The rise of China's teapot refineries
Armed with import permits, the country’s private refineries are mopping up cheap global crude oil
CHINA’s small independent refiners are driving the country’s oil imports higher this year – a trend that started in 2015 when Beijing lifted restrictions barring private firms from importing oil directly. No wonder international crude suppliers are scrambling to court the independents: they could account for as much as one-fifth of China’s oil imports this year.
Increased buying by the smaller processors, known as teapots, overwhelmed the port of Qingdao in Shandong province – home to most of them – in April with unprecedented tanker traffic. Crude imports to the province hit a record of 2.3m barrels a day in March, up a massive 1.1m b/d compared with a year earlier, even though China’s overall crude imports were lower.
During the second half of last year about 20 teapots received crude-import quotas from the government and started importing oil in the fourth quarter. This helped push the country’s crude imports to a record high of 8.04m b/d in February. In April, imports stood at 7.96m b/d, up 3.2% from March, official customs data show. But the rising tanker congestion should see import volumes moderate in May and June before picking up again in July as infrastructure build-outs are finished.
Increasing demand from China’s teapot refiners marks the largest source of incremental crude buying in Asia, says Michal Meidan, a China-focused oil specialist at consultancy Energy Aspects.
The teapots are expected to account for 0.8m b/d of incremental crude demand this year, possibly as much as 1.2m b/d if more import licenses are granted, she says.
Significantly, sixteen of the teapots forged an alliance in March – a bid to improve their negotiating sway with suppliers and soothe credit-risk concerns surrounding the little-known companies.
Shandong Dongming Petrochemical, the biggest teapot refinery, capable of processing 15m tonnes a year (300,000 b/d), was in the first batch of private refiners to receive an import quota. It was given approval to source 7.5m t/y of crude, equal to about 3% of China’s imports in 2015. But the company was thinking even bigger and led the push to create the buying group.
Now Pacific Commerce, the trading arm of Dongming Petrochemical in Singapore, is buying oil on behalf of the alliance’s private refineries with a combined crude import quota of over 50m t/y, or roughly 1m b/d.
The China Petroleum Purchase Federation of Independent Refiners, as the alliance is known, although still small compared with state-backed Sinopec and CNPC, has been making a splash on the international oil markets by buying crude at a startling rate and triggering a burst of activity along Shandong’s coast. There is little sign of the buying spree abating: 83 supertankers were bound for Chinese ports, a 16-month high, at the end of April, according to Bloomberg data.
But the teapots’ lack of experience in global trading, coupled with limited access to financing and ports, has resulted in quite erratic buying patterns. Crucially, over time the alliance should help normalise their buying behaviour.
All the crude in China
Through the alliance the teapots hope to negotiate better deals with suppliers. West African crudes appeal to them, but the quality of oil will be a secondary consideration to price and ease of supply, particularly as the Dubai Mercantile Exchange is trying to work more closely with the teapots, reckons Meidan.
Gordon Kwan, a Hong Kong-based oil specialist at research house Nomura, says the teapots’ combined negotiating power could see them snare a 3-5% discount from Middle East exporters, such as Saudi Arabia and Iran.
Saudi Arabia recently sold crude from storage on the Japanese Island of Okinawa, signaling that producers are becoming more creative in their efforts to target the new source of demand from the teapots.
The privately owned refiners were historically kept on the fringes of China’s oil business and global crude markets by Chinese majors Sinopec and CNPC. They were barred from importing their own supplies and survived by processing fuel oil and a diverse menu of whatever crude they could get. As a result they have more flexible refinery configurations and a more dynamic approach to buying crude.
As China starts to liberalise its state monopolised oil sector, the teapots’ lower operating cost allows the country to stay supplied with cheaper fuels, cushioning the effect of slowing economic growth in the provinces.
Research from investment bank Goldman Sachs estimates the teapots can make gasoline or diesel for $10 less per barrel than the Chinese majors, which rely on domestically produced crude from higher-cost fields or international operations bought at the height of oil-asset prices.