China's Independent Oil Refiners Adapt To New Challenges
Cut off from lucrative fuel export markets and seeing
their margins squeezed by new taxes, China's independent
oil refiners are branching out into new sectors from
clean energy and lumber as well as expanding their
trading to overcome the challenges.
These independents, known as "teapots" since they are
smaller companies than their state-owned rivals, are
scrambling to survive shifting government policies at the
same time domestic oil demand growth is slowing,
undermining their ability to expand by just serving their
home market. In 2016, China's annual fuel demand growth
was at a three-year low.
"The good days won't last much longer, as China's oil
demand has been shrinking," said Zhang Liucheng, vice
president of Shandong Dongming Petrochemical Group, the
country's largest independent refiner.
Late last year, Beijing suspended fuel export quotas for
the independents, handing control of diesel and gasoline
exports to the dominant state refiners.
Other government moves may also squeeze the independent's
margins. Top state refiner Sinopec overhauled its fuel
buying policy by centralizing all purchases at its
Beijing headquarters and China plans to slap consumption
taxes on refinery by-products such as light cycle oil,
sold as diesel, and mixed aromatics, which are added to
gasoline to improve fuel quality.
"They had already been diversified and nimble at working
around the various government mandates...now they are
definitely looking for ways to step up their game and
have better people, global access and financing to do
so," said Michal Meidan, analyst at consultants Energy
Executives at some of China's top independent refiners
outlined to Reuters their plans to diversify to endure
Dongming, for example, plans to add a 800,000 tonnes-per
-year naphtha cracker, extending its business from
transportation fuels to higher value plastics and
synthetic rubber as well as fine chemicals, said Zhang.
The 260,000 barrels-per-day (bpd) refiner is also looking
to invest in small-scale onshore fields, said Zhang.
Zhang also aims to boost trading operations by combining
physical oil and gas trading with financial services such
as offering credit facilities for fellow teapots at
better rates than banks.
Underscoring how much Beijing has prioritised clean
energy, Shandong Haike Group said it will open this month
a factory that makes electrolytes used in lithium
batteries for electric vehicles.
The company said the plant will be the country's largest
with the capacity to produce 100,000 tonnes a year. It
also plans to grow its pharmaceutical business but has no
plans to expand its refining capacity.
Shandong Chambroad Group plans to move into lumber
processing to develop a special building material for
villa cottages and gardens, said chairman Ma Yunsheng.
In addition to the policy actions against them, the
teapots have lost a major advocate with the departure of
Shandong provincial governor Guo Shuqing, which further
shrouds their future, said Energy Aspects' Meidan.
Newly installed Shandong party chief Liu Jiayi could try
to tackle overcapacity and pollution in the province,
which would add to pressure on the independents, she
For some, the expansions are an opportunity to move from
a small local operation into a global company.
Shandong Hengyuan Petrochemical Co, a refiner backed by a
local government and the first teapot to own a refinery
abroad, wants to become a regional player, combining
assets at its home base in Shandong with the refinery in
Port Dickson, Malaysia, that it recently acquired from
As part of the expansion, it will set up a trading desk
in Kuala Lumpur to secure crude for the two plants with a
combined capacity of 160,000 bpd and also supply 4
millions of tonnes of fuel annually to Shell under a 10-
"Without differentiating yourself, the competition will
be tough," said Hengyuan's chairman Wang Youde.