NDRC probe on mismanagements may hit China private sector refinery crude throughput

Singapore — The recently launched special government investigation of China's private refining sector will likely put brakes on independent refiners' crude purchases temporarily, while crude throughputs at some of the refineries could come to a brief halt in April as associated industry mismanagements are likely to come under the scanner.

The investigation kicked off after government-backed media reports surfaced about the plight of the country's refining sector, which is still plagued by massive overcapacity. Although the government has implemented several new mega refining projects and wants to phase out the old refineries, the small and aging refineries not only linger on but also aim to expand, prompting corrective action by the central government.

According to a notice released by Shandong Provincial government dated April 9, the China's National Development and Reform Commission, or NDRC, team will spend three to five days from April 13 to investigate 55 independent refineries across the country.

The investigation of 40 independent refineries including 32 in the Shandong province, all of whom are crude import quota holders, will focus on the requirement for the refineries' to do away with their old and aging capacity, a condition that was imposed on them for granting quotas.

The team will also inspect the closure of 13 refineries in the Shandong province, the notice said. These refineries have a capacity of less than 2 million mt/year. Meanwhile, four refineries have also agreed to shut and transfer their capacity to the 20 million mt/year Yulong Petrochemical, which is currently under construction.

In addition, the investigation teams will also check if any new refining capacities have been added without official permits, while also taking steps to clamp down illegal crude trades in the secondary market.

Steering through requirements

Those who qualified for the crude import quota were required to stop any capacity expansion. Moreover, the quotas were non-transferrable to any other party.

Despite the restrictions, at least 15 million mt/year of new refining capacity was built by various quota holders in Shandong, S&P Global Platts estimated.

Continued operations at outdated units, including those promised to be mothballed in return for quotas as well as those with a capacity of under 2 million mt/year and have to close by end-2020, have also contributed to increased crude throughputs in Shandong since 2017.

Ironically, this capacity should have peaked in 2017 and despite the government policies to lower their capacities, crude throughput surged thereafter.

According to Platts calculations based on JLC data, total crude throughput in Shandong was only 78.5 million mt in 2017, but grew 9.2% on the year to 85.7 million mt in 2018, 12.6% on the year to 96.5 million mt in 2019 and 4.1% year on year to 100.5 million mt in 2020.

Moreover, it has become a common practice for some independent quota holders to re-sell excess imported crude barrels along with their quotas to their private peers for better profits in the secondary market.

The price for this quota, which usually ranges from around Yuan 100-300/mt [$15.31-45.93/mt] is considered as an indicator of demand for imported crude, despite it being an unwarranted market practice defined by the government.

Caught off guard

An official at one of the independent refineries said that an investigation team had arrived at its plant located in Zibo city in Shandong province on April 14, while several other refinery sources said investigators will arrive April 15, or later in the week.

"We got the notice only on Saturday and were told they were coming this week, which is very abrupt," said the source.

To attract less attention, refiners are likely to temporarily shut their outdated and newly added units, at least during the investigation period, said one independent refinery source.

This will likely result in a sharp drop in crude throughputs in Shandong in April, at a time when many refineries also undertake their scheduled maintenance, an analyst with JLC, said.

The crude throughput in Shandong reached a record high of 11.6 million mt in March, according to JLC data.

However, the drop will unlikely cause a significant reduction in the overall capacity there, a Beijing-based analyst said.

The new capacities were built with the provincial government's permit in the name of asphalt units, crude pre-treating units, or other fuel production facilities instead of a primary unit like CDU, the analyst said.

The heavy investment and new technology that the units adopted for higher value-added petrochemical production also protects them from being eliminated.

Moreover, quite a few new refinery capacities that came online were private and are not on the NDRC's list, the analyst added.

Meanwhile, sources said that the provincial government's notice has not mentioned any punishment measures, which means that it will not likely tackle the structural overcapacity issue effectively and fix the problem permanently.

Some refinery sources believe the inspection team will just scratch the surface and will wrap up its findings, given that this is not the first time this kind of investigation has taken place.