(Yicai) Sept. 26 -- Yulong Petrochemical’s new complex has begun operations in Shandong province, the cradle of China’s many so-called teapot refineries, marking a significant step in consolidating these small, privately-owned businesses into a large and cost-efficient facility.

Part of the first phase of the Yulong Island Refinery and Petrochemical Integrated Project came on stream yesterday after 34 months of construction, local media reported on the same day. The project is the largest ever built in Shandong.

Shandong’s teapot refineries have played a key role in China’s fragmented refining industry, accounting for a large share of production capacity but are often inefficient and have a limited product range and low profitability. The CNY116.8 billion (USD16 billion) Yulong project is a move toward consolidation, with the goal of improving efficiency and competitiveness.

These teapot refiners had 130 million tons of capacity in 2028, accounting for 70 percent of China’s total small refinery capacity and 17 percent of its overall refinery capacity. Over the past five years, Shandong has phased out nearly 27 million tons at small refineries producing less than three million tons a year. The province plans to cut small refinery capacity to 90 million tons by 2025.

The Yulong project’s first phase includes a refinery with an annual output capacity of 20 million tons a year, an ethylene plant with a production capacity of three million tons, and ancillary downstream chemical facilities.

Yesterday, a refining unit with an annual output of 10 million tons kicked off operations, with some downstream chemical units, the second refining unit, and remaining chemical facilities expected to begin production by the end of the year.

The project’ initial phase will give Yulong a competitive low-cost advantage and help it achieve its goal of increasing the output of high-margin chemicals while reducing that of fuel products, Chairman Cheng Rence said. “We’ll ensure the project is profitable and sustainable,” he added.

A second phase is also in the planning. It will likely include another 20-million-ton refinery and additional downstream chemical plants.

By replacing many small refineries in Shandong, the Yulong project is expected to cut coal consumption by 750,000 tons a year and carbon dioxide emissions by four to five million tons, according to official estimates from Yulong Petrochemical.

Nanshan Group, a privately held firm in Shandong, owns 51 percent of Yulong, and state-owned Shandong Energy Group holds 46 percent. Saudi Aramco expressed interest in buying a 10 percent stake in Yulong last October, but no progress on the deal has been disclosed so far.

Editor: Futura Costaglione