The refineries in China's eastern Shandong province are being asked by the government to cut throughput ahead of the Winter Olympics in an effort to keep emissions under control, a move that could reduce independent refineries' appetite for crude oil even further, refinery sources told S&P Global Platts.
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The move will not only alter the import strategy of independent refiners over the next couple of months, it will also add to the woes of the independent sector in which five refineries have been already denied crude import quotas in the first round of allocations at the start of this year.
The upcoming Winter Olympics will be held over Feb. 4-20 in Beijing, which is not far away from Shandong province, while the Chinese New Year holiday begins from Jan. 31 and lasts one week.
Several sources in Shandong, who are with private and state-owned refineries, told S&P Global Platts that they are required to cut throughput to ensure "blue sky" during the event.
There is no clear and written directive from the government bodies yet, while the required reductions vary from cutting 30% of current throughput volume to capping utilization to below 70%.
"If every refinery in that region needs to adhere to the below 70% throughput mandate, this is likely to dampen runs," said Grace Lee, senior oil analyst for China at Platts Analytics. "The larger independent refineries have been running at quite high rates and forcing them to run below 70% will likely drag the overall runs lower."
There were about 21 independent refineries that ran at over 70% capacity in December, according to local information provider JLC's survey which covered 43 of the plants in Shandong.
JLC expected the average run rate of independent refineries in Shandong to fall to around 65%-66% in the week of Jan. 10 from 66.4% in the previous week.
An analyst in the province warned that the average run rates are likely to fall below 60% at the most if all independent refineries adhere to the directive and cut their respective run rates below 70%.
Varying calls for cut
A source at a Binzhou-based independent refinery told Platts that the sector had received notices from respective local authorities to cut run rates by about 30% from their current levels during the Jan. 30- Feb. 20 period, when the sporting event will be held.
"It means that we will have to cut crude throughput by about 2,400 mt daily, " said the source. The refinery operates at around 80% capacity and processes around 8,000 mt of crude daily.
Sources from the neighboring Zibo, however, said they would have to run rates at around 60%-70% because of the Winter Olympics.
These included the state-owned Sinopec's 14 million mt/year Qilu Petrochemical in Zibo, which is required to cut its run to around 70% during the same period from 83% in December and 88% in November.
At the same time, refinery sources from the Shandong refining hub in Dongying said they had not received any notices yet regarding the need to cap run rates during the upcoming event.
"But it's likely that crude throughput will be capped from end January or early February in order to curb emissions during the winter and during the Winter Olympics," said a Dongying-based refining source.
In addition, the refineries which still rely on trucks for feedstock delivery are required to shut during the event, according to refining sources. The Dongying-based 4 million mt/year independent Hualian Petrochemical was likely shut because of this.
Most of the key independent refineries in Shandong have been connected with crude pipeline from ports, so that only very few refineries are likely to be shut due to the transportation issue.
Some refinery sources said that the Olympics is not the only factor that would affect the run rates at Shandong's independent refineries.
"The run rates are also capped a little bit due to the recent long-lasting checks on tax-related issues in the regions," said a trader source, adding that the refineries' product sales were affected because of those checks, thus affecting overall crude throughput.
Independent refiners are set to face the toughest crackdown since the sector was liberalized and given access to imported crude in 2015. Before 2021, independent refiners were finding ways to use policy loopholes, but last year the government started to tighten supervision by launching investigations on the sector's operations, taxation compliance and environmental responsibility.
A Zibo-based independent refinery will likely shut one crude distillation unit from next week, which will see its crude throughput falling by about 40% to around 4,000-5,000 mt per day, according to a refinery source.
"The margins has been narrowing slightly recently, also the Chinese New Year is coming, so we plan to cut throughput," said the source.
Some refineries scheduled maintenance in the period too, such as Shenchi Petrochemical which is likely to shut its 2.6 million mt/year plant from early February, market sources said.
Shandong-based independent refineries imported about 123 million mt of crude, bitumen blend and fuel oil for use as feedstock in 2021, down by about 9.4% year on year from 136 million mt in 2020, according to Platts data.
In China, refineries built and operated by state-owned companies -- CNOOC, PetroChina, Sinochem and Sinopec -- do not need quotas to import crude. All other refineries, including independents and those owned and operated by state-owned companies such as ChemChina and Norinco, require quotas.