Chinese ‘teapot’ refineries tie up on crude

September 6, 2016

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A consortium of trying to get out from under the shadow of powerful state-owned rivals has laid out plans for co-ordinated international crude sourcing, and exports of diesel and other oil products.

Independent refineries, known as “teapots”, account for about a fifth of China’s refining capacity and have been gaining market share since Beijing granted them crude import . But their eagerness to capitalise on the new clearance resulted in chaotic buying in the spring that led to severe port congestion and high storage charges in China’s northern province of Shandong.

The new consortium opens the door for more co-ordinated purchases and could help the teapots diversify their crude imports and lower their sourcing costs. It is led by Pacific Commerce, the Singapore-registered trading arm of Dongming Petrochemical, one of the largest of the teapots and which will represent the 16-strong group in international crude sourcing and product sales.

On Tuesday, Pacific Commerce signed an agreement on behalf of the group to source 8m barrels a year of crude oil through Unipec, the trading arm of state-owned Sinopec. The deal follows a similar agreement with .

The structure of the consortium means that Dongming is shouldering the risk for its Shandong-based partners. The refineries are discussing taking shares directly in Pacific Commerce and setting up a bank-backed fund in Shandong to absorb some of the risk, a step that would strengthen the group’s plans to trade oil as a unified block.

“We are all brothers. We know each other. None of us would endanger the others,” said Dongming vice-president Zhang Liuchang. “We can’t ruin our credit because then the banks won’t lend to us.”

The independent refiners have for years scraped by on spare domestic crude and imported fuel oil while facing official hostility. Their fortunes turned when they were issued crude import licences, and were able to buy higher-quality crude due to the glut in international markets.

However, the reprieve was threatened when the National Development and Reform Commission warned in August that it could revoke crude import licences for refiners that had not paid taxes. Various loopholes and complications in the Chinese tax code have in the past allowed teapots to avoid paying taxes on oil products refined from fuel oil.

“That will raise our costs but sooner or later we need to regularise ourselves,” Mr Zhang said.

The teapots’ resurgence has had an impact beyond the domestic market, as they have contributed to in China that is pressuring middle distillate markets in Asia and as far away as the Middle East. Their licences to export refined products expire at the end of this year, another disadvantage versus the big state-owned companies.

To be truly a part of the international oil markets the independent refiners still need to convince global oil traders that they are creditworthy partners, especially after Baota Petrochemical, a teapot not part of the consortium, failed to get letters of credit last winter for $50m of crude purchased from traders Vitol and Mercuria.

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Category: Oil & Gas