SEOUL (Reuters) - Top South Korean refiner SK Energy will spend $1.5 billion to build a diesel-producing hydrocracking unit at its Inchon unit, it said on Tuesday, nearly two years after the plan was first mooted.

The project is part of SK’s effort to upgrade the quality of fuel from its Inchon plant, the country’s smallest and most basic at just 275,000 barrels per day, with an aim to increase exports of lighter, higher-value products to China and Southeast Asia.
SK Energy will spend 1.52 trillion won to build the 40,000 bpd hydrocracking unit (HCC) at Inchon, on the country’s West Coast, strategically near the Chinese market. It is due to begin commercial production in June 2011.
The unit is smaller than the 55,000 bpd capacity figure that had been reported back in August 2006, when SK Energy was said to be considering whether to build a gasoline-making residual fluid catalytic cracker (RFCC) or a hydrocracker, which produces diesel and kerosene, with costs estimated then at around $1 billion.
SK Energy, previously known as SK Corp, bought the struggling Inchon refinery out of bankruptcy in late 2006; it then formally absorbed SK Incheon into the parent company in February 2008.
SK Energy is the country’s biggest refining firm with total crude distillation capacity of 1.115 bpd, but it is unable to make as much high-value, low-sulphur fuels as its peers due to a lack of more complex upgrading units.
The refiner’s total upgrading capacity will rise to 202,000 bpd with the new unit, and its upgrading ratio will increase to 17.6 percent from 14.5 percent now.
SK Energy’s main complex in Ulsan, south of Seoul, currently operates upgrading facilities with 45,000 bpd and 57,000 bpd capacity. Its new 60,000 bpd residue fluidised catalytic cracking (RFCC) will go into commercial operation by late-June.
S-Oil Corp, the country’s third-largest refiner by size but with the most complex units, has a 25.8 percent upgrading ratio, while second-ranked GS Caltex has a 22.5 percent ratio. Hyundai Oilbank, the smallest refiner by crude distillation capacity, has 16.6 percent upgrading ratio. The new unit will produce highly-valued naphtha, diesel and kerosene using low-priced bunker-C fuel as feedstock, taking advantage of depressed residual fuel prices to help meet fast-growing regional demand for middle-distillates.
“SK Energy is a significant supplier of jet fuel and diesel to China and Vietnam. With the upgrading units, exports will grow for the cleaner products,” said a refinery source close to product operations. “But the refiner will have to become a fuel oil importer, which will tighten the regional bunker-C market.”
SK Energy usually exports around 150,000-200,000 tonnes of spot middle distillates per month. It also sells one or two straight-run fuel oil cargoes to China each month, but the refiner has skipped exports since January after cutting crude runs on poor cracking margins.
Simple refining margins were at 33 cents a barrel on average for the first three months of the year, while complex margins were at $6.95 a barrel during the same period.