Singapore — Chinese oil companies' lack of export quotas is likely to cap their supplies of domestically-produced low sulfur fuel oil, or LSFO, which will become less competitive than imported fuel oil barrels in China's bonded bunkering market.
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As a result, the quota hurdle would force China to step up imports of LSFO in the second quarter instead, to meet demand from ships sailing into international waters from Chinese shores, trade sources told S&P Global Platts.
"Especially Sinopec and PetroChina, which are running out of export quotas, will import more until a new round of quota allocation," a Beijing-based source with a state-owned oil company said.
The sources said China's fuel oil imports, almost all of which are LSFO, are likely to exceed 3 million mt in Q2, compared with 2.69 million mt that the official data showed for the first quarter.
Domestically-produced fuel oil barrels were exempted from a 13% value-added tax and Yuan 1,218/mt ($187.93/mt) of consumption tax from February 2020 when they were sold for bonded bunking under export quotas. With that rebate under the quota, domestically-produced fuel oil has become competitive in China's bonded bunkering market.
The five oil companies that hold export quotas are Sinopec, PetroChina, CNOOC, Sinochem and Zhejiang Petroleum & Chemical.
Sinopec produced around 1.75 million mt, or about 590,000 mt/month, of LSFO in Q1, data from market research firm Longzhong showed. If the oil giant maintains a similar pace to produce and export LSFO, it would almost run out of its current quotas of 2.4 million mt for 2021 in May.
China's second LSFO producer PetroChina's output was at 779,000 mt, or 264,000 mt/month, in Q1, suggesting its current quota of 1.49 million mt would sustain exports only until mid-June.
According to Longzhong, China's LSFO production capacity has risen to 20 million mt/year currently from about 13 million mt/year in early 2020.
Beijing is unlikely to issue the second batch of export quota until late-June or early-July, market sources with knowledge about the matter said.
"We have not got any notice to apply for new quotas yet," the Beijing-based source said.
Market sources said the export quota for fuel oil is normally issued along with those for oil products -- gasoline, gasoil and jet fuel.
"The quotas for gasoline, gasoil and jet fuel are sufficient enough for Q2 due to a heavy maintenance schedule. Therefore, there is no hurry to issue more quotas by the end of the first half," a second Beijing-based source said.
Beijing has so far allocated 29.5 million mt of quotas for gasoline, gasoil and jet fuel this year. Chinese companies exported 12.93 million mt of those three products in Q1, leaving enough quotas for future use, assuming they keep exporting at the same pace in Q2.
Rise in imports limited
As China had become a net exporter for fuel oil, it is unlikely to see import volumes hitting a record high, the sources said.
Even late last year, when the Chinese oil companies had a similar quota shortage, their fuel oil imports rebounded from 598,000 mt in October to 1.04 million mt in November and then to 1.05 million mt in December, data from General Administration of Customs showed.
China used to rely on fuel oil imports for its bonded bunkering until February 2020, when the government allowed tax rebate or exemption on domestically-produced fuel oil supplies to ships plying on international routes at Chinese ports.
As a result, the country's top bunker supplier Chimbusco estimated that about 62% of the 14.2 million mt LSFO bonded bunkering volume that China supplied in 2020 was produced by domestic producers while the rest was imported.
In the first three months of 2021, China's net fuel oil exports stood at 2.06 million mt, compared with net imports of 1.03 million mt in the same period last year.