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The possibility that Beijing may not award oil product export quotas to independent refiners has created turmoil in the industry and raised questions on the impact this would have on refinery run rates, oil product exports, and the Shandong provincial government's infrastructure investment plans.

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Reliable trading sources in China told S&P Global Platts last week that the government may not allocate export quotas to independent refiners for 2017.

This would leave the independent refiners dependent on state-owned trading companies to export oil products.

The Ministry of Commerce, the authority responsible for allocating quotas, has not yet issued a statement. But a formal announcement may not come, given that the export policy for independent refiners is only valid until end-2016.

The speculation has stemmed from the fact that the government has not yet asked the independent refiners to submit quota applications, when in fact, to secure quotas for the first quarter of 2017, the applications should have been submitted by mid-November. Industry sources said the government may be looking to control independent refiners' exports.

There is also a policy debate going on in the government on whether China wants to and should become a big oil products exporter, as this runs counter to the government's plan to control excess refining capacity and pollution.

"There is some expectation of changes to export policy next year as the quota application has been delayed for more than half a month," a Beijing-based policy observer said. "It is possible that the authorities need time to consider the changes."

He added that it might just be a simple delay, although this has rarely happened in the last few years.

"But the independent refineries would have no export quota at least in the first quarter of 2017 if there is no [communication] from the government by late December."


Even if the government does not allocate export quotas to the independent refiners, this is unlikely to reduce the outflow of products from China due to the oversupply situation in the domestic market, analysts said.

Independent refiners exported around 750,000 mt of oil products over January-November 2016, according to Platts data. Though this accounted for only 2.4% of China's product exports of 30.2 million mt of gasoline, gasoil and jet fuel, in the period, the entry of independent refiners in the export market has impacted product cracks and regional refiners' export plans.

"Limiting the teapots' [independent refineries] ability to export products would only mean fiercer competition in the domestic market and, ultimately, these [surplus] volumes would still find their way into the international market via the state-owned refiners," Energy Aspects' Michal Meidan said in a report.

The London-based analyst expects the independent sector to increase crude purchases and throughput in 2017 by a modest 200,000-400,000 b/d from 2016 with crude import permission, while the majors are not, as yet, planning to cut runs. She expects China's oil demand to grow at around 250,000 b/d year on year in 2017, suggesting domestic oversupply would continue.

Zhao Yong, Chinaoil's president, last month said that he expects the country's oil product exports to rise in 2017 although he expects independent refiners to cut processing volumes next year as they grapple with tighter compliance, tax and environment regulations.

"The state-owned major refineries will lift throughput next year to make up for an anticipated volume cut from the independent sector," he said.


Meanwhile, independent refiners may still be able to export oil products under the normal trade route, given that Beijing last month allowed rebates on VAT for oil products exported under this route.

In China, there are two ways for refiners to export oil products -- the "normal" trade route and the "processing" trade route.

Under the processing trade route, there are no applicable taxes on the product, but the condition is that the exported product has been produced using imported crude oil. The refiners also need quotas to export products under this route. The state-owned refiners use this route and get allocated export quotas every year, while the independents joined in late last year.

Under the normal trade route, refiners are free to export oil products irrespective of whether they have been produced from domestic or imported crudes. But, until recently, they needed to pay taxes including VAT and consumption tax to the government. Exports under this route have been rarely seen in the last decade.

The government last month allowed rebate on VAT for oil products exported under the normal trade route. The government has also indicated that it may allow a rebate on consumption, but no announcement has been made yet.

The VAT rebate makes it relatively economical for independent refiners to export their oil products using the route via state-owned trading companies, although this is not seen as the best option.

But even if the government confirmed consumption tax on oil product exports is refundable, the exporting companies could have cash-flow issues as they will have to pay all the taxes first and then wait to get a rebate, said a trader from a Sinopec refinery in eastern China.

In China, gasoline and gasoil are subjected to consumption taxes of Yuan 2,110/mt ($36/b) and Yuan 1,411/mt ($27.5/b), respectively, and VAT is at 17%. Moreover, there will be no difference for the independent refineries between selling barrels to state-owned oil companies for domestic sales or export, said a Shanghai-based market analyst.


If the talk about stopping export quota allocation for independent refineries proves to be true, the sector will need to revamp its plans.

Independent refiners had expected to export more refined products in the future and accordingly made infrastructure investment plans and plans to set up trading teams.

"I will be laid off if we don't export oil products," said a trading source with a Shandong-based refinery.

A refiner in central Shandong was even attempting to fix a term oil products supply contract with an international trading house.

The Shandong provincial government recently outlined a number of infrastructure enhancements to be made by 2020, including seven new oil product pipelines with a total length of 1,975 km and capacity of 44.5 million mt/year, and port facilities, that would support product flows both in and out of the province. Shandong is home to most of China's independent refineries.

Oil product exports by independent refineries are expected to rise with more investment for better infrastructure, if the government continued to issue them with export quotas, said Zhang Liucheng, vice president of Dongming Petrochemical, during the APPEC oil conference in September.

"But it [failure to get export quotas in 2017] could be a reality now," a senior official from Dongming told Platts Wednesday.

The biggest independent refinery has submitted a special request to the government to clarify the export policy for next year, a refinery source said.

--Oceana Zhou, with analyst Daisy Xu
--Edited by Mriganka Jaipuriyar,; Geetha Narayanasamy,