PetroChina refineries and private Hengli Petrochemical (Dalian) Refinery are expected to bid for China's first set of planned auctions for crude barrels from its state crude reserves due to their proximity to the storages, refining sources told S&P Global Platts on Sept. 17.
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China's National Food and Strategic Reserves Administration on Sept. 14 said that it will release 7.38 million barrels of crude oil from its state reserves Sept. 24.
The barrels for auction are Qatar Marine, Forties, Oman, Murban and Upper Zakum in five lots, which were put into state reserve tanks in China's northeastern Dalian city, Liaoning province.
"We will be one of the most strongest bidders, as our refinery is close to Xingang storage," a source with PetroChina's Dalian Petrochemical said.
There are pipelines connecting the storage sites in Dalian Xingang with two PetroChina refineries - Dalian Petrochemical and Dalian Wepec. Two lots of the state crudes, with 951,137 barrels of Qatar Maine and 1.09 million barrels of Forties are in the Xingang port in Dalian.
Those state refineries under PetroChina and Sinopec, will likely take part in the auction via the companies' trading arms Chinaoil and Unipec, respectively, as these refineries are not allowed to buy crudes directly.
Meanwhile, Hengli is close to the other storage site in Changxing Island, Dalian where the rest three lots of the state crude reserve locate. The three lots are 1.79 million barrels of Oman, 2.95 million barrels of Murban and 592,031 barrels of Upper Zakum.
A company source with Hengli said they will also take part in the auction, since it's so close to their facility, with Middle East crudes also their designed-feedstock.
"But we have to consider our crude import quota availability for rest of the year," said the source.
Hengli has about 4.5 million mt of crude import quota available for the rest of 2021, S&P Global Platts' data showed.
Independent refineries keen to take part in the auction should have sufficient crude import quotas to buy these bonded crude barrels, according to the NFSRA statement.
In China, refineries built by state-owned Sinopec, PetroChina, CNOOC and Sinochem are allowed to import crude oil without quota limits, but all other refiners need to abide by quotas to bring in imported barrels.
Meanwhile, the barrels are allowed to be kept in the bonded tanks for 60 days only once the deal is done with purchasing contract is signed. This means winners have to bring out the barrels by end-November and are unlikely for a private refiner to use new quota for 2022.
Less interest from refineries in other region
Refineries in other parts of China showed less interest for the first set of auctions due to logistic issues despite the prices are likely to be competitive, and they expect the coming releases would auction for the barrels that are closer to plants.
The notional prices for the auctions are estimated at the costs that the lots were purchased, plus storage costs and marginal profit, which are expected to be much lower than the current market prices as they were put into storage between April to August 2020.
In April 2020, Dated-Brent averaged at $18.54/b, while Platts Dubai was at $26.74/b, Platts data showed. The September average prices were at $72.93/b and $70.36/b respectively as of Sept. 17.
"Domestic freight is quite high, making the affordable price for us not that competitive compared with those refiners located in Dalian," said a source with PetroChina's Guangxi Petrochemical in southern China.
"Quite a lot of logistic issues for bring crude barrels from bonded storage in Dalian to our plant, need to transfer from ship to ship along the coast to Yangtse River, while the availability of our storage tanks in the plant is another issue," a refining source with Sinopec in central China said.
China has a few state crude reserve sites across the nation, including in southern China Huizhou, Zhanjiang and Hainan, eastern China Zhoushan, Zhenhai and Huangdao, as well as northern China Tianjin and northeastern Dalian, and Lanzhou, Dushanzi in the northwest.
The reserve in Zhoushan, Zhejiang province is most likely to be the next one to be released for auctions.
A source with the Zhoushan state reserve said they haven't got any notice yet, but judging from the first release in Dalian, it won't be long.
"The government's movement is firm and high efficient for the release, with short notice," the Zhoushan source said.
Around 9 million barrels of reserve crude have been stored in the Zhoushan sites, including 1 million barrels stored in commercial tanks. But most of the barrels in Zhoushan were put into storage before 2018, or even in 2010, suggesting the price would be higher than those in Dalian.
The Zhoushan site also is connected with pipelines with several Sinopec refineries, with the flagship Zhenhai Petrochemical and Refining as the nearest one, which could probably take more.
In addition, the private Zhejiang Petroleum & Chemical also has a pipeline already connected with the state reserves, with another parallel line under construction, according to the source.
ZPC currently has about 3 million mt of crude import quota available, and was expected to obtain 4.5 million mt for its phase 2 project startup by end of this year.
China sets crude auctions for Sept. 24
Source: National Food and Strategic Reserves Administration