to its existing partnership in the adjacent Wuhan petrochemical plant, making the Wuhan refinery and petrochemical complex the single largest joint energy project between China and South Korea.
SK and Sinopec have been in talks about the deal for three to four years as the South Korean company had been keen to enter China's refining sector, according to market sources.
While SK's strength is in petrochemicals, it had limited bargaining power due to lack of crude refining assets, the sources said, adding that Wuhan was an affordable asset that Sinopec was willing to sell.
Sinopec-SK Wuhan Petrochemical, a joint venture between SK Energy's unit SK Global Chemical and China's Sinopec, bought the Wuhan refinery from Sinopec in April. The venture was formed in October 2013 to operate an 800,000 mt/y ethylene plant in Wuhan, with SK Global Chemical holding a 35% stake and Sinopec owning 65%.
Under the latest deal, SK Global Chemical's board approved an investment of Yuan 1.1 billion ($160 million) and Sinopec agreed to spend Yuan 2.05 billion ($298 million) on the expanded joint venture, valuing the Wuhan refinery at Yuan 3.15 billion ($458 million).
The new shareholder structure at Sinopec-SK Wuhan Petrochemical -- which took effect this week -- remains unchanged with SK Global Chemical owning 35% and Sinopec 65%.
"The acquisition is the largest cooperation project between China and South Korea in the refinery and chemical industry," SK Global Chemical said at a ceremony to mark the acquisition of the Wuhan refinery on July 3.
The transaction will help reduce operating costs and improve efficiency at the 8.5 million mt/y Wuhan refinery and the 800,000 mt/y ethylene plant, located in China's central Hubei province, Sinopec said on its website Thursday.
The Wuhan Refinery, with a refining capacity of 170,000 b/d, has been working to upgrade its fluidized catalytic cracker, used to process heavy distillates into light ends, by 2020, an official at SK Innovation, the holding company of SK Global Chemical, said on Thursday.
"The Wuhan Refinery has been also investing to expand its capacity to 1.1 million mt/y of ethylene from 800,000 mt/y by 2020," the official said. He added that refinery will also have a capacity to produce 900,000 mt/y of polyethylene in 2020 from 600,000 mt/y currently, and 700,000 mt/y of polypropylene from 400,000 mt/y, currently.
Wuhan refinery, which started operations in 1977, is Sinopec's second refinery that has received foreign investment, following ExxonMobil and Saudi Aramco's investment in Fujian Refining and Chemical. Kuwait Petroleum Corp. had previously pulled out from constructing the Zhanjiang refinery.
