By GURDEEP SINGH
China's effort to shut down dozens of small privately owned
oil refineries is instead making them grow bigger, threatening
Beijing's plans to regulate an industry that the International
Energy Agency (IEA) says is already overheating.
Government policies in the resources sector in recent years
have caused the closure of hundreds of small Chinese coal mines
and cement and steel factories but a similar push in oil
refining is playing out differently, including through ventures
with state companies.
Faced with a potential government crackdown next year on
refineries processing less than 40,000 bpd of oil, some
independent refiners - called teapots because of their small
size - are responding by raising capacity, and their efforts to
resist closure are being backed by regional governments,
reflecting how China's top-down policies can run into
resistance at a local level.
Continued big rises in China's capacity would be bad news for
refiners globally, especially in the industrialized world,
where plants are being shut or run at substantial losses due to
overcapacity and weak demand.
In its latest medium-term outlook, the IEA, a Paris-based
global energy watchdog, said China could become a petroleum
product exporting powerhouse given current expansion plans.
The IEA last week forecast that global oil demand would rise
to 95.7 million bpd by 2017, but refining expansion plans will likely
take global refining capacity to 100.5 million bpd.
China will account for over 40% of global refining capacity
growth in the next five years. However, the viability of the
country's refining sector is under question due to recently
sluggish demand and a weaker economic growth outlook, which has
prompted some state-run oil firms to scale back expansion
plans, the IEA said.
Analysts say while Beijing can slow the pace of expansion by
its state-owned oil companies, a surge in capacity addition by
private refiners could undermine its balancing act.
Nearly half of the some 155 independent refineries spread
across China have yet to be even legally identified by Beijing,
according to a new study published by Argus Media.
Teapot refineries, which already make up more than a quarter
of China's total refining capacity, may expand by 37% to 5.23
million bpd by 2015, according to the Argus study.
If so, together, the teapots will rival the entire oil refining capacity of big energy
consuming nations like India and Japan.
Beijing faces tough choices in dealing with the teapots.
Often, they are key to preventing fuel shortages when demand
swings up, but their growing scale and significance threatens
to loosen Beijing's control over the vital industry and weaken
the sector domination of two powerful state-run groups, China
Petrochemical Corp. known as Sinopec
Group, and China National Petroleum Corp. and their units.
Teapots have traditionally produced low-grade fuels but with
expansions and upgrades many can now
produce on-specification products like high-quality diesel,
potentially putting them in direct competition with the big
Unlike their state-run rivals, who are mandated to produce
fuel to meet domestic demand often at a loss because of
government-set fuel prices, teapots are largely swing players -
who raise production when refining margins are good and reduce
output when they are weak.
"Teapots have become a credible force in China's refining
sector and it's a challenge for the government to handle," said
Kang Wu, a senior advisor at Facts Global Energy.
Beijing still maintains a tight control over the teapots'
operation by controlling their supply of crude-oil, which often
leaves them reliant on processing imported fuel oil.
Analysts say the government could continue to raise the
minimum threshold for refining capacity in hopes of closing
more of them, although that could prompt another wave of expansion.
One way China's National Development and Reform Commission
is managing the growing prowess of independent refiners is by
pushing them to integrate with state-run giants, with whom they
have a complex relationship, says Tian Miao, an energy analyst
at North Square Blue Oak, a London-based institutional
While teapots are a market share threat for Sinopec, the
country's biggest refiner, for companies like Cnooc and
Sinochem Group they offer a quickfire way to expand in the
refining business. Partnering with big state companies gives
teapots access to much-needed crude oil.
Some analysts' estimates suggest state-run oil firms now own
or have joint ventures with 20% of total teapot refining capacity.
"The government is kind of forcing [teapots] to sell to
state-run companies," Ms. Miao said "Teapots that expand won't
be shut down but they'll still be consolidated by the
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