China’s intention to relax hitherto strict crude import rules may be causing alarm within its state-owned refiners.
The country’s small but resilient independent teapot refiners have long complained that restrictions on crude import rights have forced them to rely on alternative feedstocks — primarily imported straight-run fuel oil — and, as a result, hampered their margins and crimped processing volumes.
So the announcement of guidelines for new crude oil import quotes last month by the National Development and Reform Commission was received favorably by the refiners.
Will the ability to officially import crude revive teapot refiners’ fortunes? More importantly, should state-owned giants Sinopec and PetroChina, which control over 60% of China’s refining sector, be concerned over the potential loss of market share if teapot refiners raise their run rates?
The short answer is no.
Besides limited feedstock options, teapot refiners, many as small as 20,000 b/d, today face other pressing challenges, which Platts explored in an in-depth series published in December.
To reduce non-performing loans, banks have clamped down or raised limits on borrowing, which has squeezed many refiners’ ability to procure huge volumes of feedstock.
Teapot refiners also often do not have the luxury of marketing and retail outlets, which forces them to wholesale their oil products to the state-owned companies at discounts.
Additionally, the oil sector is partly being held responsible for China’s serious pollution problems and is under intense government pressure to either clean up production or consolidate to enhance efficiency.
This explains why the central government has shrewdly tied the award of new crude oil import quotas directly with closure of primary distillation capacity, which will force teapot refiners to abolish their smaller crude distillation units if they want to apply for the new quotas.
The hope is that this will finally make consolidation among teapot refiners a reality after previous targets, which came with no incentives, were repeatedly ignored.
Platts estimates that about a fifth of the teapot refiners that are heavily concentrated in eastern Shandong province could qualify for crude import quotas in excess of 500,000 b/d if they opt to decommission their smaller CDUs.
This is less than 10% of China’s total crude imports last year and under 20% of total teapot refining capacity in Shandong.
To predict what could happen with the further influx of crude oil, one need only look at how the situation has unfolded in the last two years.
Since late 2013, Shandong’s teapot refiners have managed to get their hands on more domestic crude, and crude oil now accounts for 80% of the refiners’ total feestock, with demand for imported fuel oil fast dwindling.
Yet overall refinery utilization has remained below 40% for the province’s teapot refiners.
Shandong Dongming Petrochemical, the largest independent teapot refiner in the province with capacity of 12 million mt/year, is not officially a crude importer, although it has been able to buy imported grades through a tie-up with PetroChina.
It used crude exclusively last year, but utilization averaged just 35%, rising only slightly from 31% in 2013, when fuel oil accounted for nearly a fifth of its feedstock.
It seems likely that the trend will continue, and that even rising run rates among many of the teapots won’t threaten China’s refining giants.