OREANDA-NEWS. A new breed of companies are emerging from China. Part of the band of independent teapot refiners, which by almost any measure are considered underdogs in the country, they are now taking their first, albeit tentative steps into international trading.

This comes after the Chinese government pledged to loosen the hitherto strict controls on crude oil imports earlier this year and in uncharacteristic swift fashion promptly awarded roughly 660,000 b/d of new crude import quotas to seven independent teapot refiners, five of which are located in the oil-rich eastern province of Shandong.

Does this mean we should expect to see 660,000 b/d of incremental crude imports from China? Yes and no.

It turns out 60% of these teapot refiners’ feedstock already comprised a mix of imported and domestic crude. Some were already buying imported cargoes off state-owned companies such as PetroChina, although choice was limited to excess barrels within the state owned companies’ trading portfolios. This was how PetroChina found steady buyers for its term imports of Venezuelan heavy crude — by selling them to the teapot refiners.

As Platts has regularly reported, teapot refiners have in recent years shunned their historical feedstock of choice — straight-run fuel oil — as they’ve increasingly managed to get access to crude. This is simply the result of a combination of higher domestic production and growing crude imports, which have allowed state-owned companies and traders to divert more volumes to the teapot refiners.

So far this year China’s incremental crude imports have hit nearly 600,000 b/d, so there is an argument to be made that some of this demand has come from the teapot refiners.

On the other hand, the 660,000 b/d of new quotas would satisfy nearly the entire combined installed capacity of the seven teapot refiners. Given current overcapacity in China, it is hard to imagine them raising utilization to near 100% — and by extension increasing their feedstock needs — overnight.

 

One scenario is that once teapot refiners start sourcing more of their own imported crude, this would start to replace more undesirable crudes offered by the state owned companies, such as those from Venezuela. In this case, could PetroChina then start reselling these crudes outside China?

Then there is also the question of domestic crude, where production has been rising.

Take China National Offshore Oil Corp., for instance. It has had some measure of success raising its upstream production offshore China following heavy investments in prior years. On the other hand, it has a much smaller refining system, so it has been marketing over 300,000 b/d of offshore crude to teapot refiners.

CNOOC itself acknowledges there are few alternative outlets for its own offshore crude — exporting does not make sense as the government slaps a tax on outflows.

Teapot refiners have been clamoring for the right to import crude as it gives them a variety of choice. But how much they ultimately import will still come down to price and costs.

As it stands, Chinese offshore crude is now highly attractive to teapot refiners as some grades are lighter and sweeter compared with onshore crudes. Delivery is almost immediate while volumes can be procured in smaller parcels — compared with VLCCs for imported crude — which poses less of a credit strain on the refiners.