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Economic Reform
Fueling Oil Trade
China seeks to upgrade its oil import and refining capabilities for export opportunities
By Mei Xinyu | NO. 4 JANUARY 26, 2017

 

A oil refinery of the China National Petroleum Corp. in Shenyang, capital of northeast China’s Liaoning Province (XINHUA)

 
China's oil trade practices are shifting from simply exchanging goods to a long-term focus on importing crude oil to replace its domestic supplies. China is increasingly becoming an international center for oil refining and processing, and as infrastructure for oil storage and transportation improves, Chinese ports may function even better as a regional hub for oil trade in East Asia.

This is a result of China's poor pool of oil resources, which are of low quality but require high production costs to exploit. When the international primary commodities market is prosperous, the price of imported oil and domestically produced oil are almost the same. In that case, the use of domestic oil wouldn't increase costs for manufacturing and other downstream industries, and would instead help China curb oil exporters' high prices. But when the market becomes sluggish, international oil becomes cheaper than domestic oil, meaning that the low-cost but high-quality imported oil is favored as a means to boost manufacturing and other downstream industries.

China's manufacturing and modern service industries are the real foundations for its economy. It would be a grave mistake for China to damage the efficiency of those industries just to maintain its domestic output of crude oil.

New exporting markets

The trend of replacing domestic supplies with imported oil has accelerated in China following the oil price collapse in the latter half of 2014.

The fast growth of China's oil imports should mostly be attributed to the growth of its refined oil exports. They have accelerated since 2013, with growth reaching 21.9 percent and 35 percent respectively in 2015 and the first 11 months of 2016. Over the past several years, the country has shifted from a net importer of refined oil to a net exporter.

China finds it more desirable to expand its refined oil export market than to cut its domestic oil refining capacity and transfer it to foreign countries.

Admittedly, China's oil refining capacity surplus poses serious problems. In 2013, only 67 percent of the country's oil refining capacity was actually utilized. After two years of efforts to cut excessive production capacity, China's oil refining production reached 730 million tons in 2015, and some senior industrial insiders have estimated that the figure is likely to reach 800 million tons by 2020, with 80 million tons of production capacity being excessive.

China is correct in shutting down outdated, high-polluting oil refineries, but it will be wrong to blindly encourage Chinese refineries to build factories in overseas markets, because of the hefty amount of investment required, as well as possible business and political risks. Many oil producing nations hope to increase their oil refining capacity, but their local economic, social and cultural environment would only result in a product that is unlikely to be competitive in the international market. If China blindly invests in building refineries in those countries, these projects are very likely to become riddled with huge losses, placing both investors and the hosting nations in a bind.

Under such circumstances, working to expand China's refined oil export market, including expanding its oil processing trade, will be a more suitable option for the country.

 

A crude oil storage base in north China’s Tianjin Municipality (XINHUA)

Policy support

China has already adopted some measures to facilitate its refined oil exports.

The Ministry of Finance and the State Administration of Taxation jointly issued on November 4, 2016 a circular to increase tax rebates for exports of mechanic oil, refined oil and other products. According to the document, as of November 1, 2016, the rate of value-added tax refunds on exports of refined oil, including gasoline, diesel oil and aviation fuel, will be raised to 17 percent, greatly boosting refined oil exports.

After international oil prices plunged in 2014, China grasped the opportunity to replenish its crude oil reserves, and such action is expected to continue in the future, making the country a top oil reserve holder in the region and even the world. In the long run, this means the country is gaining capacity to influence international oil prices through its reserves, just as the United States has been doing. As China's infrastructure for oil storage and transportation improves beyond satisfying domestic demand, Chinese ports will cement their role as a regional hub for oil trade in East Asia. Such a change will bring new investment opportunities in related industries.

Upgrading China's oil trade will spark an evolution in corporate structure. Local refineries—dubbed "teapot refineries" by the international market—other than state-owned industrial giants are accounting for an increasing percentage in China's oil trade.

In recent years the Chinese Government has been relaxing access restrictions for oil imports, allowing 15 local refineries to import crude oil and use imported crude oil, 12 of which are in east China's Shandong Province. As a result, China's teapot refineries have become target clients for Russian and Saudi Arabian oil exporters. In the first 11 months of 2016, Shandong imported 84.17 billion yuan ($12.16 billion) worth of crude oil, soaring 2.6-fold from the same period in 2015 and accounting for 14.6 percent of the province's total imports.

The upgrading of China's oil trade is also a result of lower transportation costs incurred by the increasingly popular very large crude carriers compared to those of oil pipelines and other land-bound transportation means. Its eastern region and ocean shipping will play a more important role in crude oil imports.

According to a report published by the Naval War College Review of the United States in 2010, the cost of transporting crude oil in a tanker 7,000-km from Ras Tanura in Saudi Arabia to east China's Ningbo City cost $1.25 per barrel, or $0.18 per barrel per 1,000 km traversed.

Compare that to the cost of transporting oil 3,200-km from Angarsk in Russia to northeast China's Daqing City through pipelines. The latter would cost $2.41 per barrel, or $0.75 per barrel per 1,000 km traversed, more than four times the cost of ocean shipping.

China is willing to diversify its sources of oil imports, but under such cutthroat conditions, Russia, Central Asian countries and Myanmar must work harder to make their crude oil more competitive in the Chinese market.

Copyedited by Bryan Michael Galvan

Comments to zhouxiaoyan@bjreview.com

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