China Fuel Oil Export Quotas Help Upgrade Oil Refining Industry

SCI99

2020-04-28

导读：China Fuel Oil Export Quotas Help Upgrade Oil Refining

China Fuel Oil Export Quotas Help Upgrade Oil Refining Industry

China will soon issue 10 million mt fuel oil export quotas under general trade, sources with the knowledge told SCI. Specifically, the quotas to be awarded to Sinopec, PetroChina, CNOOC, Sinochem and Zhejiang Petroleum & Chemical will be 4.29 million mt, 2.95 million mt, 0.86 million mt, 0.9 million mt and 1 million mt respectively. The release of fuel oil export quotas is regarded as a solution to regulate the high potential export volume of fuel oil in the future.

China believes that the IMO 2020 0.5% sulfur cap on marine fuels is an opportunity for China, and China would like to seize the opportunity. Previously, around 90% of China’s bonded bunker was imported from other countries, mainly from Singapore and Malaysia. And China’s refineries did not produce bunker for the bonded bunker market. But China is building Zhoushan Port into a bunkering hub in Northeast Asia, and Sinopec has promised that Sinopec will supply compliant low sulfur bunker at major coastal ports in China from 2020 and even supply low sulfur bunker in Singapore and some other ports along the Belt and Road Initiatives.

On January 22 China announced the value added tax rebate on fuel oil exports, and the value added tax rebate has been started since February 1. On February 14, the first batch of VLSFO which was produced by PetroChina Liaohe Petrochemical was exported with the tax rebate. And then, more and more refineries are preparing for the production of VLSFO, because the value added tax rebate policy significantly raises refineries’ production profits.

China Refinery LSFO Production Data

Remarks: The above production statistics are based oninformation as of the beginning of April.

Source: China (Zhoushan) Bonded Bunker Monthly, Mar 2020

For refineries under PetroChina, PetroChina Liaohe Petrochemical would produce low sulfur bunker blending components via its CDUs, and that is the solution with the lowest production cost. CNOOC Ningbo Daxie Petrochemical, CNOOC Zhoushan Petrochemical and PetroChina International Company signed long-term export agreements. In February and March of 2020, Chinese refineries, including Sinopec Zhenhai, Sinopec Shanghai, Sinopec Jinling, PetroChina Liaohe, PetroChina Liaoyang, PetroChina Jinxi, etc., exported 185,000mt of fuel oil via Zhoushan.

There are three main channels to supply low-sulphur bunker. The first one is to produce low-sulphur bunker with low-sulphur crude oil. This solution will change the consumption structure of low sulfur crude oil grades. The second one is to use residue hydrogenation units to produce LSFO. This solution will influenced Chinese FCC units’ feedstock throughput and operating rates and then influence the output of gasoline, diesel and asphalt. The third one is to blend low-sulphur components.

It is expected that governments’ regulations on fuel oil export quotas will be similar to the regulations on gasoline and diesel export quotas. The second batch of non-state crude oil import quotas for 2020 were awarded last week by the Ministry of Commerce, with the total volume of 53.88 million mt. By now, the MOFCOM has awarded 157.71 million mt of non-state crude oil import quotas which was 8.29 million mt lower than the first batches for 2019. Current low crude oil prices benefit China’s independent refineries, and the independent refineries have high crude oil procurements. Some refineries are even pre-selling their products to keep sufficient capital for crude oil procurement. According to SCI, the complex crude oil refining margins at Shandong independent refineries averaged RMB 743.3/mt on April 15. In addition, some of the independent refineries use financial tools to avoid market sharp fluctuations and keep high profits. The second batch of crude oil import quotas for 2020 were issued about two months ahead of the issue time in 2019. This is regarded as a solution for governments to support the development of China’s independent refineries and allow the independent refineries to cope with the impacts from the coronavirus outbreak more flexibly.

The existing reforms and further reforms in the Chinese bonded bunker market will help to encourage more domestic refineries to produce compliant low sulfur bunker, improve the diversification of low sulfur bunker supply origins and promote the regulations of the market growth.

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