Analysis: China presses ahead with import reforms

OREANDA-NEWS. The Chinese government is considering allowing independent teakettle refineries to directly import crude in its latest move to liberalise the country's refining sector.

The change would enhance teakettles' ability to compete with state-controlled refiners Sinopec and PetroChina and is likely to lead to stronger competition in the domestic wholesale product market in the coming years.

China's commerce ministry (MoC) late last week invited refiners to apply for licences to import crude. Applicants must be qualified oil product wholesalers with at least one crude unit of more than 40,000 b/d capacity, as well as at least 2.19mn bl of storage, a 365,000 bl berth and access to at least \\$1bn of bank credit, among other requirements.

Beijing allows only five state-controlled firms — Sinopec, PetroChina, Sinochem, Zhenrong and CNOOC — unrestricted access to the crude import market. Another 23 firms hold non-state licences allowing them to import a set amount of crude. The MoC has set the total non-state crude import quota for 2015 at 752,000 b/d, after keeping it unchanged at 582,000 b/d since 2011.

The criteria for the proposed teakettle import licences are stricter than those for the non-state licences. But the MoC has removed some requirements, including that firms must have two years of experience in importing crude, which had previously ruled out most teakettles.

The prospect that crude imports will be opened up to more independent refiners indicates the government's reform plans are moving faster than expected. Top regulator the NDRC has separately awarded preliminary or final approvals to six teakettle refineries to use almost 600,000 b/d of imported crude at their plants in recent months. The NDRC approvals only allow the firms to process imported crude. Those that want to import crude directly will need import licences and quotas from the MoC.

ChemChina, the first teakettle operator in Shandong to receive a quota to process imported crude, and Shandong Dongming Petrochemical (SDP) — the operator of the 150,000 b/d Heze Dongming plant — are in pole position to win the right to import directly under the MoC reforms. Norinco, which is controlled by the Chinese military, won the right to import crude directly for its 160,000 b/d Huajin refinery from the MoC earlier this year. The firm already had a non-state import licence and the right to process imported crude at its plants.

Many teakettle refineries operate at less than 50pc of capacity because of a lack of access to crude feedstock. But direct access to imported crude would enable them to compete more strongly with their bigger state-controlled rivals, such as by more aggressively selling their motor fuel output in what is currently an oversupplied diesel market. It would also reduce teakettles' dependence on Sinopec or PetroChina for their crude feedstock and potentially give them more opportunities to co-operate with other foreign and domestic companies. Sinopec and PetroChina typically supply crude to some teakettles and buy products in return.

The MoC's reform plans will increase the number of Chinese firms that are active in the international crude market. They could also lead to more firms being qualified to deliver crude into the physically-settled crude futures contract that the Shanghai International Energy Exchange (INE) is expected to launch in the fourth quarter. The prospect of physical delivery being limited to the five state-controlled importers had raised doubts over the viability of the contract. But a bigger factor in its success may be whether foreign firms are allowed to take part.