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China's Hengli Petrochemical in talks to take Saudi crudes for trial run

China's independent refiner Hengli Petrochemical is in talks to securecrude shipments from Saudi Arabia for its trial run in October as it hasapplied for 20 million mt/year of quota for cracking imported crude oil, acompany source said Thursday.

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"We plan to take Arab Medium crude and Arab Heavy crude for a trial run,"the source said, adding that the volumes ratio between the two grades would be1:2.

Vice GM Huang Xudong said late last year it would take the first crudecargo in July 2018 as commissioning feedstock for a trial run in its 20million mt/year greenfield refinery.

The refiner planned to import total 2.4 million mt of crudes in 2018,Huang added.

The plan is unchanged, the company source said Thursday.

The refinery in northeastern China was designed to crack Saudi ArabianArab Heavy, Arab Medium and Brazilian Marlim with a ratio of 6:3:1.

"We will take the Saudi cargoes traded through Chinaoil and Sinochem,"the source said.

Chinaoil is the trading arm of the state-owned oil giant PetroChina.

Meanwhile, the state-owned Sinochem has signed earlier this year an MOUwith Hengli Petrochemical to cooperate in feedstock procurement and productsmarketing.

Hengli Petrochemical is also in the process of securing its crude oilsupplies by term contract, informed sources said.

In contrast to its independent peers, Hengli Petrochemical would have torely more on term supplies due to its large scale.

Most of the existing independent refineries have capacities ranging from2 million mt/year to 7.5 million mt/year. The small scale allows them totake all of their crude oil from spot market.

But suppliers will not sign term supplies with an independent refineryuntil the Chinese government awards quota to it to crack imported crude oil,said a Beijing-based source with a Middle East crude producer.

In China, refineries under the state-owned Sinopec, PetroChina, CNOOC andSinochem are automatically awarded the right to crack imported crude,while the rest need to apply for quotas.

"We have submitted an application for the quota, at 20 million mt/year,"said the company source.

The refinery was expected to be awarded a ceiling quota of 20 million mtin a calendar year.

In 2018, however, it was expected to be only allowed to import one fourthof the volume at 5 million mt as the refinery plans to start trial run inQ4.

The other greenfield independent refinery in eastern Zhejiang province,the 20 million mt/year Zhejiang Petrochemical, was expected to get the sametreatment due to its similar trial run schedule.

"We expect each of Hengli Petrochemical and Zhejiang Petrochemical wouldbe allowed to import 5 million mt crude this year [based on their schedule],"said Li Han, a sector head with the Sinopec's trading arm Unipec, at the S&PGlobal Platts Asian Refining Summit held in Singapore Thursday.

"These quota allocation will be on top of the current allocation thisyear," she said.

The Ministry of Commerce has issued the first batch of crude importquotas at 121.3 million mt for 2018.

Wu Jian, a senior manager with Zhejiang Petrochemical, said on Thursday 5million mt quota should be sufficient for the refinery this year.

"We will buy the crudes in the spot market this year instead of fixingany term deals," he said on the sidelines of the refining summit.

-- Oceana Zhou, oceana.zhou@spglobal.com, and Staff

-- Edited by Jeremy Lovell, jeremy.lovell@spglobal.com