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Analysis: Chinese Independent Refiners Step Up Gasoil, Gasoline Production

Feb 24, 2016

China's independent refiners nearly doubled their gasoil and gasoline production in January and output is expected to remain at high levels going forward as they maintain strong run rates, set up reformers, and continue to process light product-yielding crudes. 

The country's state-owned refiners are meanwhile, starting to feel the impact of the oil products supply glut with at least two Sinopec refineries located in the vicinity of these independent plants cutting run rates. 

According to Beijing-based information provider JYD, 39 surveyed refineries in eastern Shandong province produced 5.05 million mt of gasoil and gasoline in January, up 86% year on year and up 17% from December. 

Their sales went up 89% year on year and 16% from December to 5.01 million mt, JYD data showed. 

The 39 refineries account for around 70% of the total capacity of independent refineries in Shandong province. 

The average run rate of these refineries rose to 54.4% in January, up from 45% in December and 36% last January, JYD's data showed. 

HIGH OPERATING RATES 

Analysts expect this trend to continue in 2016 with teapot refiners likely to raise throughput and operate at 50% to 60% of capacity for most of the year. 

Unlike their state-owned counterparts, the independent refineries have always been the country's marginal producers and operated at 30% to 40% of capacity before mid-2015 when they had no access to imported crudes. 

Things changed last July when the government gave them access to imported crudes and run rates have since been rising. 

Also unlike their state-owned counterparts, these refineries are not regulated by the government and have more flexibility to adjust run rates depending on the market situation. 

Moreover, these teapot refineries typically sell their products at a price below the government's guidance price and state-owned refiners' price, which makes it easier for them to offload products. 

Typically a third of their oil products are sold to Sinopec or PetroChina sales companies, as they lack retail outlets. 

Higher throughput will also be supported by strong refining margins after China last month tweaked its product pricing mechanism and set a floor price for gasoil and gasoline. 

SHORTER MAINTENANCE SHUTDOWNS 

These independent refineries have also planned to shorten their annual maintenance in 2016 amid good margins, which in turn will also keep refinery run rates and products output high in the year. 

Typically, the independent refiners would shut for maintenance for one to two months in the second quarter when the demand for oil products is low. 

However, only around six refineries have initial maintenance plans this year, less than the figure of over 10 refineries in the same period in last few years. 

Among the six, only the 3.5 million mt/year Yatong Petrochemical has fixed a date to shut for two weeks of maintenance in February, shorter than the normal one-month shutdown in the previous years. 

HIGHER PRODUCT YIELDS 

Besides higher throughput, market sources also credit the higher gasoline and gasoil output to better yields from imported crudes than the traditional feedstock of heavy residual fuels. 

Shandong's teapot refineries are able to crack crude and fuel oil, but due to limited access to crudes, heavy residual fuels used to account for 40% of their total feedstock until mid-2015. 

However, this proportion fell to less than 4% of the total last month, with crude oil accounting for the remaining 96%. 

Moreover, the yields of gasoline and naphtha has also increased as these refiners process more light crudes such as Russian ESPO. 

The yield is expected to further rise as five big independent refineries are constructing new reformer units, with two others ready to start construction soon to fully utilize the naphtha production and produce more gasoline. 

STATE REFINERS' RUNS 

The flood of oil products into the domestic market has meanwhile to some extent forced the neighboring state-owned refineries to lower their run rates. 

Sinopec's 14 million mt/year (281,000 b/d) Qilu Petrochemical in the same province cut its run rate to 81% in February from 84% last month, the third consecutive month-on-month drop. 

Run rate at Sinopec's 12 million mt/year Qingdao Refining also dropped to 88% in January from 94% last December. 

These two Sinopec refineries are surrounded by Shandong's independent refineries, also known locally as teapot refineries. 

"With more oil products coming from teapot refineries, we find it difficult to sell out in central China, not only in Shandong. Sinopec's sales arms also prefer to buy the fuels from teapot refineries at lower prices, rather than from Sinopec refineries," said a Qilu source. 

In 2015, independent refiners have taken significant market share from PetroChina and Sinopec, Bernstein said in a recent report. 

"Sinopec's crude refined against China's total declined from a peak of 52% in Q3 of 2008 to just above 45% in Q3 of 2015, while PetroChina's market share decline has been even more substantial dropping from 35% in Q1 of 2007 to 25% in Q3 of 2015," Bernstein said. 

PetroChina reported a 2% year on year decline in sales of refined oil products in both Q2 and Q3 of 2015, while Sinopec reported its largest decline in domestic oil products sales at 4% in Q3 since end 2008, it added. 

Dai Jiaquan, head of oil products research at China National Petroleum Corp.'s Economics and Technology Research Institute, said sales of oil products at oil majors has faced great competition after the teapot refineries were given the access of imported crudes last year. 

"It is clear that oil majors' sales of oil products will fall in this year while teapots are ramping up," he said. 

On the contrary, "Sinopec and PetroChina will try to keep their crude runs stable or slightly down from 2015, and increase oil products procurement at relatively low price from teapot refineries," said Dai.