Chinese independent refineries set to cut imports of H2 crude by 27%

Strong points

Probe ready to cut PetroChina Fuel Oil imports

Five refineries facing reductions in import quota volumes

A consumption tax to reduce imports of bitumen mixtures

Imports of crude oil by independent Chinese refineries are expected to fall 27% in the second half of 2021, S&P Global Platts estimated on June 11, as an investigation into the illegal trade cuts the inflow of PetroChina Fuel Oil, five factories risk to see their quota allocations reduced, and a consumption tax reduces imports of bitumen mixtures.

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Imports from independent refineries are expected to fall from 4.4 million mt (1.06 million bbl / day) to 11.74 million mt / month in the second half, compared to 16.13 million mt / month on average during the first five months of 2021, according to Platts’ estimates.

The private sector has been the engine of China’s crude import growth in recent years, accounting for about 30% of the country’s 10.71 million b / d of crude imports from January to May, as well as almost all of the country’s 7.76 million cubic meters of bitumen mix. imports from January to April, based on data from Platts and the General Customs Administration.

Cutting imports by nearly a third in the second half of the year will force independent refiners to cut back on their throughput if they cannot find another way to ensure adequate feedstock. The sector’s monthly crude throughput between January and May was about 14.7 million tonnes / month, according to Platts data.

However, the potential reduction in throughput by independent refiners is not being treated with concern by the market, as state-owned refineries are currently not operating at full capacity and could increase production to cover part of the deficit, as well as reduce refined products. exports and new refining capacity are also expected to come on stream, analysts said.

Platts’ estimates are based on crude imports from 37 import quota holders, which accounts for about 87% of China’s total quota allocation.

Supply reduction without quota

Independent refiners face three main barriers to importing crude in the second half of the year. Among these is the reduction in supply to PetroChina Fuel Oil following an investigation by China’s leading planner, the National Development and Reform Commission, into the illegal trade in imported crude oil.

PetroChina Fuel Oil, a grant from state-owned oil giant PetroChina, originally aimed to supply 16 million tonnes of imported quota-free crude oil to private refineries in 2021, of which around 6 million tonnes have already been delivered.

However, the balance of 10 million tonnes is unlikely to be delivered after the NDRC launched a series of investigations in mid-April into the capacity of the independent refining sector and the use of import quotas from crude oil, before extending its controls to the public sector.

PetroChina Fuel Oil sold barrels of imported crude without quota to independent refineries and obtained refined products in return, in a form of government-authorized toll trading.

However, in recent years it has sold 15-20 million tonnes of imported barrels per year to private refineries without receiving any petroleum products in return, which has strained its adherence to government policies.

China requires all refineries to use their own crude import quota allocations to import raw materials, except those built by state-owned oil giants Sinopec, PetroChina, CNOOC and Sinochem.

Quota volumes to be cut

NDRC investigations have found that some independent refineries have illegally traded crude quotas in the secondary market, which should be punished by cuts in quota allocations to identified refineries in upcoming batches for 2021, independent refiners have said. based in Shandong.

This includes four independent refineries in Shandong Province and a qualified state-run factory in Shaanxi Province.

Market sources said these refineries would likely be allocated smaller quotas in the next batch, resulting in a reduction of around 3.04 million tonnes from their annual quota cap volumes.

Qualified refineries typically receive quotas at their cap every year, but strict government inspections should change that.

In addition to this, the government is also expected to withdraw 1.3 million tons of quota issued to Zhonghai Fine Chemical because the refinery was dismantled as part of the Shandong Province refining consolidation plan.

Zhonghai Fine’s quotas are expected to be transferred to Yulong’s next 20 million ton per year petrochemical refinery, which is still under construction. This will translate to only about 45.28 million tonnes of additional allowances allocated for the remainder of 2021 to the 37 refineries, if one does not take into account the new capacities planned by Zhejiang Petroleum & Chemical and Shenghong Petrochemical.

These independent refineries imported 71.81 million tonnes of crude between January and May, according to data from Platts. This compares to the 102.68 million tonnes of crude import quota allocated to refineries for 2021 in the first batch, and the 6 million tonnes supplied by PetroChina Fuel Oil.

The second batch of quotas is expected to be released after the Dragon Boat Festival on June 14.

Reduced imports of bitumen mixtures

Finally, a consumption tax that will begin on June 12 should reduce imports of bitumen mixtures.

The bitumen blend is typically heavy crude cargo mixed off Malaysia with heavy grades, mostly Venezuelan Merey and Iranian crudes in 2021.

Independent refineries, especially those in Shandong Province, are the main buyers of bitumen blend as barrels are currently exempt from consumption tax and refiners are not required to use crude import quotas for import the cargoes.

About 8.86 million tonnes of bitumen mixture were imported into Shandong Province between January and May, accounting for about 10% of total raw material imports by the industry during the period, according to data from Platts.

The consumption tax will add 1,376 yuan / mt or $ 215.20 / mt to the cost of imports of bitumen mixtures, after value-added tax, effective June 12.

“We have to see how far Merey and Iranian crude prices can go,” said a Shandong-based refiner.

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