Nationwide, China’s refining production approached pre-pandemic levels in the first half of 2021. Private refineries largely located in China’s Shandong province ran at close to peak utilisation, thanks to low-cost oil stocked in 2020. AME expects teapots’ utilisation to fall toward the end of 2021, given the crude oil price rally and tightened crude oil import quota. However, AME expects refining oversupply to persist.

In addition to the large new capacities to commission, the utilisation of state-owned refineries’ existing capacity also started to rise during 2021 as major overhauls were completed. Gasoline and diesel exports rebounded by 21% and 15%, respectively, in the first half of 2021, supported by a higher export quota and a recovery in regional crack spread.

The gasoline crack spread showed a steeper rebound on the opening up of the economy as the pandemic situation eased. AME believes exports may trend down, as the second batch of quota was 73% lower year on year. China plans to curb domestic refining activity, as it is polluting and uneconomic to export. 

Utilisation, Imports and Capacity

In 2015 the Chinese Government approved the processing of imported crude oils at “Teapot 1.0” refineries. This milestone event allowed these refineries to quickly turn to cheaper, imported crude feedstock initially sourced from Russia, South America and the Middle East due to the availability of small spot cargoes and attractive prices. The proportion of imported crude in the feedstock of teapot refineries has rapidly increased from about 55% in 2015 to a forecast ~90% in 2021.  

The utilisation rates of the teapot refineries are seasonally influenced, but the average annual rate has gradually increased from around 40% in 2015 to 70% in 2020 and is forecast to be about 80% in 2021 because of improved competitiveness from the import quotas that allowed teapots to capitalise on cheaper crude oils.

At their peak in 2019, Shandong's teapots had a capacity of nearly 160Mtpa, around 3.5% of global refining capacity and about 25% of China's total refining capacity. Now, however, a new wave of private petrochemical complexes, the “Teapot 2.0”, have them in a corner, threatening closures. 

Shandong's “Teapot 1.0” plants have a wide range of capacities. Plants smaller than 2.0 million tons per annum (Mtpa) are at high risk of closure, given the government's plan to upgrade the industry and halt the expansion plans for small units. Mid-sized plants, with capacities ranging from 2.0-7.5Mtpa with shorter process chains and simple product yields, are next at risk. Large complex refineries have long process chains with 20 processing units and produce 100 products, while smaller plants can have just two refining units to produce four petroleum products.

In 2020, there were about 69 refineries in China with a capacity of less than 2.0Mtpa each, and about 80% of these were in Shandong. About one-third of Shandong's 50-plus “Teapot 1.0” refineries producing 2-7ktpa may be facing closure. Altogether, around two-thirds of Shandong's “Teapot 1.0” refining capacity is at risk of shutdown.

The New Wave

China’s newest oil refiners, “Teapot 2.0”, are benefiting as they fit into President Xi’s push for cleaner industries and greater energy efficiency. Companies such as Jiangsu Eastern Shenghong Company and Hengli Petrochemical Company are poised to become more influential in global markets.

They have built huge refining complexes that are more environmentally conscious and focus on using crude oil to make plastics and chemicals instead of more polluting fuels like diesel. As a result, some are getting tax benefits or permission to import large quantities of crude oil directly from large producers such as Saudi Arabia. In June, Shenhong installed China’s largest refining tower, and dedicated the US$10.5bn facility to the centenary anniversary of the Communist Party.

Closer Emissions Scrutiny

The Xi government is supporting the firms most closely aligned with its objectives, while curbing the more polluting first-generation “Teapot 1.0” private refiners that have been around for decades. The government tightened the noose on several “Teapot 1.0” Shandong refiners this year by closing some tax loopholes. The move, which coincided with more scrutiny by the government, led to a sharp reduction in the amount of crude oil they were allowed to import. This has given the upper hand to new refiners.

North Huajin Chemical Industries Co., one of the few listed “Teapot 1.0” companies, has seen its stock fall 14% since July. Meanwhile, new firms such as Hengli and Zhejiang Petroleum and Chemical Co. still have enough quotas to import crude, while Shenhong has applied for import permits for its new refinery.

“Teapot 2.0” companies have built facilities in isolated islands or peninsulas that can dock oil tankers but stay away from crowded urban areas where the Communist Party wants to cut pollution. These firms may eventually face checks of their own, with more scrutiny of their carbon emissions. Still, many “Teapot 2.0” companies have other environmental benefits as they are more advanced in aspects such as waste and water management.

Hengli, which began as a chemical fibre manufacturer in Jiangsu, began full production at the country’s first “Teapot 2.0” refinery in 2019. Its revenue has increased since then and about 66% of its US$2.1bn annual revenue now comes from refining. State-owned companies such as the Sinopec Group and Petrochina Co. still contribute about two-thirds of China’s oil refining.

Move to Petrochemicals

The crackdown on “Teapot 1.0” refiners doesn’t mean they will all disappear, but challenging times are ahead as “Teapot 2.0” companies have advantages, such as economies of scale and preferential tax treatment, and they have integrated plants which give them the flexibility to move more from oil products to petrochemicals. “Teapot 2.0” companies are focusing less on producing diesel and more on making petrochemicals used in daily necessities from bottles to sports, where demand has increased with China’s economic boom. This is one area where China wants to become more self-reliant.