A sharp cut in oil product export quotas by China underscores Beijing's determination to cut emissions while consolidating and reshaping its refining industry, a trend that began last year with the government's crackdown on malpractices in the independent refining sector.
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In the first batch of export quotas for 2022 issued recently, allocations have been slashed by 56% from 2021 with refiners only allowed to export 13 million mt of gasoline, gasoil and jet fuel.
The steep drop came as a surprise to the market even though China has been reducing oil product exports as it strives towards cutting emissions to meet its net-zero target. In 2021, the government slashed quotas to 37 million mt from 59.03 million mt for 2020.
"The government is looking for a reduction range [in exports] to better reshape the refining industry along the energy transition journey. Cutting quotas helps to cap products output and push forward consolidation and the phasing out of inefficient capacity," a Beijing-based analyst with an international consulting firm said. "But if the sharp cut causes significant oversupply in the domestic market, it is still possible to see increases in the coming allocations in the rest of the year," he added.
But overall analysts expect China's oil product export quota in 2022 to be 25-45% lower than the allocation in 2021, and to eventually drop to zero by 2025.
One industry source pointed out that by cutting exports, China is also preempting the possibility of a carbon tax being imposed on its refined products by importing nations in the future.
"China's economy should not rely on exporting high carbon products," the source, who is a trader with a state-owned oil company in Beijing, said.
Currently, gasoline, gasoil and jet fuel cargoes are not subject to taxes when exported from China with quotas. However, importing countries may levy something like the European Union's Cross Border Adjustment Mechanism, or CBAM, on such cargoes in the future, the trader added.
The CBAM seeks to equalize the price of carbon between domestic products and imports to ensure that the EU's climate objects are not thwarted by production relocating to countries with less ambitious policies.
One evidence of this intention was that Beijing has raised fuel oil export quotas by 30% to 6.5 million mt in the same batch. This is because the fuel oil allowance only allows quota holders to send tax-free domestically produced fuel oil for bonded bunkering at Chinese ports.
China's refining and petrochemical industry accounted for 8% of overall CO2 emissions in 2020, according to Chinese think tank Sinocarbon. The sector is expected to be enrolled in China's national carbon market in the near future, which will subject it to emissions benchmarks and put a price on the sector's carbon footprint.
One of the main purposes of China's export quotas has been to balance domestic supply and demand.
But Beijing has been making structural changes to better balance the market, such as the creation of large integrated petrochemical-oriented refineries, which has led to the shutdown of the smaller private plants that mainly supplied the domestic market with transport fuels.
The government last June also introduced a consumption tax on imported blendstocks such as light cycle oil and mixed aromatics to discourage their imports, forcing the industry to rely on domestically produced transport fuels. Platts Analytics estimated imports of mixed aromatics and LCO to plummet by at least 60% to 100,000 b/d combined this year after recording around a 30% decline last year, partly offsetting oversupply pressure.
Opportunities for regional refiners
China was previously expected to increase oil product exports in line with growing refining capacity and slowdown in domestic demand growth, which would have intensified competition in the regional market. But this change in policy will open up opportunities for other regional refiners to fill the supply gap.
Due to quotas reduction, the country's gasoline, gasoil and jet fuel exports in 2021 fell by 11.9% on the year to 40.31 million mt, according to data from General Administration of Customs released Jan. 18. The exports have shown a persistent decline, dropping by 17.4% in 2020 from the peak of 55.36 million mt in 2019 due to weak demand in overseas as the coronavirus pandemic engulfed countries worldwide.
"The cut for 2022 will further dampen investments toward refined products output, such as expansions or even investments to sustain production in long term. This, however, turns the threats into opportunities for regional competitors, like South Korea and India," the Beijing-base analyst said.
"Gasoline cargoes might start to come from India more if China's export quotas remain tight," said a Singapore-based trader, adding that gasoline demand in the region has been supported by increased mobility and easing of COVID-19 restrictions.
Jet fuel traders, on the other hand, said slender supplies due to production cutbacks and expectations of less Chinese export volumes were the primary factors driving up sentiment in 2022, which has also been pillared by some seasonal heating demand in Northeast Asia.
"Asia [is] definitely lacking gasoil supply given the China quota news, so the main re-supply point into Singapore looks like west coast India barrels," a regional trader said.
"Even with refinery runs in Taiwan, Japan and South Korea at high rates, it would still be hard to fill the gasoil supply gap left behind by China," another source said.
"Lower China's product exports will have a more substantial impact than a year ago on Asian trade flows, not only because more than 80% of China's product trade flows are concentrated in Asia, but also because China's net outflows of products, including mixed aromatics and LCO, will decline by at least 10%, in the range of 50,000-100,000 b/d," S&P Global Platts Analytics said in a spotlight dated Jan. 7.
Adding to demand recovery in Asia-Pacific and refinery closures in Australia, the Philippines and Japan, Asian product balance in 2022 will be tightened by around 400,000 to 600,000 b/d from 2021, Platts Analytics said.
"The supply vacuum could be easily filled if product exporters including South Korea, India, Singapore, Taiwan, Japan, Malaysia and Thailand together increase their refinery utilization," Platts Analytics said and added that the Middle East is also able to increase product exports to Asia in 2022 when Saudi Arabia's Jizan refinery and Kuwait's Al-Zour refinery gradually ramp up rates.