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This piece is a part of the collection “All About China”—a journey into the historical past and numerous tradition of China via brief articles that make clear the lasting imprint of China’s previous encounters with the Islamic world in addition to an exploration of the more and more vibrant and sophisticated dynamics of latest Sino-Center Jap relations. Learn extra …
This yr, China is anticipated to overhaul america because the world’s largest oil refining nation.[1] Though China’s bloated and fragmented crude oil refining sector has undergone main modifications over the previous decade, it stays saddled with overcapacity.[2]
Privately owned unaffiliated refineries, generally known as “teapots,”[3] primarily clustered in Shandong province, have been on the middle of Beijing’s longtime wrestle to rein in surplus refining capability and, extra lately, to chop carbon emissions. A yr in the past, Beijing launched its newest try to shutter outdated and inefficient teapots — an effort that coincides with the emergence of a brand new technology of impartial gamers which can be constructing and working absolutely built-in mega-petrochemical complexes.[4]
The altering roles performed by China’s impartial refineries are mirrored of their relations with Center East suppliers. Within the battle to make sure their profitability and really survival, smaller Chinese language teapots have adopted numerous measures, together with sopping up steeply discounted oil from Iran. In the meantime, Center East suppliers, notably Saudi Aramco, are looking for to lock in Chinese language crude demand whereas pursuing new alternatives for additional investments in built-in downstream tasks led by each non-public and state-owned corporations.
China’s “Teapot” Refineries
China’s “teapot” refineries[5] play a big function in refining oil and account for a fifth of Chinese language crude imports.[6] Traditionally, teapots performed most of their enterprise with China’s main state-owned corporations, shopping for crude oil from and promoting a lot of their output to them after processing it into gasoline and diesel. Although working within the shadows of China’s big nationwide oil corporations (NOCs),[7] teapots served as priceless swing producers — their surplus capability known as on in occasions of tight markets.
But, the Chinese language authorities has spent the higher a part of 20 years making an attempt to consolidate the nation’s sprawling impartial refining sector by ravenous non-public operators of entry to imported crude oil and focusing on the smallest, least environment friendly vegetation for closure.[8] In 2011, China’s Nationwide Improvement and Reform Fee (NDRC) issued pointers to get rid of small refineries to realize economies of scale and enhance efficiencies. Nonetheless, insurance policies meant to discourage exercise had the alternative impact, as a lot of the items that had been earmarked for suspension expanded to remain open.[9]
4 years later, the NDRC adopted a unique strategy, awarding licenses and quotas to teapot refiners to import crude oil and granting approval to export refined merchandise in change for lowering extra capability, both upgrading or eradicating outdated services, and constructing oil storage services.[10] However this partial liberalization of the refining sector didn’t go precisely in accordance with plan. Swelling with new sources of feedstock that catapulted China into the place of the world’s largest oil importer, teapots elevated their manufacturing of refined fuels and, benefiting from larger processing flexibility and low labor prices undercut bigger state rivals and doubled their market share.[11]
In the meantime, as teapots expanded their operations, they took on huge debt, flouted environmental guidelines, and exploited taxation loopholes.[12] Of the refineries that managed to satisfy targets to chop capability, some did so by double counting or reporting reductions in items that had been idled.[13] And when, reversing course, Beijing revoked the export quotas allotted to teapots and mandated that merchandise be offered through state-owned corporations, it trapped their output in China, contributing to the home gas glut.
2021 marked the beginning of the central authorities’s newest effort to consolidate and tighten supervision over the refining sector and to cap China’s general refining capability.[14] Moreover imposing a hefty tax on imports of mixing fuels, Beijing has instituted stricter tax and environmental enforcement[15] measures together with: performing refinery audits and inspections;[16] conducting investigations of alleged irregular actions comparable to tax evasion and unlawful resale of crude oil imports;[17] and imposing tighter quotas for oil product exports as China’s decarbonization efforts advance.[18]
Final October, Beijing decreased crude oil import quotas awarded to small impartial refineries for the primary time since they had been allowed into the market whereas elevating them for bigger, extra environment friendly non-public vegetation. Among the many main beneficiaries of those new allocations are a brand new technology of provincial-backed impartial gamers lengthy involved in increasing into the oil refining enterprise.[19]
The politics surrounding this new class of greenfield mega-refineries is vital, as is their geographical distribution. Beijing’s reform technique is targeted on lowering the nation’s petrochemical imports and rising its excessive value-added chemical enterprise whereas capping crude processing capability. The push by Beijing on this route has been conducive to the event of privately-led mega refining and petrochemical tasks, which native officers have welcomed and staunchly supported.[20]
But, of the three most up-to-date main additions to China’s greenfield refinery panorama, none are in Shandong province, dwelling to a bit over half the nation’s impartial refining capability. Hengli’s Changxing built-in petrochemical advanced is located in Liaoning, Zhejiang’s (ZPC) Zhoushan facility in Zhejiang, and Shenghong’s Lianyungang plant in Jiangsu.[21]
As China’s impartial oil refining hub, Shandong is the bellwether for the rationalization of the nation’s refinery sector. Over time, Shandong’s teapots benefited from favorable insurance policies comparable to entry to low-cost land and help from a neighborhood authorities that grew reliant on the {industry} for jobs and contributions to financial progress.[22] For that reason, Shandong officers had resisted strictly implementing Beijing’s directives to cull teapot refiners and turned a blind eye to practices that ensured their survival.
However with the start-up of superior liquids-to-chemicals complexes in neighboring provinces, Shandong’s competitiveness has diminished.[23] And with strain mounting to seek out new drivers for the provincial financial system, Shandong officers have put in play a plan aimed toward shuttering smaller capability vegetation and thus clearing the way in which for a large-scale non-public sector-led refining and petrochemical advanced on Yulong Island, whose building is effectively underway.[24] They’ve additionally been growing compensation and employee relocation packages to cushion the affect of deliberate plant closures, whereas acquiring letters of assure from impartial refiners pledging that they’ll neither resell their crude import quotas nor attempt to buy such allocations.[25]
To make certain, the variety of Shandong’s impartial refiners is shrinking and their composition throughout the province and throughout the nation is altering — with some smaller-scale items dealing with closure and others (e.g., Shandong Haike Group, Shandong Shouguang Luqing Petrochemical Corp, and Shandong Chambroad Group) pursuing efforts to diversify their sources of income by shifting up the worth chain. However make no mistake: China’s teapots nonetheless account for a 3rd of China’s complete refining capability and a fifth of the nation’s crude oil imports. They proceed to make use of artistic defensive measures within the face of presidency and market pressures, have partnered with state-owned corporations, and are deeply built-in with essential industries downstream.[26] They’re consummate survivors in a key sector that continues to evolve — and so they stay too vital to be pushed out of the home market or allowed to fail.
Below the Radar: Chinese language Teapot Refiners and Center East Producers
The altering construction and dynamics of China’s refining sector, particularly with respect to Chinese language teapots, has impacted power relations with Center East producers. Certainly, Chinese language teapot refiners, which only a few years in the past arose as engaging crude oil spot market targets, have recently emerged as shops for longer-term crude exports from the area.
In 2016, in the course of the interval of frenzied post-licensing crude oil importing by Chinese language independents, Saudi Arabia started focusing on teapots on the spot market, as did Kuwait. Iran additionally joined the fray, with the Nationwide Iranian Oil Firm (NIOC) working via an impartial dealer Trafigura to promote cargoes to Chinese language independents.[27] Since then, the approaching on-line of main new greenfield refineries comparable to Rongsheng ZPC and Hengli Changxing, and Shenghong, that are designed to function utilizing medium-sour crude, have led Center East producers to pursue long-term provide contracts with non-public Chinese language refiners. In 2021, the mixed share of crude shipments from Saudi Arabia, UAE, Oman, and Kuwait to China’s impartial refiners accounted for 32.5%, a rise of greater than 8% over the earlier yr.[28] This can be a development that Beijing appears intent on supporting, as some greater, extra refined non-public refiners whose enterprise technique aligns with President Xi’s imaginative and prescient have began to obtain tax advantages or permissions to import bigger volumes of crude instantly from main producers comparable to Saudi Arabia.[29]
The shift in Saudi Aramco’s market technique to deal with buyer diversification has paid off within the type of priceless provide relationships with Chinese language independents. And Aramco’s efforts to increase its presence within the Chinese language refining market and lock in demand have dovetailed neatly with the event of China’s new greenfield refineries.[30] Over the previous a number of years, Aramco has collaborated with each state-owned and impartial refiners to develop built-in liquids-to-chemicals complexes in China. In 2018, following on the heels of an oil provide settlement, Aramco bought a 9% stake in ZPC’s Zhoushan built-in refinery. In March of this yr, Saudi Aramco and its three way partnership companions, NORINCO Group and Panjin Sincen, made a remaining funding resolution (FID) to develop a serious liquids-to-chemicals facility in northeast China.[31] Additionally in March, Aramco and state-owned Sinopec agreed to conduct a feasibility research aimed toward assessing capability enlargement of the Fujian Refining and Petrochemical Co. Ltd.’s built-in refining and chemical manufacturing advanced.[32]
Commenting on the rationale for these undertakings, Mohammed Al Qahtani, Aramco’s Senior Vice-President of Downstream, acknowledged: “China is a cornerstone of our downstream enlargement technique in Asia and an more and more important driver of worldwide chemical demand.”[33] However what Al Qahtani did not say is that the ties solid between Aramco and Chinese language main teapots (e.g., Shandong Chambroad Petrochemicals) and new liquids-to-chemicals complexes have been instrumental in Saudi Arabia regaining its place as China’s high crude oil provider within the battle for market share with Russia.[34] Just some brief years in the past, independents’ crude purchases had helped Russia acquire market share on the expense of Saudi Arabia, accelerating the 2 exporters’ diverging fortunes in China. In reality, between 2010 and 2015, impartial refiners’ imports of Jap Siberia Pacific Ocean (ESPO) mix accounted for 92% of the expansion in Russian crude deliveries to China.[35] However since then, China’s new technology of independents have performed a big function in Saudi Arabia clawing again market share and, with Beijing’s assent, have fortified their provide relationship with the Kingdom.
Smaller Chinese language independents have been much less lucky, hit exhausting not simply by harder home regulation however by hovering crude oil costs.[36] US-led sanctions flowing from the conflict in Ukraine have compounded the strain on teapots, which previous to the battle had sourced a couple of fifth of their crude oil from Russia. Hovering oil tanker freight charges and the refusal of Chinese language banks to problem letters of credit score for Russian crude have choked off a lot of this provide, although some non-public refiners have compensated through the use of money transfers to pay for Russian ESPO mix crude.[37]
In the meantime, although, enticed by discounted costs Chinese language independents in Shandong province have continued to scoop up sanctioned Iranian oil, particularly as their home refining margins have thinned because of tight regulatory scrutiny. In reality, all through the interval wherein Iran has been beneath nuclear-related sanctions, Chinese language teapots have been a key outlet for Iranian oil, which they reportedly unload from reflagged vessels representing themselves as promoting oil from Oman and Malaysia.[38] China Harmony Petroleum Firm (CCPC), a Chinese language logistics agency, remained a pivotal participant within the provide of sanctioned oil from Iran, even after it was blacklisted by Washington in 2019.[39] Though Chinese language state refiners shun Iranian oil, not less than publicly, due to US sanctions, non-public refiners have by no means stopped shopping for Iranian crude.[40] And in current months, teapots have been on the forefront of the Chinese language surge in crude oil imports from Iran.[41]
Conclusion
China’s small-scale, inefficient “first technology” teapot refiners have come beneath mounting market strain, in addition to nearer authorities scrutiny and tightened regulation. Although some have already been shuttered and others face imminent closure, dozens of China’s teapots, concentrated primarily in Shandong province, proceed to function due to the artistic defensive measures they’ve employed and the vital function they play in native economies.
Vertical integration alongside the worth chain has change into a worldwide development within the petrochemical {industry}, particularly in refining and chemical operations. China’s drive to self-sufficiency in chemical substances is a key issue powering this worldwide development.[42] And it’s the emergent “second technology” of impartial refiners that it’s serving to make China the frontrunner in growing huge liquids-to-chemicals complexes. Following Beijing’s lead, Shandong officers seem decided to observe this development fairly than danger being left in its wake.
As Chinese language non-public refiners’ quantity, dimension, and stage of sophistication has modified, so too have their roles not simply within the home petroleum market however of their relations with Center East suppliers. Beijing’s import licensing and quota insurance policies have enabled some teapot refiners to keep up profitability and others to thrive by sourcing crude oil from the Center East. For his or her half, Gulf producers have discovered Chinese language teapots to be priceless prospects within the spot market within the battle for market share and, particularly within the case of Aramco, within the effort to seize the expansion of the Chinese language home petrochemicals market because it expands.
[2] Si-Yuan Chen et al., “Evaluate on the petroleum market in China: historical past, challenges and prospects,” Petroleum Science 17 (2020): 1779-1794.
[3] These refineries are generally known as “teapots” due to the form of early designs. They grew from small clay kilns that started processing oil from fields in Shandong that produced greater than state refiners may soak up.
[5] Teapots may also be present in Liaoning and Zhejiang provinces.
[7] China Petroleum & Chemical Company (SINOPEC), China Nationwide Petroleum Company (CNPC), and the China Nationwide Offshore Oil Company (CNOOC).
[10] The brand new coverage, although primarily aimed toward spurring consolidation inside China’s impartial refining sector, was additionally supposed to show NOCs to extra competitors, in addition to to compensate for a worldwide value downturn and an anti-corruption purge that had lowered manufacturing from state-owned oilfields. See US Power Data Company (EIA), “Nation Evaluation Government Abstract: China,” September 30, 2020, https://www.eia.gov/worldwide/content material/evaluation/countries_long/China/china.pdf.
[11] Riyuta Minamihata, “‘Teapot’ oil refinery consolidation in China might spawn a tempest,” Nikkei Asia, October 15, 2017, https://asia.nikkei.com/Enterprise/Markets/Commodities/Teapot-oil-refinery-consolidation-in-China-may-spawn-a-tempest; Lucy Hornby, “China’s ‘teapot’ oil refineries pose problem to majors,” Monetary Instances, April 7, 2016, https://www.ft.com/content material/7fc95106-fc71-11e5-b5f5-070dca6d0a0d.
[13] In 2015, China’s Nationwide Improvement and Reform Fee (NDRC) issued the “Discover on Points Regarding the Administration of the Use of Imported Crude Oil,” which allowed certified non-public enterprises to get rid of outdated manufacturing capability in change for quotas for using imported crude oil. See Downs, “The Rise of China’s Unbiased Refineries;” and “Oil Refiners Struck by Glut Discover Consolation in China Teapot Drought,” BloombergQuint, July 27, 2016, https://www.bloombergquint.com/china/oil-refiners-struck-by-glut-find-comfort-in-china-teapot-drought.
[17] Shu Zhang and Muyu Xu, “China cuts second batch of crude oil import quotas for personal refiners – doc, sources,” Reuters, June 21, 2021, https://www.reuters.com/enterprise/power/china-cuts-2nd-batch-crude-oil-import-quotas-private-refiners-document-sources-2021-06-21/; Alfred Cang, “China Clamps Down on Non-public Oil Refineries to Curb Capability,” Bloomberg, April 13, 2021, https://www.bloomberg.com/information/articles/2021-04-13/china-clamps-down-on-independent-oil-refiners-to-curb-capacity; “China Takes Goal at a Booming $7 Billion Marketplace for Soiled Oil,” Bloomberg, March 17, 2021, https://www.bloomberg.com/information/articles/2021-03-17/china-takes-aim-at-a-booming-7-billion-market-for-dirty-oil; “China discovered three impartial oil refiners evaded gas tax,” Hydrocarbon Processing, January 20, 2022, https://www.hydrocarbonprocessing.com/information/2022/01/china-found-three-independent-oil-refiners-evaded-fuel-tax; and “China’s Oil Boomtown Braces for Crackdown From Beijing,” Bloomberg, June 17, 2021, https://www.bloomberg.com/information/articles/2021-06-17/china-intensifies-oil-refining-probe-that-could-upend-industry.
[21] “China cuts crude oil import quota and favors mega-refiners,” Power Voice, December 12, 2021, https://www.energyvoice.com/oilandgas/asia/376566/china-cuts-crude-oil-import-quota-and-favors-mega-refiners/; and Daisy Xu, Oceana Zhou, and Eric Yep, “Highlight on Shandong: New petchem complexes threaten China’s oldest refining cluster,” S&P International, October 21, 2019, https://www.spglobal.com/commodityinsights/en/market-insights/latest-news/oil/102119-china-oil-refineries-shandong.
[24] “China begins constructing $20 billion mega petchem advanced in Shandong oil hub: media,” Reuters, October 28, 2020, https://www.reuters.com/article/us-china-petrochemical-shandong-idUKKBN27D14A; Chen Aizhu and Muyu Xu, “China to chop teapot refining capability as plans for mega advanced,” Reuters, June 9, 2020, https://www.reuters.com/article/us-china-oil-refineries-closures/china-to-cut-teapot-refining-capacity-as-plans-for-mega-complex-idUSKBN23G0Z9; and “China to Shutter Teapot Refineries for Upcoming Mega Advanced,” Globalenergyinfrastructure.com, November 11, 2021, https://globalenergyinfrastructure.com/articles/2021/11-november/china-to-shutter-teapot-refineries-for-upcoming-mega-complex/.
[26] Kanason, “Bother within the Teapot Oil Refining Trade;” Hornby, “China’s ‘teapot’ oil refineries pose problem to majors; Chen Aizhu, “China’s teapot vegetation kind new membership to beat rivals, however will it work?” Reuters, September 8, 2017, https://www.reuters.com/article/china-oil-refineries/chinas-teapot-plants-form-new-club-to-beat-rivals-but-will-it-work-idUKL4N1LM2FZ; and “China ‘teapot’ oil group urges compliance on quotas, tax,” Reuters, June 6, 2017, https://www.reuters.com/article/us-china-oil-independents-idUSKBN18X0GY.
[30] Philip Vahn et al., “Evaluation: China’s Hengli, Zhejiang provide reduction for Saudi Arabia’s faltering crude gross sales to Asia,” S&P International, July 19, 2019, https://www.spglobal.com/commodityinsights/en/market-insights/latest-news/oil/070919-analysis-china-s-hengli-zhejiang-offer-relief-for-saudi-arabia-s-faltering-crude-sales-to-asia; and Chen Aizhu and Florence Tan, “China’s Hengli boosts Saudi oil buys as new refinery ramps up,” Reuters, Might 6, 2019, https://www.reuters.com/article/us-china-oil-refinery-hengli/chinas-hengli-boosts-saudi-oil-buys-as-new-refinery-ramps-up-idUSKCN1SC0TX.
[34] Henning Gloystein and Florence Tan, “Saudis open new part in Asia oil market turf conflict with China spot sale,” Reuters, April 27, 2016, https://www.reuters.com/article/saudi-oil-exports-idUSL5N17U06J; Jenny W. Hsu, up to date 30 Might 2016, “‘Teapot’ Refineries Shore Up China’s Demand for Crude,” Wall Road Journal; and Rania El Gamal and Florence Tan, “Saudis, Mideast producers vie for China’s teapot crude imports,” Reuters, October 28, 2016, https://www.reuters.com/article/us-mideast-china-oil/saudis-mideast-producers-vie-for-chinas-teapot-crude-imports-idUSKCN12S0ZY.
[35] Downs, “The Rise of China’s Unbiased Refineries,” 23.
[41] Chen Aizhu and Alex Lawler, “China buys extra Iranian oil now than it did earlier than sanctions, knowledge exhibits,” Reuters, March 1, 2022, https://www.yahoo.com/video/china-buys-more-iranian-oil-091505030.html; and “China buys extra Iranian oil now than it did earlier than sanctions, knowledge exhibits,” Reuters, March 1, 2022, https://www.yahoo.com/video/china-buys-more-iranian-oil-091505030.html.
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