Amidst the convergence of energy transition, dual carbon goals, and high-quality development imperatives, China's refining and petrochemical industry is undergoing a pivotal shift from “scale expansion” to “quality enhancement.” Under national macro-control policies, China's crude oil primary processing capacity must be capped at 1 billion tons by 2025. With current refining capacity nearing this policy threshold, authoritative projections indicate domestic annual oil refining capacity may surpass 980 million tons in 2025—a historic milestone. With total capacity hovering just below the policy ceiling, and under the strict enforcement of production caps, new capacity will be prioritized for integrated refining-chemical projects and low-carbon initiatives (such as refineries equipped with CCUS), while the construction of new pure fuel-type refineries is strictly prohibited. Meanwhile, the phase-out of outdated capacity will accelerate, guided by the criteria of "energy consumption (≤12kg standard oil/ton of crude oil), carbon emissions (≤0.8 tCO2/ton crude oil), and scale (below 5 million tons/year). By 2027, over 50 million tons/year of outdated capacity will be phased out, with industry concentration enhanced through mergers and reorganizations (e.g., consolidation of Shandong's independent refiners).

Shandong hosts approximately 70% of China's independent refining capacity, making it the nation's largest regional refining hub. Leveraging the resource endowment of the Shengli Oilfield, Shandong has cultivated a deep-rooted refining and petrochemical industry. Shandong's independent refineries are primarily concentrated in Dongying, Weifang, Zibo, and Binzhou. Among these, Dongying has developed into the province's largest independent refining cluster, supported by its advantages as an oilfield extraction site and port city. However, Shandong's independent refineries are notably characterized by “numerous facilities, small scale, and outdated technology.” Facing environmental upgrades, supply chain volatility, and the province's accelerated transition to new growth drivers, some small-scale refineries have struggled to adapt to policy and market shifts, leading to successive bankruptcies and liquidations. Statistics indicate that as of October 2025, approximately 50 refineries remain operational in Shandong Province, with 25 enterprises still possessing production capacities ≤5 million tons per year. Under the province's policy to consolidate local refineries, these facilities with capacities below 5 million tons per year will undergo further adjustments.

The “Work Plan for Stabilizing Growth in Shandong's Petrochemical and Chemical Industry” (hereinafter referred to as the “Work Plan”), jointly issued by seven departments including the Shandong Provincial Department of Industry and Information Technology, sets key objectives: By 2026, the province's petrochemical and chemical industry value-added output will grow by over 5% year-on-year. Chemical production and operations will maintain stable performance, with economic benefits from high-end chemicals steadily increasing to account for over 60% of the province's chemical industry. Local refineries will become a pivotal force in achieving these targets.

Exploring Three Transformation Pathways

To ensure survival, Shandong's local refineries are exploring three transformation pathways:

Reducing Oil, Increasing Chemicals: Lowering the proportion of refined oil products while raising chemical yield to over 30%, focusing on developing basic chemical raw materials like propylene and ethylene.

Reducing Oil, Increasing Specialty Products: Producing differentiated products such as specialty oils, high-end solvents, and lubricant base oils. Integration and Restructuring: Participating in integrated consolidation through large-scale projects, leveraging “replacing small with large, capacity reduction with replacement.” However, this transformation faces technical bottlenecks and financial pressures, making it difficult to reverse the downturn in the short term. Details are as follows:

01 Deepening the Industrial Chain

This is the mainstream choice for large local refineries, exemplified by the Yulong Island Refining and Chemical Integration Project with a total investment exceeding 100 billion yuan. As a key provincial initiative in Shandong, the Yulong Island 40-million-ton-per-year integrated refining and chemical project consolidates capacity from 11 local refineries to form an “aircraft carrier-class” base, transitioning from traditional refining to high-end chemical products. It establishes a distinctive industrial chain spanning “crude oil refining to basic chemical feedstocks, then to high-end chemical new materials and specialty chemicals,” driving Shandong's chemical industry from ‘big’ to “strong.” The first phase of the Yulong Island project, with a capacity of 20 million tons per year, has commenced operations, while the second phase is planned to expand capacity to 40 million tons per year.

02 Expanding Niche Markets

For mid-sized refineries lacking the capacity for hundred-billion-yuan investments, focusing on specialized segments is a prudent strategy. For instance, Jingbo Petrochemical specializes in high-end specialty oils and lubricants. Hengyuan Chemical has made an even more decisive transformation—completely shutting down traditional refining units and leveraging its existing carbon resources to shift production to high-value-added carbon materials like needle coke. These products are used in lithium battery anodes and ultra-high-power electrodes, achieving a remarkable evolution from “refining crude oil” to “refining materials.”

03 Integration and Restructuring: Optimizing Layout

In June 2025, Shandong Refining & Chemical Energy underwent another equity change. Dongming Petrochemical's stake decreased from 100% to 33.3333%, while China United Energy International Investment Co., Ltd. became the controlling shareholder with a 66.6667% stake. This company is also effectively controlled by Li Xiangping. Shandong Refining & Chemical Energy's subsidiaries were reduced from nine to four. Based on the business distribution of these subsidiaries, the company now leans more toward investment management, while its controlling shareholder, Zhonglian Energy International, focuses solely on project investment. Shandong Refining & Chemical Energy's registered capital has also increased from RMB 1 billion to RMB 3 billion, optimizing its capital structure. This lays a solid foundation for Dongming Petrochemical to undertake large-scale financing and advance industrial upgrades in the future, while also securing ample funding for major projects such as technological innovation.

The 2025 Shandong Provincial Government Work Report explicitly calls for vigorously advancing new industrialization, integrating and establishing landmark and key industrial chains, and accelerating the transformation and upgrading of traditional industries. Dongming Petrochemical's integrated refining and petrochemical project is listed among these initiatives, becoming one of Shandong's four key refining and petrochemical projects for 2025.

The year 2026 will be crucial for evaluating the effectiveness of Shandong's refinery transformation and restructuring efforts over the past few years. The advancement of major projects like the Yulong Island integrated refining and petrochemical complex and the Dongming Petrochemical integrated refining and petrochemical upgrade will substantially reshape the landscape of Shandong's petrochemical industry. Enterprises that successfully pivot toward high-end chemical products or new materials will be the first to reap the dividends from increased product value-added, with profit margins expected to widen compared to traditional refining operations. Furthermore, national support for strategic emerging industries and the development of low-carbon technologies—such as green hydrogen and CCUS—will provide new technical pathways and growth opportunities for Shandong's local refineries undergoing transformation.

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