China may let Shandong independent refiners share Yulong's crude import quota

China's Shandong provincial government could allow independent refineries in the region to share Yulong Petrochemical's crude oil quota for 2024, as the commissioning of its new 400,000 b/d refinery has been delayed, local refiners told S&P Global Commodity Insights on July 26.

If approved, this will be the first official arrangement for quota transfers among the refineries and help the Shandong independent refining sector meet its annual import target for the year.

"Provincial government officials called us to check if we need more crude import quotas," said an independent refinery source in Shandong. Yulong declined to comment on the matter.

As of July 26, Beijing had issued 85.18 million mt (1.71 million b/d) of crude import quotas to 24 qualified refineries in 2024, including 8.3 million mt to the new Yulong Petrochemical refinery.

The refineries have imported a combined 41.34 million mt (1.66 million b/d) of crudes over January-June, down 23.2% year on year, leaving about 43.84 million mt (1.75 million b/d) of crude import quotas available for the second half of the year, Commodity Insights data showed.

Refinery sources said the provincial government could allow the Shandong refineries to apply for a share of 6 million mt of Yulong's quota.

Yulong's startup delay

A startup delay in Yulong's new refinery in eastern Shandong province because of weaker demand has raised the possibility of other independents in the region sharing its quota.

"The trial run has been delayed again from mid-2024 to the third quarter, and it is very likely to be rescheduled to October/November. So [we] estimate Yulong would use only about 1 million-2 million mt of the quota this year at the most," a Shandong-based industry source said.

Commodity Insights estimated Yulong Petrochemical to use about 400,000 mt of its crude import quota by the end of July, considering its latest cargo of 100,000 mt Russian ESPO crude to be discharged in the coming days.

"There are no other cargoes arriving in the near term, and neither has there been any talk that Yulong is buying more crude cargoes," said an industry source.

Analysts and refining sources have been generally pessimistic about the startup of Yulong Petrochemical's new refinery on schedule and said it could take longer for the refinery to start producing on-spec oil products due to sluggish demand in the domestic market.

Quota shortfall

Meanwhile, more than 10 independent refineries, with bigger refining capacities than the respective quotas they have been allocated, are expected to face a shortfall in crude import quotas in 2024.

These are led by four plants in central and east Shandong that have a combined capacity of 28.6 million mt/year against their total crude import quota of 9.63 million mt for the year, official data showed. If the local provincial government decides to redistribute Yulong's spare quota to other refiners, it could help offset the quota shortfall at these refineries and lift the overall quota utilization.

Shandong independent refiners processed a combined 7.06 million mt of imported fuel oil in the first half of 2024, almost double from 3.5 million mt a year earlier, data from local information provider JLC showed, as they took advantage of competitive feedstock prices.

However, not all the independent refineries in Shandong are interested in Yulong's spare quota as slower domestic demand has dampened their throughput.

The average utilization rate at Shandong's independent refiners in H1 2024 fell 10 percentage points year on year to 58%, as average refining margins during the period plunged to Yuan 85 ($11.6)/mt, from Yuan 612/mt a year earlier, JLC data showed.

As of July 24, the average utilization rate at the independent refineries was around 53.1%, rising slightly from an average of 52% in June. The June utilization was the lowest since March 2020 when the country was struck by the pandemic.