Beijing gives state-run refiners more flexibility in managing oil exports

Singapore — Beijing has given state-owned refiners more flexibility in managing their export plans by not only boosting the volume allocated in the first round of export quotas for 2020, but also not specifying quotas by refined product, an official document showed.

The move will allow refiners to adjust their export plans based on market conditions.

China uses quotas to control export volumes to avoid any drastic increase in crude imports and product exports, while addressing the country's fossil fuel pollution issues. Export quotas are allocated under two routes -- the general trade route and the processing trade route.

The general trade route offers exporters more flexibility than the processing trade route, which comes with conditions such as the exported product must be produced from imported crude oil and must be from a refinery that has been awarded an export quota.

China's Ministry of Commerce this week allocated 24.56 million mt of oil product export quotas under the general trade route to five state-owned oil companies in the first round for 2020, S&P Global Platts reported earlier.

In a break from the norm, the official document did not give a breakdown of export quota by product -- gasoline, gasoil and jet fuel -- under the general trade route, and it also showed that 3.44 million mt of exports had been allocated under the processing trade route.

This is different from all the previous documents which stated export allocations under only one trade route, and gave a detailed breakdown of export volumes allocated by product and by company.

"The government had said that it would only set a cap for total oil product export volume, [and not detail] product breakdown during a meeting with the state-owned oil majors in late December," a Beijing-based with knowledge of the matter said.

The document only stated that the 2.49 million mt quota to CNOOC includes 7,000 mt for natural gas; the 2.65 million mt quota to Sinochem includes 2,000 mt for natural gas; and all of the 60,000 mt, to China Nation Aviation Fuel covers jet fuel.

"The quota holder is [now] allowed to decide the product and volume freely [based on] domestic and international market changes, as well as quota availability," the source added.

Previously, quota holders needed to get approval to adjust their quota volume for a specific product to meet their changing export plans.

For example, companies had only 1.01 million mt of gasoil export quota available in December, far below their average exports of 1.8 million mt/month, but needed approval to swap it for jet fuel quotas which were more than sufficient in the month at 3.63 million mt compared to 1.43 million mt/month of average exports over January-November, Platts calculation based on official data showed.

Meanwhile, only products exported under the processing trade route are allowed to be sold in the bonded fuel markets and stored in bonded areas -- where no sales tax is imposed.

The Ministry of Commerce stated product breakdown of the quotas under processing trade route for Sinopec, CNPC, CNOOC and Sinochem in the document. Jet fuel accounted for 95.64% of the total quota volume under this route.

SUFFICIENT QUOTA

Moreover, sufficient volume allocation in each round and reducing the number of allocation rounds also provides more flexibility, analysts said.

Beijing has reduced the number of rounds of quota allocation from five in 2017 to three in 2019 and has been raising the volume allocated in each round, leaving more room for companies to manage their export plans.

"It won't be surprising if Beijing awards export quota in no more than three rounds this year," Kang Wu, head of S&P Global Platts Analytics in Asia, said.

The total volume for the first 2020 round is up 30% from the same batch for 2019 at 28 million mt. The volume is also half of the total export quota volume of 56 million mt allocated in 2019.

S&P Global Platts Analytics expected Beijing to allocate about 66 million mt of export quota this year, up 17.86% from 2019, while China's product exports are set to increase accordingly.

Sinopec's Economics & Development Research Institute expects a narrower year-on-year increase at 7% for China's oil product exports in 2020 amid modest year-on-year throughput increase of 3.1% and an evenower oil product output increase of 1.6% as Chinese refineries lift petrochemical product yield.

-- Analyst Oceana Zhou, newsdesk@spglobal.com

-- Edited by Mriganka Jaipuriyar, newsdesk@spglobal.com