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Why Is China Buying Up These Unprofitable Natural Gas Assets?

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Chevron’s ‘unprofitable’ natural gas assets…

China May Clip Teapot Refiners’ Wings

China oil storage

China may not renew the oil product export quotas for independent refineries, the so-called teapots, according to local trading sources who spoke to S&P Platts. The current quotas expire at the end of the year, and Beijing has not yet asked teapots to submit applications for quotas for the first quarter of 2017. Normally, applications are submitted by mid-November.

Teapots this year have accounted for about 2.4 percent of China’s total oil product exports from January to November, but the lack of quotas for the near term will intensify their competition on the domestic market. Export-wise, state-owned companies will fill in the fuel export gap left by the teapots.

Some of the sources that talked to Platts reporters said that the lack of news about teapot refinery quotas could indicate that Beijing is seeking to limit their influence on the market, small as it is to date.

Other analysts are saying that the no-quota move would not prevent teapots from exporting fuels by the so-called normal trade route: this route allows independent refiners to export their produce and pay VAT and consumption tax for the crude they process. Because of this, they have overwhelmingly preferred the processing route, which does not include taxes, but obliges refiners to use imported crude as feedstock and apply for quotas.

Related: Did Big Oil Layoff Too Many Workers Too Quickly?

It was thanks to this processing route that China’s teapots were praised for helping with the global crude oil glut.

Recently, however, Beijing started granting rebates on VAT to teapots for the normal trade route, and there was talk about extending the rebates to the consumption tax, although no final decision has been announced yet. According to one Sinopec source, teapots may run into cash-flow problems using the normal route, as they would have to pay their taxes upfront and then wait for the rebates.

Even so, analytical firm Energy Aspects expects teapots to increase their crude oil purchases in 2017 by around 200,000-400,000 bpd. However, local demand for crude is seen to rise by about 250,000 bpd, which means the oversupply is likely to persist.

By Irina Slav for Oilprice.com

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