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China's Private Oil Refiners Are Too Powerful For Beijing

In a dramatic reversal of fortunes, Beijing has announced huge cutbacks in import quotas for the country's private oil refiners. According to Reuters, China's independent refiners have been awarded a combined 35.24 million tons in crude oil import quotas in the second batch of quotas this year, a 35% reduction from 53.88 million tons for a similar tranche a year ago. The big reduction has come as part of a government crackdown on private Chinese refiners known as teapots, who have become increasingly dominant over the past five years. This is intended to allow Beijing to more precisely regulate the flow of foreign oil as it doubles down on malpractices such as tax evasion, fuel smuggling, and violations of environmental and emissions rules by independent refiners.

The move is also intended to claw back control of China's crude refining sector from private refiners to state-owned refineries. And it's reminiscent of its earlier crackdown on big tech operations that were getting dangerously powerful and seen to be threatening party politics. 

China's teapots have been steadily grabbing market share from entrenched state players such as China Petroleum and Chemical Corporation (NYSE:SNP), also known as Sinopec, and PetroChina Co. (NYSE:PTR) ever since Beijing partially liberalized its oil industry in 2015. Teapots currently control nearly 30% of China's crude refining volumes, up from ~10% in 2013.

Source: Bloomberg

National oil companies to benefit

A total of 39 companies--led by the largest private refiners Zhejiang Petrochemical Co (ZPC), Hengli Petrochemical, and Shandong Dongming Petrochemical Group--will receive quotas for this year's second batch, with ZPC and Hengli each receiving quotas for 3 million tonnes apiece.

At least four refiners who received quotas in the first tranche were denied any quotas during the latest round of issuance.

China's Ministry of Commerce's press office has declined to comment on its motivations for the latest probe, but teapots have long been accused of lax compliance on tax rules and also lagging behind their state-owned peers on meeting stricter emission targets.

More importantly, national oil companies (NOCs) are likely to emerge as the biggest winners thanks to stricter emission standards and growing climate activism as we reported here.

According to SIA Energy analyst Seng Yick Tee, the crackdown will impact oil imports by teapots, but not the overall crude imports or refinery operations as NOCs are expected to bridge the shortfall.

It's a sentiment echoed by industry experts following the recent wave of climate activism.

Apparently, OPEC and leading national oil companies are reveling in schadenfreude following Big Oil's latest woes, viewing it as a prime opportunity to grab more business and market share.

The boardroom and courtroom defeats of Exxon (NYSE:XOM), Chevron (NYSE:CVX), and Shell (NYSE:RDS.A) could turn out to be a windfall for Saudi Arabia's national oil company Saudi Aramco (2222.SE), Russia's Gazprom (GAZP.MM) and Rosneft (ROSN.MM) as well as Abu Dhabi National Oil Co. who are looking to capitalize by filling the gap that will be left if these companies start cutting oil production in a bid to pacify investors.

 "Oil and gas demand is far from peaking and supplies will be needed, but international oil companies will not be allowed to invest in this environment, meaning national oil companies have to step in," Amrita Sen from consultancy Energy Aspects has told Reuters.

Last year, China's President Xi Jinping turned heads after he announced that the country had set a goal to become carbon neutral by 2060. President Xi Jinping said that China will adopt "more vigorous policies and measures" in a bid to peak carbon dioxide emissions before 2030. 

The announcement caused shockwaves in the energy world because China is not only responsible for one-quarter of the world's greenhouse gas emissions but has also repeatedly resisted calls to lower emissions, arguing that wealthier nations who benefited from earlier industrialization ought to shoulder the bigger economic burden for preventing catastrophic warming. Last year, China's carbon emissions reached 5.7 billion tonnes, roughly equal to the combined emissions by the United States and the United Kingdom. To his credit, Xi has adopted environmental protection as one of his core mantras as he seeks to temper the growth-at-all-costs mentality that dominated previous administrations.

Related: It’s Too Late To Avoid A Major Oil Supply Crisis

That pledge is sweet music in the ears of environmentalists because no single nation can do more than China to limit warming below the 1.5C threshold set in the 2015 Paris Agreement. If delivered, the pledge would result in the biggest reduction in projected global warming of any climate commitment made by any nation to date as per research consortium Climate Action Tracker.

Boon for renewables

But it's sweeter still in the ears of clean energy buffs because it could trigger some of the biggest investment inflows into the renewable energy sector.

According to Wood Mackenzie, China's goal to achieve carbon neutrality by 2060 would require investments of more than $5 trillion, the majority of which would flow to renewable power generation.

Woodmac reckons that for China to reach its goal, solar, wind and storage capacities would have to increase 11-fold to 5,040 gigawatts (GW) by 2050 compared to 2020 levels. Over the nearer term, Xi has committed to increasing China's wind and solar energy capacity from $500 million kilowatts to at least 1.2 billion kilowatts by 2030.

Such a big ramp up in renewable capacity will inevitably require an equally huge increase in storage capacity.

Woodmac estimates that China will have to increase its storage capacity by at least 20% to meet its CO2-reduction goals. Utilities and onsite generators primarily use li-ion batteries to harness the electricity during peak generation and release that energy at night, thus improving reliability and limiting price spikes. Unfortunately, these storage devices come with a critical shortfall: The inability to provide long-term storage as well as relatively high costs.

Chris Allo, president of ElektrikGreen, a Colorado-based developer of hydrogen-based power storage solutions, has proposed a possible solution: Hydrogen.

Renewable electricity can be used to produce green hydrogen that can be stored in tanks before being converted to energy in a fuel cell, thus leaving a low carbon footprint. Back in August, Siemens AG (OTC:SIEGY) was contracted by Beijing Green Hydrogen Technology Development Co. Ltd., a subsidiary of China Power International Development Ltd. (China Power), to construct the country's first megawatt green hydrogen production project. The green hydrogen will be used as fuel for public transportation by the Yanquing District of Beijing during the 2022 Winter Olympics.

By Alex Kimani for Oilprice.com

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