05 Oct 2023 | 09:22 UTC — Insight Blog

Surviving competition, regulations: 5 things you need to know about China's independent refiners

Featuring Oceana Zhou, Market Specialist – Oil, Daisy Xu, and Market Specialist – Oil


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S&P Global Commodity Insights made its first visit to China's independent refiners in Shandong province in 2012 when they were little known, and barring a break during the COVID-19 lockdown, our team visited the refiners every year from 2014 to 2019.

We resumed our visit in the summer of this year, during which we spent five days visiting Qingdao, Dongying, Binzhou and Zibo, meeting senior officials with nine independent refineries, four trading houses, and the Qingdao port authority.

These trips over the years have allowed us to see from close quarters the rise in their influence and sway over the oil markets in their glory period between 2015 and 2019 -- when China's oil demand was growing at a brisk pace; the oil market was oversupplied; and with a combined crude oil buying capacity of over 2 million b/d, these refiners were courted by every trading house and supplier worth their salt -- to a more recent turn in fortunes as the government disavows them in favor of larger, integrated plants.

The small Shandong-based independent refineries in this series include privately owned plants with capacities between 40,000 b/d and 214,000 b/d, and exclude those under the state-owned ChemChina and the large integrated refining and petrochemical complexes.

The latest visit has been turned into a five-part series. Here's everything you need to know about China's small independent refineries.

1. Shifting crude buying strategies

From importing 123 crude grades from 38 countries in 2020, China's independent refiners currently rely almost entirely on Russia, Iran and Venezuela(opens in a new tab) -- suppliers facing a host of sanctions.

Between January and July 2023, 99% of their crude imports -- around 2.5 million b/d -- came from these countries.

This almost total reliance on sanctioned, discounted crudes can be explained by their struggle to survive amid Beijing's policy shifts.

Read more: China independent oil refineries: Refiners succumb to vagaries in Chinese policymaking (opens in a new tab)

2. Stronger appetite for Iranian crudes

Competition among sanctioned resources has led to Iranian volumes gradually surpassing those from Russia.

S&P Global data showed that the independent refineries imported 957,000 million b/d of Iran-origin crudes in July, 44% higher than their Russian crude inflows of 665,000 b/d in the same period.

The sharp increase in Iranian inflows(opens in a new tab) by these refiners has made Iran one of the top four crude suppliers to China.

Read more: China independent oil refineries: Refiners' shift to sanctioned Iranian crude gives world breathing space (opens in a new tab)

3. Stalled oil infrastructure investment

Map: Crude pipelines shared by independent refineries in Shandong | China independent oil refineries special report

In 2016, to expand its oil refining industry and inject dynamism and competition into it, Beijing allowed independent refiners to import crude oil as a feedstock and export refined products. This led to billions of dollars of investment for associated infrastructure, including pipelines and storage tanks, as landlocked refineries needed access to imported crude oil.

But oil infrastructure investment in Shandong has generally stalled(opens in a new tab) over the last couple of years in the wake of Beijing's shift toward consolidating and streamlining the sector.

Several pipeline projects have been shelved, international trading firms have exited their investments, and a crude and a product pipeline lie idle with not a drop of oil transmitted through them since they were completed in 2021.

Red more: China independent oil refineries: Shandong faces stalled and sunk investments (opens in a new tab)

4. Rising competition from mega plants

China's Shandong is set to witness increased competition in the independent refining sector, as the 400,000 b/d Yulong refining and petrochemical complex(opens in a new tab) completes construction by end-2023, putting the spotlight back on how small-sized refiners in the province can remain profitable despite challenges.

With bigger financial muscle, stronger credibility among international suppliers, provincial government backing, and locational advantage, Yulong is bringing back the "small vs big" debate that the sector has seen since it was liberalized in mid-2015, while also raising the question: Can small, standalone refiners survive under the shadow of large, integrated refiners?

Read more: China independent oil refineries: Yulong set to alter competitive landscape in Shandong (opens in a new tab)

5. Haike focuses on new transport fuels

With China's transportation oil demand set to peak in the coming years, most independent refineries in Shandong have shifted to producing petrochemicals. But the Haike Group stands out with its focus on new transport fuels(opens in a new tab).

Headquartered in the heart of Dongying city, the group is investing in sustainable aviation fuel and special materials for lithium battery production.

Read more: China independent oil refineries: Haike focused on transport fuels despite ongoing petrochemical shift (opens in a new tab)

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