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CPC Corporation Taiwan

Downstream Operations

Downstream Operations

Downstream Operations

DOWNSTREAM OPERATIONS ENSURING STABILITY IN SUPPLY: INNOVATION AND INVESTMENT BOOST QUALITY AND QUANTITY

IMPORTING & REFINING

CPC aims to ensure the stability of its supply both by purchasing crude oil under long-term contracts and by utilizing vendors dispersed around the world. In 2017 its crude imports amounted to 140.65 million barrels: imports from the Middle East accounted for 56%, Africa 20.92%, Southeast Asia 2.74%; the remaining 20.34% came from other locations. In recent years, increasingly stringent domestic environmental standards have mandated that low-sulfur crude makes up a certain percentage of total imports.

To facilitate its handling of these vitally-important shipments, the company has set up large tanker offloading pontoons just offshore its refineries – at Shalun near Taoyuan in the north of Taiwan and Dalinpu near Kaohsiung in the south. In addition, purpose-built oil tanker wharves have been constructed at Kaohsiung, Taichung and Shen’ao ports.


SHOULDERING RESPONSIBILITY – MEETING THE DEMAND FOR REFINED PRODUCTS

CPC’s two operating oil refineries at Taoyuan and Dalin currently have a combined daily refining capacity of 500,000 barrels. In order to honor a commitment made to the government some years back to relocate the Kaohsiung refinery complex– which had a daily capacity of 200,000 barrels and an annual capacity of 50,000tons for storing refined products and chemicals – it was shut down at the end of 2015. In order to avoid disrupting the supply of refined products on to the domestic market, its operations are being progressively transferred to the Dalin Refinery – which was already undergoing capacity expansion to meet rising internal demand for refined products. The job of filling the petrochemical raw material supply gap consequent to the Kaohsiung refinery closure has been transferred to a naptha cracker in CPC’s Linyuan petrochemicals complex.

The Dalin Refinery was originally established as a part of the Kaohsiung complex but in 1996 was hived off as an independent operation. Its daily capacity is 300,000 barrels, with both incoming crude and outgoing refined products handled by four offshore mooring and unloading buoys and dedicated port facilities.

The Taoyuan Refinery started up in 1976. Following renovations and the addition of a second distillation plant, it now has a daily refining capacity of 200,000 barrels.

In 2017 CPC’s total output of refined petroleum products amounted to (in million kiloliters): gasoline 9.753; aviation fuel 1.918; diesel 5.761; fuel oil 3.041. Liquefied petroleum gas (LPG) production totaled 377,000 metric tons.


REFINING TECHNOLOGY UPGRADED TO ENHANCE QUALITY AND QUANTITY

In response to Taiwan’s ever more demanding environmental and quality of life standards, coupled with the government’s increasingly strict enforcement of the environmental protection regulations enacted to improve air quality and reduce haze, CPC has in recent years moved to both improve the quality of its products and raise their production value. Refining and production facilities have undergone design and process upgrades to enable the supply of highergrade products – such as desulfurized gasoline and diesel – to Taiwan’s internal market. At the same time, those upgrades have raised the level of production efficiency across the whole range of refining processes.

Additionally, CPC’s refinery facilities are in compliance with the Environmental Protection Administration’s (EPA) 2011 directive setting parameters for the sulfur and aromatics content of gasoline and diesel fuel. The EPA measure required that diesel fuel’s sulfur content be reduced to 10ppmw or less, its aromatic hydrocarbon content to 35vol% or less and that the olefin content in gasoline be 18vol% or less. The aforementionedfacilities consist of a 30,000-barrel-per-day cracked gasoline hydro-desulfurization plant at the Taoyuan Refinery, completed in 2008; a 20,000-barrel-per-day cracked gasoline hydrodesulfurization plant at the Dalin Refinery, completed in 2009; and a similar 40,000-barrel-per-day plant for diesel at the Dalin Refinery, completed in 2010. The 18,000-barrel-per-day cracked gasoline quality improvement plant at the Kaohsiung Refinery was moved to the Dalin site in 2011.In 2006 CPC began construction of an 80,000-barrel-perday residual fluid catalytic cracking (RFCC) facility at the Dalin refinery to upgrade its refining infrastructure and heavy oil recovery rate. That plant began mass production in 2013. At the same location, construction of a 14,000-barrel-per-day alkylation plant – designed to boost gasoline quality and to take advantage of the plentiful supply of crude butane feedstock from the refinery’s heavy fuel oil conversion facility – began in 2008 and was completed in 2013 with the onset of massproduction. With the aim of eliminating acidic fumes from the alkylation process and reducing other harmful emissions, CPC has built an extraction plant that began producing a daily output of 250 tons of high-grade sulfur in mid-2014.

In March 2017 CPC initiated its fully-funded plan for revamping the No. 3 residue hydro-desulfurization (RDS) plant at the Dalin Refinery. The scheme is aimed at boosting capacity for refining high-sulfur crude oil, thereby reducing procurement costs and reinforcing both the quality and stability of supply of the feedstock for its residual oil conversion facility. The plan’s overall scope includes updating and restarting the existing residual oilhydrogenation and desulfurizing site within the Taoyuan refinery, plus construction of a 70,000-barrel-per-day desulfurization plant. But the immediate goal was to get both buy-in from local residents and approval by the competent authorities.

Due to the aforementioned closure of the Kaohsiung Refinery in late 2015, CPC is in the throes of installing an additional processing plant at its Dalin site to ensure an uninterrupted supply of raw materials to Taiwan’s petrochemical industry. The plans call for the construction of a crude distillation unit (CDU) with a daily refining capacity of 150,000 barrels; a 50,000-barrel condensate fractionation unit (CFU) and hydro-desulfurization plants for both diesel (40,000 barrels) and kerosene (30,000 barrels) – all of which were due for completion in November 2017. After that, the Dalin complex’s No. 9 CDU plant – which has been in operation for 40 yearsand has a daily refining capacity of 100,000 barrels – would be shut down. CPC’s overall daily crude oil refining capacity will eventually be raised to 600,000 barrels when the Dalin site’s throughput reaches 400,000 barrels a day.

CPC is involved in a joint venture with a Japanese firm to build and operate an 180,000-ton-per-year isononanol (INA) plant as well as a 144,000-ton-per-year methyl tert-butyl ether (MTBE) facility. Construction is scheduled to begin in July 2018 and production to start up at the end of 2021. The project’s rationale is to boost the utility and commercial worth of the mixed C4 hydrocarbons produced by the heavy fuel oil conversion plantthat turns out high-value petrochemical materials.

External sales of key refined products in 2017 amounted to approximately 3.012 million kiloliters. They were sold mainly to South Korea, Malaysia, Indonesia, the Philippines, Singapore, the United Arab Emirates, the Sultanate of Oman, Angola, Papua New Guinea and Hong Kong and other destinations. CPC will continue developing these and other export markets in the future as a means of helping to optimize the company'soverall manufacturing efficiency and return on investment.


DEVELOPING EXPORT MARKETS HELPS OPTIMIZE OPERATIONAL EFFICIENCY

External sales of key refined products in 2016 amounted to approximately 3.178 million kiloliters. They were sold mainly to Japan, South Korea, Malaysia, India, the Philippines, Vietnam, Singapore, the United Arab Emirates, Papua New Guinea, Australia and China and other destinations. CPC will continue developing these and other export markets in the future as a means of helping to optimize the company’s overall manufacturing efficiency and return on investment.


CPC PETROCHEMICALS: THE WHERE AND HOW OF PRODUCTION

CPC’s principal petrochemicals production sites are its Linyuan Petrochemicals Complex - run by thePetrochemicals Business Division - as well as the Taoyuan and Dalin refineries operating under its RefiningBusiness Division.

The heavy fuel oil conversion plants at Taoyuan and Dalin produce propylene; the naphtha cracker and butadiene extraction plants at the Linyuan site produce ethylene, propylene and butadiene products, while its aromatics extraction facility produces benzene, toluene and xylene. CPC’s current annual production capacity for petrochemical raw materials comprises 1.07 million tons of ethylene, 1.194 million tons of propylene, 158,000 tons of butadiene, 274,000 tons of benzene, 321,000 tons of toluene and 507,000 tons of xylene.


PIONEERING THE PETROCHEMICALS INDUSTRY: COMMITTED TO INNOVATIVE DEVELOPMENT

CPC’s long-term investment in upstream petrochemicals manufacturing has helped drive the industry’s development and also support and sustain Taiwan’s economic miracle. In recent years, the company has put greater effort into updating equipment and expanding production capacity so as to eliminate any possibility of a shortfall in the supply of raw materials to downstream users. Starting in 2005, a total of NT$40 billion was invested in upgrading the Linyuan site’s Third Naphtha Cracker and production of high-quality ethylene began in 2013. That renovated and expanded Third Naphtha Cracker now produces annually 720,000 tons of ethylene, 370,000 tons of propylene and 100,000 tons of butadiene. As well as supplying downstream manufacturers in the adjacent industrial park, the Linyuan plant provides petrochemical materials to companies in the Renda Industrial Park that were previously supplied by the Fifth Naphtha Cracker. The Linyuan complex generates about NT$60 billion in annual revenue and its evident success has both encouraged downstream companies to invest and helped raise profitability in the industry to a new level. Looking ahead, CPC plansto employ new processes, low-energy consumption technologies and economies of scale to provide the downstream part of the petrochemical industry with reliably adequate supplies of such key raw materials as ethylene and propylene.

In the context of the challenges posed by climate change and depletion of natural resources, CPC lends practical support to the government’s Circular Economy policy by turning petrochemical by-products used as fuel or previously regarded as industrial waste into value-added products. Going further, the company aims to create a win-win situation between economic development and environmental protection by adhering to the principles of sustainable operations in its efforts to overcome the challenge of industrial transformation.


MARKETING CPC PETROLEUM PRODUCTS KEEPING TAIWAN ON THE MOVE:

CPC’s marketing of refined petroleum products in its home territory is primarily focused on the transportation sector – specifically for gasoline, diesel, fuel oil and aviation fuel. In 2017 sales of those products in Taiwan totaled 20.694 million kiloliters in volume and generated revenue of approximately NT$369 billion – the latter sum a significant increase over 2016. Automotive gasoline accounted for the largest share at approximately 51.6%, followed by diesel at about 23.6%, fuel oil at about 16.9% and aviation fuel at around 7.9%.

Taiwan’s internal market for refined petroleum products is divided chiefly between CPC and the Formosa Plastics Group and competition between the two has grown increasingly intense. CPC has worked hard at leveraging the advantage of its marketing network, and to protect its market share, by consolidating its gas station network: of the 2,490 sites operating in Taiwan at the end of 2017, 610 were directly run by CPC, 5 were jointly run by CPC and other parties, and 1,371 were privately-owned CPC franchises. These 1,986 CPC branded locations give CPC an unbeatable advantage; their sales as a part of the total market volume break down as gasoline 81.8%, diesel 79.1%, fuel oil 95.1% and aviation fuel 57.3%, the overall market share being 80.4%.


CPC FUELS KEEP THINGS MOVING ALL AROUND TAIWAN

CPC operates aviation fueling stations at all of Taiwan’s airports – Songshan, Taoyuan, Taichung, Hualien, Taitung and Kaohsiung as well as offshore at Kinmen, Matsu and Magong. Around the coast, it has marine bunkering stations for both local and international vessels at Kaohsiung, Keelung, Suao and Taichung ports.

As of end-2017 CPC operated 14 product distribution centers, located country-wide at Keelung, Shimen, Hsinchu, Taichung, Taichung Harbor, Wangtian, Minxiong, Tainan, Fengde, Qiaotou, Suao, Hualien, Magong, Kinmen and Matsu. These depots supplied filling stations in their surrounding areas with a total of 23,339,000 kiloliters of product over the course of the year. Three chemical analysis centers in Keelung, Taichung andKaohsiung, plus seven testing laboratories, were charged with testing products for quality control and altogether handled 29,583 samples during the year.


CPC GAS STATIONS ARE SUCCESSFUL MULTISERVICE OPERATIONS

Maintaining market leadership requires maximizing customer satisfaction, so CPC has set as the keynote of its gas station operations a standard of service that differentiates them from their competitors. All CPC directly-operated filling stations throughout Taiwan provide all-round, high-level service – washrooms are updated and kept clean; staff employ a customer-experience management approach, actively promoting the VIP card system and applying proven customer relations management principles. Faced with the need to reduce operating costs and resolve manpowershortage issues, CPC has taken the lead in introducingself-service fueling using credit cards; and also requires all filling stations under its flag to increase revenue from non-core areas by providing a diversity of services and strengthening horizontal sales alliances by, for example, selling produce from local farms.

Gas station managers oversee the provision of ancilliary services such as car wash, quick maintenance, convenience stores and sales of high-quality automotive accessory products. A growing number of sites now feature a battery exchange station for electric scooters. Sales of CPC-branded goods grew in 2017: sales of intake valve cleaning fluid for motorcycles, cars and diesel trucks reached 1,130,000 bottles, while sales of See Clean, an environmentally-friendly laundry detergent, reached 440,000 units. Further, sales of CPC-branded mooncake gift boxes for the Mid-Autumn Festival reached a record high of 97,000 units. The revenue generated by car washing and quick maintenance services also reached a record high in 2017. Overall gross profit from multi-service gas stations exceeded NT$1.17 billion and the consistent growth in their use demonstrates that the consumer now sees them as a useful and valuable retail channel.

When it comes to customer satisfaction, the 0800-036-188 customer service hotline – and the more recently added “1912” CPC service line – have expanded the scope of CPC’s services and enabled a quicker response to customers’ problems across the spectrum.


CPC CONSTRUCTS GREEN-FRIENDLY BUILDINGS IN ITS PUSH TOWARDS SUSTAINABILITY

Within the global trend towards environmental protection there is now an emphasis on constructing buildings in a way that serves the cause of sustainability. Variously termed ‘ecology buildings’ in Japan, ‘eco-buildings’ or ‘sustainable buildings’ in Europe and ‘green buildings’ in the USA and Taiwan, the aim is to build so asto protect ecological systems, encourage a mutually beneficial relationship between the structures and the environment, conserve energy and reduce both pollution and the overall environmental impact. These sustainable design and ecoprotection principles align with CPC’s dedication to achieving sustainability in its operations and accordingly a program to green its gas stations began in 2013. As of February 2018, 37sites have received 'green building' certification.


NATURAL GAS SUPPLY CPC ENSURES TAIWAN'S VITAL NATURAL GAS SUPPLY

CPC’s promotion of natural gas as the fuel of the future, in keeping with Taiwan’s policy aim of energy diversification, is based on its inherent advantages in terms of high thermal efficiency, low pollution profile and convenience for safe handling. A new era of clean energy for Taiwan was ushered in with the completionof the country’s first LNG receiving terminal in Kaohsiung’s Yongan District in 1990. To cope with growing demand, its capacity was later boosted to 4.5 million tons annually; and a second-phase expansion project wascompleted in December 1996.

A third-phase expansion project to satisfy demand for natural gas from independent power producers as well as urban end-users in northern Taiwan commenced in July 1996. In addition to terminal-area expansion, thisinvolved laying a 36-inch diameter, 238 kmlong undersea pipeline from the Yongan plant to Tongxiao. Its completion in December 2002 expanded CPC’s then annual LNG handling capacity to 7.44 million tons.

In the years since those projects were completed, a second terminal has been built at Taichung – it came on stream in 2009 - and planning of a third plant in northern Taiwan is now under way.


CPC IS BUILDING RELIABILITY INTO NATURAL GAS SUPPLY

Taiwan’s aforementioned second LNG receiving terminal, sited close to Taichung's harbor and with an annual capacity of 3.0 million tons, became fully operational in 2009. It was designed to supply natural gas to Taiwan Power Company’s (Taipower) Datan Power Station as well as industrial firms and household users in northern and central Taiwan. This project entailed building three 160,000-kiloliter LNG storage tanks, gasification and gas supply facilities and a 135-kilometer, 36-inch sea/land long-distance transportation pipeline from Taichung Harbor through the Tongxiao distribution center to the Datan power plant. The current Taichung LNG Terminal Phase II Investment Project calls for the construction of three additional 160,000-kiloliter above-ground storage tanks and another gasification facility at the terminal itself; a 26-inch, 21.8 km terrestrial gas pipeline between the terminal and the Wuxi Separation Station; and a further switching station linked with the existing 26-inch pipeline at the Wuxi site. Once completed in 2018/2019, the project will boost the annual capacity of the Taichung terminal to over 5.0 million tons and ensure a stable, dependable supply of gas during the winter monsoon period as well as greater storage capacity in terms of the number of days’ supply on hand.

In addition, in the context of the government's non-nuclear homeland and greenhouse gas reduction policies, the MOEA's Bureau of Energy plans to reach the goal of 50% of total electricity generated from natural gas in orby 2025. In preparing for this, CPC plans to lease West 11 and 12 terminals from Port of Taichung and to build a second pier in Taichung Port, in order to enhance the Taichung terminal's LNG unloading capacity and hence gas supply stability. After the project is completed in 2022, the annual capacity of the Taichung terminal will be boosted by another 1.0 million tons.


TOWARDS A NATIONWIDE NATURAL GAS PIPELINE NETWORK

CPC has constructed a natural gas transmission and distribution system in western Taiwan comprised of approximately 2,149 kilometers of terrestrial trunk pipeline, extending from Pingtung in the south to Keelung in the north, which includes eight supply centers and 44 distribution stations. Current plans are centered on the goal of constructing interlocking ring-shaped networks to produce a figure-8 configuration; this will involve laying down a 238-kilometer undersea pipeline from Yongan to Tongxiao and a 500-kilometer terrestrial pipeline onwards from Tongxiao to Taoyuan, creating a circular network in Taiwan. In addition, afterthe 36-inch undersea gas pipeline from the Taichung LNG plant to Datan has come on stream, it will be linked with terrestrial pipelines in central and northern Taiwan to form another circular formation – thus completing the planned islandwide, integrated ‘figure-8’ natural gas transmission network.

In the context of Taiwan’s new energy policy that calls for gradually phasing out nuclear power and building a low-carbon environment partly run (20%) on renewable energy, Taipower is planning the addition of another 4 natural gas-fired generators to its Datan Power Plant. In a parallel development noted above, CPC is now planning construction of a third LNG receiving terminal, located in the Guantang Industrial Area in northern Taiwan, to supply both the expanded fuel uptake of the Datan plant and growing demand from residential, industrial, and other energy users in the region. Apart from the LNG plant itself, the project will involve constructing a dedicated LNG pier and building facilities for handling the import of 3.0 million tons of LNG each year. The new works will include four 160,000-kiloliter LNG storage tanks as well as vaporization and distribution plants that will be connected to the existing natural gas distribution system. The total investment entailed will amount to NT$60.08 billion.

The third LNG receiving terminal project formally commenced in 2016, with full operation scheduled by 2023. Its capacity may later be expanded up to 6.0 million tons of LNG annually to meet higher demand. With its three LNG receiving terminals located in the north, center and south of the island, CPC stands to reap economies of scale that will lower both the costs and risks of importing natural gas in the future. The existing figure-8 undersea and terrestrial pipeline system will enable mutual support by its components in transporting natural gas around Taiwan and raise the level of both operational safety and stability of supply.


CPC'S DIVERSIFICATION OF ITS NATURAL GAS SOURCES MAKES FOR A STABLE SUPPLY

CPC has devoted much effort to diversifying its liquefied natural gas (LNG) sources to ensure a reliably stable supply of natural gas for Taiwan. This has entailed signing multiple LNG import contracts for procurement around the globe – including the Middle East, Southeast Asia, Northeast Asia, Australia, North America, Africa and Europe as well as other areas.

In addition to those long-term LNG purchase contracts, CPC acquires yet more supplies through medium/short-term (spot) contracts. In 2017, CPC imported most of its LNG from Indonesia, Malaysia, Qatar, Papua New Guinea and Australia, with some coming from Russia as well.


OTHER PRODUCTS


CPC IN LPG: MASTERING THE MARKET AND
FORGING EXCELLENCE IN DISTRIBUTION

CPC’s long-standing monopoly in the LPG market was broken when the government opened it up to competition in 1999. Formosa Petrochemical Corp. came in as a producer and independent traders began importing their own supplies. As both a stateowned enterprise and one of the market’s main suppliers, CPC is charged with maximizing its operating performance while at the same time ensuring sufficiency of supply to the domestic market.

With household gas, CPC’s LPG Business Division has been able to maintain its leading market share by making full use of its quality advantages and also fully utilizing the company's north-south transport and storage systems and comprehensive marketing and retail network. In selling industrial gas, the company aims at lifting the quality of its customer service so as to both retain existing customers and win new ones. On the downside, CPC has to balance compliance with the government’s LPG safety reserve policy against optimizing the rate of turnover in its storage tanks, which is crucial to profitability; and at the same time it must endeavor to reinforce both occupational safety and environmental protection protocols.

And along with those preoccupations the company must be a good corporate citizen and be seen to fulfill its CSR commitments, an obligation not shared by all of the players in the market.


SOLVENTS & CHEMICALS CPC TAKES AN
INNOVATIVE APPROACH TO AN ESTABLISHED

MARKET
CPC holds a dominant market share position in Taiwan’s solvents and chemicals sector: around 80% in solvents, 35% in toluene, 45% in xylene, 60% in methanol, 50% in asphalt and 45% in sulfur. CPC’s Solvents & Chemicals Business Division aims to achieve its operating objectives in a number of ways. This initially involves taking a vigorous approach to efficient customer service as well as expanding exports to promising markets such as China, Vietnam, ASEAN and other Asia Pacific countries – which is in line with the government's New Southbound Policy. There is also much effort going into enhancing product quality and image, continuous improvement of the refining process and lowering production costs. Most important of all, they are developing both new and innovative products and new areas of business.


CPC LUBRICANTS: MARKET LEADER AT HOME,
EXPANDING IN ASIA-PACIFI

CPC is the leader in Taiwan's automobile lubricants market with its duo of brands ‘CPC’ and ‘Mirage’ appealing to both consumer and professional users - a position supported by strong, well-defined and diversified sales channels. Those include more than 30 contracted distributors, the 600-plus CPC directly-operated gas stations and many retail chain stores. CPC's Lubricants Business Division (LBD), founded in 1999, systematically integrates production, logistics, marketing, technical capacity and other resources to construct a uniquely competitive profile; and is committed to providing quality products, premium services and full technical support to meet the needs of its community and corporate customers.

The LBD has established an automated precision blending system in Chiayi that took more than three years from the start in 2011 to construct - at a cost of NT$400 million - and which is unique in Taiwan. This plant has sharply lifted the level of efficiency and accuracy in lubricants production, which runs at an annual output of up to 90,000 kiloliters. After the installation of lubricating grease production machinery with an annual output of more than 3,300 tons as part of the renovation project, CPC’s lubricant production equipment and technology is second to none, not only in Taiwan but also in the wider Asia-Pacific region. All production is carried out in strict accordance with CPC-researched formulas and rigorous and reliable inspection, backed by a strong sales team – evidencing CPC’s dedication to creating a gold-standard brand.

In addition, CPC's LBD has set up a highly efficient logistics network, based on four warehouses for finished products in northern, central and southern Taiwan, which works as a distinct competitive advantage in making sales. In current developments, CPC has as of early 2018 embarked on the two-phase construction of bonded storage and blending facilities for base oils and additives at Taichung Port to strengthen its supply capacity and enable international trading in lubricant materials and customized products.

In addition to cultivating its domestic market, the LBD is also vigorously expanding in the Asia-Pacific region. Distributorships, direct customer shipments and agencies are currently operational in China, the Philippines, Indonesia, Vietnam, Myanmar, Cambodia, India and other locations. CPC’s future focus with regard to expansion into overseas territories will be on developing diversified international trade in lubricant materials and on external OEM manufacturing. An example of the latter approach, designed to circumvent the ASEAN tariff barrier to non-members, is the recently-formed Maxihub Corporation joint-venture located in Vietnam's Tong-Nai province. Formed by CPC along with Taiwanese and local firms with specialist know-how, this company will operate a lubricants blending, storage, packaging and logistics complex producing both CPC-branded and OEM products for distribution across ASEAN markets. Commercial operation is scheduled to begin in 2019 and when full production is reached it will become the LBD's second-ranked manufacturing base.

CPC's LBD will continue to uphold its core competences in manufacturing and marketing lubricants – skills such as R&D, formulation and blending, logistics, quality control and technical support services – while focusing on developing innovative premium products, technical consultancy and customer satisfaction. Looking to the future, the LBD's vision encompasses maintaining its lead over the competition in the home market while significantly expanding its presence in Asia- Pacific and other overseas markets to make the lubricant brands 'CPC' and 'Mirage' become well-known worldwide.