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China’s Teapot Refiners Diversify As Exports Remain Forbidden

New federal regulations and Beijing’s increased favoritism towards nationalized oil refiners are pushing “teapots”, or small-scale independent refiners, to diversify their revenue sources, according to a new report by Reuters.

In the fourth quarter of 2016, teapots suffered the transfer of control over national oil and gas exports to major government refiners, which cut the independent refiners out of foreign markets for refined petroleum goods. The move tempered the rise of the small but growing sector, which accounted for over 90 percent of China’s 2016 oil import growth. From this experience, teapots learned that they had to be responsive to remain relevant as the nation’s energy priorities change.

"They had already been diversified and nimble at working around the various government mandates...now they are definitely looking for ways to step up their game and have better people, global access and financing to do so," Michal Meidan, an analyst at Energy Aspects, told Reuters this week.

One teapot named Dongming will expand its business to sell high dollar petroleum-based chemicals to plastics and other synthetic materials manufacturers. The 260,000 barrels-per-day refiner also stands ready to try its hand at oil extraction by investing in onshore oilfields.

Another teapot, Shangdong Haike Group, will begin making electrolytes for use in lithium batteries fitted in electric vehicles. This maneuver will sit well with Beijing as the country begins taking a leadership role in environmental issues. Related: Will Shale Kill Off The Oil Price Rally Again?

Shangdong says that with a capacity of 100,000 tons a year, it will be the largest electrolyte producer in the country. The company’s refining capacity will remain the same size even as it expands into the pharmaceutical sector in the coming months.

The changes in China’s regulatory landscape comes as the country commits to green energy goals in lockstep with the Paris climate change agreement of 2015. As a result, national fossil fuel consumption is now slumping. Last year, China’s oil demand growth was at a three-year low.

Still, Chinese oil imports are increasing. Data from last month shows that the Asian giant imported 9.17 million barrels of crude every day, overtaking the U.S. as the largest importer of the commodity globally, both in March and in the year to date.

One of the reasons for the spike in imports was teapots scrambling to get crude after they finally received their import quotas from the government. Most of the cargoes going to teapot refiners were scheduled to arrive in March, hence the record-breaking number. Some shipments for state refiners probably accounted for the rest of the increase—they were bought in December and January from North Sea producers and only arrived at their destination in March. Related: Goldman’s $50 Forecast May Prove Bullish

Not that they have secured the crude, it looks like finding buyers for the refined goods will be the bigger obstacle.

The end of March brought new restrictions on independent refiners’ ability to sell the fruits of their labor. Sinopec, a major state-owned fossil fuel company, decided to begin processing all gasoline and diesel purchases through its office in Beijing, instead of allowing regional offices to manage their own sectors. This allowed teapots in different parts of China to get the most competitive deal within their vicinity after the government blocked them out of the export game.

"We're hoping to see a fair policy that applies to both state-run and private players," Zhang Liucheng, vice president of the teapot Shandong, said at the end of last year, adding that teapots were still lobbying the government.

Domestic buys from government-run companies will not be enough for the survival of a sector that had been baited by Beijing to grow for the satiation of China’s energy needs. At this point, teapots will disintegrate their refining operations either through diversification or sheer lack of capital.

By Zainab Calcuttawala for Oilprice.com

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