How China’s Private Refiners Upended the Oil Market
(Bloomberg) -- China’s independent refiners have driven a meteoric shift in the global oil market since Beijing gave them permission to import crude in 2015, helping the nation overtake the U.S. as the world’s biggest importer and shaking up trade flows. Private processors underpinned a market recovery in 2020 after the Chinese economy rebounded from the Covid-19 pandemic, buying so much cheap oil at one stage that a traffic jam of tankers formed off the coast as they waited to unload millions of barrels.
1. Where did it all start?
The foundations for China’s private refining industry were laid in Shandong province during the 1960s. To ease resistance to the development of the Shengli oil field, Beijing allowed local governments to build plants to process crude that leaked from pipelines servicing the deposit. Known as teapots because they started out as small and simple refineries, the industry has evolved over the years and now includes larger and more sophisticated plants in other regions including in the provinces of Liaoning and Zhejiang.
2. Where is the crude coming from?
China created a huge new global demand center by granting crude import quotas to the independent refiners. Russian oil became an immediate favorite due to its close proximity, helping the nation to momentarily displace Saudi Arabia as the biggest Chinese supplier in 2016. The list of suppliers has grown to include Angola, Brazil, Oman, Venezuela and more recently, crude from Norway’s Johan Sverdrup field.
3. How much oil can they buy?
Independent refiners don’t have the luxury of buying as much crude oil as they want: The central government in Beijing issues quotas. Allocations vary in size and are typically given out just before the start of a new year, with additional quotas sometimes provided after the first batch. For 2021, processors are allowed to collectively import about 4.9 million barrels a day, more than the daily output of Iraq, OPEC’s second-biggest producer.
4. Where is all that fuel going?
The rise of the independents has swelled domestic fuel supplies and led to a surge in diesel and gasoline shipments from China, although not directly from private processors. Companies also need quotas from Beijing to export fuels and the state-run refiners have held a monopoly on exporting over the years. Those big national oil companies are now shipping more to countries like Singapore and the Philippines and competing for market share with regional processors including South Korea.
5. Are the independents likely to get export quotas?
While sales by the independent refiners have been primarily limited to the domestic market, changes are afoot. One of the largest operators, Zhejiang Petroleum & Chemical Co. -- a unit of Rongsheng Petro Chemical Co. -- was last year given approval to ship fuels to overseas markets, the first time since 2016 that a private processor has been granted an export quota. It remains unclear when or how much can be shipped, but the move potentially paves the way for more independents to send fuel abroad.
6. How do they compare with the majors?
State-run companies like PetroChina Co. and China Petroleum & Chemical Corp. (better known as Sinopec) still make up the lion’s share of the nation’s refining -- about two thirds in 2020. But the new wave of independents has chipped away at that over the years and is set to take a bigger slice as larger plants come online. Those include the ramp-up of Zhejiang Petroleum & Chemical’s mega-plant in Zhoushan this year, while Shenghong Group is starting China’s biggest crude-processing unit by capacity. Those two companies along with Hengli Petrochemical Co. have operations that rival those of their state-run counterparts. The vast majority of private processors are still concentrated in Shandong, and still known as teapots. The smallest plants refine as little as 10,000 barrels of oil a day but, collectively, they processed 3.16 million barrels a day in 2020, rivaling that of Japan or South Korea.
7. How’d the teapots do it?
They’ve shown a knack for survival. Beijing initially tried to shut down many of the processors in a bid to consolidate the industry in the hands of state-run refiners, but local government support and the exploitation of tax loopholes helped them thrive. Teapots even highlighted their importance to China’s fuel security by helping alleviate shortages in the 2000s, despite national oil companies also trying to squeeze them out.
The Reference Shelf
- Sinopec’s 2021 report on the development of China’s energy and petrochemical industry.
- A report from Center on Global Energy Policy at Columbia University on teapots, and another from the Oxford Institute for Energy Studies.
- Bloomberg Opinion’s David Fickling wrote about teapots and China’s thirst for oil.
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