China lowers second round of crude oil import quotas for private refiners

China's Ministry of Commerce has recently issued 35.24 million tons of crude oil import quotas to non-state refiners in a second batch of allowances for 2021, sharply down around 35% from the same slot of 53.88 million tons in 2020.

Combined with the first batch of 122.59 million tons, the quotas for the first two batches in 2021 totaled 157.83 million tons, broadly flat with 157.71 million tons for the first two tranches in 2020.

The sharp decline comes after a recent crackdown on trading of such quotas as authorities work to consolidate its bloated refining industry and reduce emissions.

The move will impact the pace of oil inflows into independent refiners, or so-called teapot refiners, which accounts for a fifth to a quarter of the China's oil processing capacity, on the back of rising scrutiny of their use of quotas.

Some refiners only got 50% of the remaining quota, so it is still difficult to effectively relieve the quota tightness with the second batch, and teapot refiners will remain cautious in procurement in the second half of 2021. Market participants expect that there will still be a third batch of quotas this year, along with additional allocations for new refineries, including ZPC II and Shenghong Petrochemical.

Zhejiang Petroleum & Chemical (ZPC) and Hengli Petrochemical each will receive 3 million tons in the second around, with the volume among the top, but which are still 63% and 69% lower from the same slot last year.

The two companies could receive 17 million tons in the first two arounds, accounting for 85% of their current process abilities. (based on ZPC 20 million mt/year Phase I)

ZPC has started its 20 million tons per year Phase II early this year. It was heard that ZPC has initialed a separate application for additional quota and are waiting for reply from the authority.

Shenghong Petrochemical is expected to bring its 16 million mt/year CDU in August 2021.

Since early 2021, authorities have introduced many measures again the petrochemical industry, i.e., strict investigation on backward production capacity elimination of independent refineries and trading of quotas – taxation on LCO, mixed aromatics and diluted bitumen-review on import oil usage of the five state-owned companies-regulation of refined oil and strict investigation of tax evasion.

These moves indicate that the change in petrochemical industry is accelerating and irregularities are constantly contained. Under the background of carbon neutralization, China may deliberately accelerate the promotion of the petrochemical industry's upgrading and transformation.

In Shandong, some refining capacities have exited from the industry since 2020. By the end of 2022, teapot refining capacity is expected to decrease by nearly 30 million tons and around 12 million tons of quota would be allocated to Yulong Petrochemical 20 million mt/year project.

Besides independent refiners in Shandong, national oil companies also have expansion and layout in refining and chemical integrated project. According to open sources, new oil refining projects include: Sinopec Hainan Refining 5 million mt/year, Gulei Petrochemical II 16 million mt/year, Zhongke Refining & Chemical II 15 million mt/year, Sinopec ZRCC expansion project 15 million mt/year, PetroChina Guangdong Petrochemical 20 million mt/year. In addition, Hebei Risun Chemical also has a 20 million mt/year. By 2025, China's refining capacity may exceed 1 billion mt/year, with an average refining scale of over 5 million mt/year.