The Rise of China's Independent Refineries

Lead PI: Erica Downs

Unit Affiliation: Center on Global Energy Policy (CGEP)

September 2017 - Ongoing
Asia ; China ; Beijing
Project Type: Research Outreach

DESCRIPTION: This report examines the history of China’s independent "teapot" refining sector, which has had a significant impact on oil markets since Beijing’s decision in 2015 to allow these refineries to import crude oil through a system of import quotas and licenses. The unique study, which draws on both external and local sources, including Chinese-language media reports, explores the teapots' transformation over the past three years, their impact on domestic and international energy markets, and the outlook for their future

OUTCOMES: In short, the paper finds:
• Beijing's decision in 2015 to award China's independent refineries crude oil import quotas and licenses has transformed the world oil market..
• While the central government's policy towards the independent refineries will continue to evolve, Beijing is unlikely to reverse its decision to allow qualified teapots direct access to crude imports.
• Other repercussions are redefining global trade. Since they started receiving import quotas, Russia displaced Saudi Arabia as China's largest crude supplier on an annual basis in 2016, and other suppliers such as Angola and Brazil are gaining ground in the coveted market.
• As larger refineries with greater access to imported crude thrive, smaller plants with less or no access will likely end up being acquired by stronger firms. Already there have been at least three mergers involving independent refineries in the first half of 2017.
• Further consolidation pressure may come as "teapots" work to meet the China V fuel quality standard to reduce air pollution from vehicle emissions.
• Independent refineries are likely to remain opportunistic crude buyers as higher crude prices and greater government scrutiny of their tax payments and operations put pressure on their margins.