Oil Refiners Struck by Glut Find Comfort in China Teapot Drought

(Bloomberg) -- Oil refiners rocked by a market glut in Asia are finding some solace as what was expected to be a flood of fuel from China’s private processors is proving to be a benign trickle.

While the Chinese companies known as teapots were expected to swamp the market after they received government approval to ship supplies overseas, a lack of facilities to transport products from plants to ports has hindered such plans. For instance, one of the refiners took two months to fill a single ship of 35,000 metric tons after having to repeatedly cart the fuel in 30 ton trucks, according to BMI Research.

Teapots have gained prominence over the past year after the government relaxed rules governing their oil purchases and sales. Processors elsewhere in Asia and beyond braced for more competition while already grappling with rising supply from state-owned giants such as China Petroleum and Chemical Corp. But insufficient storage capacity, few pipelines connecting facilities with ports and a lack of trading relationships abroad mean the teapot threat is yet to bite.

“We were for sure concerned about teapot refineries at first when they were initially allowed to export because we didn’t know how much of their products would be shipped,” Kim Woo Kyung, a spokeswoman at SK Innovation Co., South Korea’s largest refiner, said by phone from Seoul. “But now that we know they have limitations with infrastructure, we are not too worried about them as much.”

Export Quotas

So far this year, Chinese independent refiners have received government approval to export almost 1 million tons of fuel, but are unlikely to be able to use the entire quota because of the lack of infrastructure, according to Energy Aspects Ltd. The processors have shipped only 17 percent of the diesel and 30 percent of the gasoline they were allowed to sell overseas under licenses received from January to June, according to the industry consultant.

Meanwhile, state-owned Chinese refiners that have access to sophisticated port and pipeline infrastructure continue to lift the nation’s exports. In the last batch of export licenses awarded by the government, PetroChina Co. received quotas to ship a total of 2 million tons overseas, Sinopec got approval for sending 1.2 million abroad and Sinochem could sell 2.55 million, according to Shanghai-based commodities researcher ICIS China. By comparison, five teapots received a combined total of 335,000 tons in quotas.

After boosting run rates in June to the highest level since at least 2011, independent refiners are now operating at less than half their capacity at a six-month low, according to data compiled from Oilchem.net. While small individually, together they account for almost a third of China’s refining capacity.

Elsewhere in Asia, processors from Singapore to South Korea are also cutting operating rates as they grapple with a slump in margins. The profit from turning benchmark Dubai crude into oil products in the region has averaged less than $6 a barrel in the first six months of 2016, compared with $8.25 in the same period last year, data compiled by Bloomberg show.

“I wouldn’t consider teapots as posing a significant threat to the more developed refiners in South Korea, Japan and India, especially in the next few years,” said Peter Lee, a Singapore-based analyst at BMI Research, a unit of Fitch Group. “Some of the smaller ones will have difficulty coming up with the funds and technology to carry out required upgrades, thereby paving the way for consolidation or even closures.”

High Costs

It’s not efficient and commercially viable for teapots to export fuels currently because of the lack of fuel tanks and pumps at exporting facilities, said Zhang Liucheng, chairman of the China Petroleum Purchase Federation of Independent Refinery, a group of 16 teapot processors. The costs are “quite high” for the companies to transport oil products from inland to export terminals, and there aren’t enough tanks at port to hold the fuel while waiting for them to get shipped, he said.

“A big concern for us is that we may be reluctant to invest in infrastructure reconfiguration at this point since it’s not clear whether we can get a long-term export quota going forward,” said Zhang.

--With assistance from Tsuyoshi Inajima To contact Bloomberg News staff for this story: Heesu Lee in Seoul at hlee425@bloomberg.net, Sarah Chen in Beijing at schen514@bloomberg.net, Debjit Chakraborty in New Delhi at dchakrabor10@bloomberg.net. To contact the editors responsible for this story: Pratish Narayanan at pnarayanan9@bloomberg.net, Sungwoo Park

With assistance from Sarah Chen, Heesu Lee, Debjit Chakraborty