Hyundai Oilbank Co. has recently completed the construction of its second heavy oil upgrading plant as local refineries are racing to get an edge in the high value-added market.

The country’s smallest refiner said on Sunday the new facility located in Daesan, South Chungcheong Province, will enter full operation in mid-May after a four-month test run.

The company has invested 2.6 trillion won ($2.33 billion) in building the unit, which converts heavy oil such as bunker C into more profitable and cleaner fuel such as gasoline, kerosene and diesel. 

“Currently we are operating equipment to generate water, electricity and steam in normal mode. Core processes of breaking down and desulfurizing middle distillates have been put on test operation which will last four months,” the company said.

The new unit is expected to raise Hyundai’s heavy oil upgrading capacity to 120,000 barrels per day, equivalent to 30.8 percent of its 390,000-bpd crude oil distillation capacity. It will mark the highest ratio among Korean refiners, followed by GS Caltex with 28.3 percent, S-Oil with 25.5 percent and SK Energy with 15.4 percent.

Refiners are increasing their investment in heavy oil upgrading units to meet growing demand for light, cleaner fuel and brace for increasingly strict environmental regulations.

GS Caltex, the nation’s second-largest oil refiner, said earlier this month that it plans to invest 1.1 trillion won in its fourth heavy oil upgrading facility in Yeosu, South Jeolla Province. The plant, to be completed in 2013, will raise its total upgrading capacity to 268,000 bpd, accounting for 35.3 percent of its total distillation capacity.

Construction will begin in March for a 53,000-bpd vacuum gas oil fluid catalytic cracking unit and 24-000-bpd gasoline hydro-desulfurization and alkylation unit to generate high-quality gasoline, GS said.

GS has been pouring 5 trillion won into such facilities since 2004. It launched its third one in December.

Korean refiners face strong competition from India and China. India’s Reliance is stepping up production at its leading refineries, while Chinese refiners are expected to add about 3.7 million bpd of new upgrading capacity until 2015.

Observers are raising concerns that the competition among domestic firms could lead to excessive production of high-quality oil amid sluggish domestic demand.

To tackle such anxieties, local refiners said they are planning to promote the use of clean diesel vehicles to operators of taxis and buses, most of which currently use liquefied petroleum gas.

By Shin Hyon-hee (heeshin@heraldcorp.com)