21  April  2018

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 Infopetro -> Industry in Focus

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

these changes.

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-

year pact.

"Without differentiating yourself, the competition will

be tough," said Hengyuan's chairman Wang Youde.

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