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Analysis: China's oil refineries to face curbs in Q3 ahead of anniversary celebrations

Highlights

Cities curb industrial activity to check pollution, safety levels

Shandong city councils cap oil refining capacity at 70%

Curbs coincide with peak refining, fuel demand season

Singapore — China's oil refineries are likely to get caught in a clampdown on industrial activity by city-level municipal authorities ahead of the country's 70th anniversary celebrations in October that could limit refined product output, crude throughput volumes and crude import levels in the third quarter.

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At least two city councils have already issued mandates asking industries to either slow down operations or ensure there are no changes to capacity levels to control pollution and reduce chances of industrial accidents around the National Day holiday week that begins October 1.

This will affect China's refineries as many are starting up after maintenance, and as the sector ramps up gasoline and gasoil output in Q3 to meet peak seasonal demand from the transportation, construction, mining, agriculture and fishing industries.

The city council of Zibo, a city in the northern Shandong province with a population of just over 4 million, has capped industrial operating rates for August and September at 70% for manufacturing sectors, including pharmaceutical, cement, glass making and oil refining, according to an official document dated July 6.

The mandate includes a 70% cap on the 2018-equivalent nameplate capacity for refining and petrochemical plants in the region.

"This kind of mandate would cut independent refineries' crude throughput by 10-15%," a Beijing-based analyst said, adding that any production cut could dampen expectations of future demand and put a brake on China's crude import growth.

Market sources are watching whether neighboring cities will join the cut and there are concerns the mandate could spread to the whole of Shandong province, which is home to 20% of China's refining capacity, and even to coastal cities in the Bohai Bay region where refining hubs are located.

In Dongying, another refining hub in Shandong, the local government has told independent refineries to keep their operational status over July-October unchanged to ensure safety and avoid unwanted incidents, which means that refineries are neither allowed to shut for maintenance nor restart from maintenance.

"We expect tighter controls in coming months to avoid any accidents, especially explosions or fires. Blue sky comes second," a Shandong-based independent refiner said, referring to previous policies to clear smog-filled skies in major cities like Beijing.

MARKET IMPACT

While refineries may not be able to ramp up throughput in affected regions, existing throughput is unlikely to fall due to the mandates as independent refineries are already operating at multi-month low levels.

Additionally, state-run refineries are already compliant with tighter environmental restrictions, and could be exempted from pollution-related clampdowns, market sources said.

Five refineries in Zibo are allowed to crack imported crude oil, with a total refining capacity of 36.1 million mt/year -- state-owned Sinopec's 14 million mt/year Qilu Petrochemical and independent refineries Jincheng Petrochemical, Wonfull Petrochemical, Qingyuan Petrochemical and Xintai Petrochemical.

A source with Sinopec's Qilu Petrochemical said the refinery was conducting partial maintenance work, though its total throughput will not be affected.

The four independent refineries, which normally process about 1 million mt of crude/month, have been operating at 55% of their combined nameplate capacity. Wonfull Petrochemical and Qingyuan Petrochemical have each shut one of their CDUs for maintenance, while Xintai has a low run rate of only around 100,000 mt/month.

"The independent refineries are already operating at low capacities, so the mandate may not affect them," a source at Wonfull Petrochemical said.

Zibo's city council has also offered waivers to plants with good emission controls and no complaints from the public. Other Chinese provinces are yet to impose curbs on industrial activity. Both central and provincial governments are keen to ensure smooth celebrations for the 70th anniversary of the founding of the People's Republic of China, when large-scale activities are planned.

China's refineries traditionally ramp up throughput in August and September, and China's crude oil imports should have been expected to rise from the average of 9.67 million b/d in June as a result.

The average run rate at independent refineries in Shandong province is usually about five percentage points higher in September than August, at around 50.25%, historic data over 2013-2018 from data provider JLC showed.

China's Shandong independent refineries imported around 56.82 million mt of crude in the first half of 2019, up 14% from the same period last year.

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

-- Eric Yep, eric.yep@spglobal.com

-- Analysis by Daisy Xu, newsdesk@spglobal.com

-- Edited by Wendy Wells, wendy.wells@spglobal.com