Chinese To Build Refinery In Brunei; May Squeeze Out PetroBru

SINGAPORE (Dow Jones)--China's Zhejiang Hengyi Group Co. has received official approval to build Brunei's second oil refinery at Pulau Muara Besar, casting doubt over the fate of a similar project in the same location.

The Chinese project could squeeze out another planned refining project in the same location under PetroBru Sdn. Bhd. and its Malaysian shareholder, the engineering firm TRC Synergy Bhd. (5054.KU), as the country's small, falling oil production of around 142,000 barrels a day couldn't feed two more new refineries.

Zhejiang Hengyi, a supplier of raw materials for textiles, is privately owned, but it has strategic partnership with China Petroleum & Chemical Corp. (SNP), the state-owned giant known as Sinopec Corp.

The company will begin building the oil refinery and an aromatics cracker project with a production capacity of around 135,000 barrels a day once a detailed engineering study is completed over the next twelve months, the Brunei Economic Development Board said Monday. The construction will take three years.

The US$2.5 billion project, which could have local equity participation of up to 30%, will process crude oil and condensate into gasoline, diesel and jet fuel, as well as paraxylene and benzene, which are mainly used in textile production. Sinopec Engineering Incorporation will undertake front-end engineering design of the project.

Zhejiang Hengyi plans further investment of US$3.5 billion to expand the refinery to allow for the production of olefins, which are used as raw materials in plastic production, the board said, without giving a timeline.

The company, when contacted by Dow Jones Newswires, confirmed its plan to develop an oil refinery and aromatics plant, but declined to release further details.

Alex Yap, an analyst with FACTS Global Energy, hinted that the approval could signal the demise of the PetroBru project.

"It doesn't seem to make sense to me" for Brunei to increase refining capacity by much, given the high level of competition in the refining sector in Asia, Yap said.

Brunei consumes 13,000 barrels of oil products a day, most of which can be supplied by Brunei