This week, China’s National Development and Reform Commission (NDRC) announced new refining targets as the country shifts from building refinery capacity to optimizing refinery capacity.
The NRDC’s updated regulation supports a 2021 cap on the country’s crude refining capacity at 20 million barrels per day by 2025, adding that refineries over 200,000 bpd will account for ~55% of capacity in the same year.
The Commission plans to incentivize upgrades to existing facilities, limit new refinery capacity, and close outdated or small refineries.
Officially, China is implementing the policy to curb greenhouse gas emissions.
Indeed, that is a side-effect of improving utilization rates – China’s refinery utilization of 73% in 2022 pales compared to the US’ 91%.
And the refineries most responsible for low utilization? Small independent refineries, a.k.a “teapots.”
But emissions are only part of the picture.
This week’s policy update follows decades of conflict between the central government’s National Oil Companies (NOCs) and small independent teapot refineries – conflict that ultimately leads to accelerated growth in refining frontiers.
Before highlighting where teapots are shifting their focus, here’s a brief history of the central government’s relationship with independent refineries.
Cycles of Consolidation Efforts
In the late 1990s, China’s central government transformed its two NOCs, Sinopec and CNPC, into vertically integrated companies with two dominant subsidiaries, PetroChina and Sinopec Corp.
In 1999, the State Council passed Document No. 38 to put more power into NOCs’ hands while restricting private access to import quotas.
Teapots that received import licenses still had to obtain certificates from NOCs to get oil through customs and sell oil back to the two state-owned firms.
Document No. 38 also granted NOCs the right to integrate independent refineries into their operations while the government targeted small teapots for closure.
The remaining teapots faced more bombardments of import restrictions and threats of closure, resulting in a “survival of the fittest” environment.
Many closed or integrated into NOCs, but many survived only to face similar consolidation cycles in the 2000s and 2010s.
As a result, teapots became scrappy and opportunistic operations, bolstered by support from local governments for the jobs and tax revenue independent refineries offer.
Ultimately, that scrappiness accelerated China’s capacity growth through 2022, when the country overtook the US for the world’s largest refinery capacity of 18.4 million bpd.
China’s 14th Five-Year Plan – Playing Chess With Policy
On one hand, the central government’s repeated targeting of small independent refineries could look like an effort to consolidate control into NOCs.
On the other hand, the country’s aggressive tactics created a decentralized ‘army’ of refineries capable of quickly shifting production to high-demand petrochemicals.
The central government’s regulatory framework provides both stick-based and carrot-based incentives that align refineries with its 14th Five-Year Plan issued in 2021.
The ‘sticks’ are similar to the threats teapots faced over the past two decades – inefficiency gets penalized.
The ‘carrots’, however, incentivize updates to existing independent facilities to accommodate growth in sectors that align with the central government’s long-term energy strategy: independence.
China is the world’s largest oil importer. In 2022, the country imported 76% of its crude, and that reliance on outside sources creates significant supply-side risk.
What China lacks in oil resources, however, it makes up for with critical minerals and renewable energy products. And that’s where the next phase of teapot regulation enters the picture.
Teapot Transition Time
In 2022, China added the most solar and wind capacity in the world.
Furthermore, Chinese manufacturing holds a dominant market share for nearly all renewable energy components for wind turbines, solar panels, EVs, and wafers.
In 2021, China sold more EVs than the rest of the world combined and five times as many as second-place Germany.
China supplies approximately 80%-90% of the world’s solar panels, and wind turbines paint a similar picture.
In 2022, China accounted for almost 60% of worldwide wind turbine installed capacity.
A massive expansion of renewable energy production might sound like a negative for Chinese crude oil refineries, but there’s more to consider.
Wind turbines need carbon fiber.
Solar panels need polyolefin elastomers (POE) for photovoltaic encapsulant films.
Batteries need ultra-high molecular weight polyethylene for battery separators.
All of these materials are petrochemicals.
And China needs more of them to accelerate its renewable energy push.
That’s where fast-moving teapots can take advantage of opportunities, and that’s where they’re going.
The Takeaway:
China’s repeated targeting of small independent refineries – teapots – over the past decades created an ‘army’ of nimble refineries.
Overcapacity in one refined product does not mean overcapacity in all refined products.
Saturated ‘broad market’ petrochemical production for cheap consumer products creates opportunities for teapots to pursue high-end and high-demand materials for China’s exploding renewable energy market.
Teapots are transitioning away from polyester fabrics and plastic packaging materials to POE for solar panels, carbon fiber for wind turbines, and ultra-high-molecular-weight polyethylene for battery separators.
Related topics to explore:
- Chinese critical mining projects in the Democratic Republic of Congo (DRC) – DRC leads the world in cobalt production and reserves. China owns the majority share of Sicomines – a joint venture with DRC’s state-owned mining firm.
- Estimated 90% of Congo mining exports head to China
- China leads the world in Rare Earth metal production (70.3%) and Natural Graphite production (61.1%). China has the second-largest share of lithium production (29.9%)
Weekly News Recap:
Oil Updates:
Brent futures climbed 2.9% to $90.48/bbl Friday, while WTI rose 2.8% to $85.54/bbl. For the week, Brent fell ~2%, and WTI settled ~4%.
Freeport LNG Approval
On Friday, the US Federal Energy Regulatory Commission (FERC) granted Freeport LNG approval to take necessary steps to restart the facilities Dock 2 service.
Freeport shut for eight months between June 2022 and February 2023 due to a fire and has since returned service to three liquefaction trains, two LNG storage tanks, and one LNG dock (Dock 1).
