 "World's hottest oil market gets a jolt from China")
Everyone wants a share of the world's hottest oil market, including China's taxman.
Purchases by the country's independent refiners, granted permission last year to buy foreign crude, have soaked up some of the global oil glut and helped revive prices after the biggest collapse in a generation. Sellers from Saudi Arabia to BP Plc have been supplying the plants known as teapots, which account for a third of the nation's processing capacity. Now a government tax crackdown threatens to constrain this new source of demand from China, which rivals the US as the world's biggest importer.
The emergence of the private refiners as major buyers of crude and exporters of refined products represents the biggest change in international oil markets since the US shale revolution, according to Trafigura Group's Asia head. Their future will be a hot topic at the annual Asia Pacific Petroleum Conference, which gathers traders, executives and bankers in Singapore this week. At stake is as much as 1.4 million barrels a day of demand, more than Saudi Arabia supplies to the world's second-biggest user.
Now, the authorities are clamping down on anyone skirting the rules. The National Development and Reform Commission on August 23 said the government will disqualify license applications or revoke import quotas if companies evade tax or falsify documents. Nobody replied to a fax seeking more details sent to China's NDRC after regular working hours on Monday or answered calls to the press office.
While local authorities in Shandong province, will support the industry, import licenses granted by the government may drop by the equivalent of 400,000 barrels a day next year to 1 million barrels amid the crackdown on tax evasion, according to consultant Energy Aspects Ltd.
Processing rates at teapots "will be curbed by the government's regulation on taxation and operations," Zhang Liucheng, director and vice president of Shandong Dongming Petrochemical Group, the biggest Chinese private refiner, said in an interview in Singapore on Monday. The company is tax-compliant, having paid 1.7 billion yuan ($255 million) in tax last year and 2.6 billion yuan in the first eight months of 2016 as it started refining imported crude, Zhang said.
"We independent refineries as well as privately owned companies in China won't ask for any preferential policies from the government," Zhang said, adding that the impact on output from the tax crackdown won't be as significant as many people expect. "What we want is just a fair market in importing, exporting, sales and taxation."
Other headwinds for the processors include tougher competition among independent refiners as well as fuel-quality upgrades and environmental-protection requirements, he said.
The allure of the teapots was highlighted earlier this year when one of them purchased a spot cargo from Saudi Arabia, which broke from its usual policy of selling only under long-term contracts. Iran's state-run oil company is said to be in talks to sell more crude to Trafigura in a strategy that may help it break into the market to supply the independent refiners.
"The advent of the Chinese private refiners as major buyers of crude and exporters of product has been the biggest change in the market since the shale revolution," said Chin Hwee Tan, the CEO for Asia-Pacific at Trafigura. "We're doing significant business with them."
China's oil imports have averaged an unprecedented 7.5 million barrels a day so far this year, boosted by the teapots, government data show. The purchases, along with production outages in Nigeria and Canada, helped benchmark Brent crude jump almost 90 per cent from mid-January to June.
Brent fell 1.2 per cent to $47.05 a barrel on the London-based ICE Futures Europe exchange at 10:07 a.m. local time on Tuesday. Prices exceeded $115 a barrel in mid-2014.
But, as well as the potential impact of increased scrutiny over taxes, teapots face other headwinds. With port and pipeline infrastructure not developing as fast as oil purchases, imports are at risk of slowing because of ship traffic and lack of storage capacity. Concern about creditworthiness and lack of experience in international trade are also challenges. Slowing refining profits have forced cuts in processing rates, while the implementation of higher fuel-quality standards could force some of them to shut.
"Some refineries are very well-placed, some have sophisticated configurations, but no balance sheet so credit is a bit of a challenge there," Andy Milnes, BP's CEO of integrated supply and trading for the Eastern Hemisphere, said in Singapore on Monday. "Others may have a balance sheet but have a less sophisticated refining system."
After boosting processing rates in June to the highest level since at least 2011, the refiners are now operating at less than half their capacity, with processing sliding to the lowest level in more than seven months in late August, according to data compiled from Oilchem.net.
BP is still optimistic about the Chinese market, Milnes said. Shandong Dongming last year got crude from the company as part of a long-term supply contract.
And in spite of China's clampdown, the government is still working toward "liberalising oil markets, and would continue to encourage the operations of independent refiners," according to Unipec's Wang. "Many of them perhaps account for 70 to 80 per cent of tax revenue in their cities, so the local government will want to keep them alive."
Purchases by the country's independent refiners, granted permission last year to buy foreign crude, have soaked up some of the global oil glut and helped revive prices after the biggest collapse in a generation. Sellers from Saudi Arabia to BP Plc have been supplying the plants known as teapots, which account for a third of the nation's processing capacity. Now a government tax crackdown threatens to constrain this new source of demand from China, which rivals the US as the world's biggest importer.
The emergence of the private refiners as major buyers of crude and exporters of refined products represents the biggest change in international oil markets since the US shale revolution, according to Trafigura Group's Asia head. Their future will be a hot topic at the annual Asia Pacific Petroleum Conference, which gathers traders, executives and bankers in Singapore this week. At stake is as much as 1.4 million barrels a day of demand, more than Saudi Arabia supplies to the world's second-biggest user.
Also Read
The government crackdown "is sort of a warning to independent refiners," said Wang Pei, a senior analyst at Unipec, the trading unit of China's largest state-run processor, Sinopec. "It has been tough to implement proper tax compliance among independent refiners." Teapots started getting licenses to import foreign crude last year as part of a government effort to boost private investment in China's energy industry. The refiners previously had to rely on state-owned oil majors including PetroChina Co and Sinopec for supplies of crude. They still have to adhere to a quota determining how much they can import.
Now, the authorities are clamping down on anyone skirting the rules. The National Development and Reform Commission on August 23 said the government will disqualify license applications or revoke import quotas if companies evade tax or falsify documents. Nobody replied to a fax seeking more details sent to China's NDRC after regular working hours on Monday or answered calls to the press office.
While local authorities in Shandong province, will support the industry, import licenses granted by the government may drop by the equivalent of 400,000 barrels a day next year to 1 million barrels amid the crackdown on tax evasion, according to consultant Energy Aspects Ltd.
Processing rates at teapots "will be curbed by the government's regulation on taxation and operations," Zhang Liucheng, director and vice president of Shandong Dongming Petrochemical Group, the biggest Chinese private refiner, said in an interview in Singapore on Monday. The company is tax-compliant, having paid 1.7 billion yuan ($255 million) in tax last year and 2.6 billion yuan in the first eight months of 2016 as it started refining imported crude, Zhang said.
"We independent refineries as well as privately owned companies in China won't ask for any preferential policies from the government," Zhang said, adding that the impact on output from the tax crackdown won't be as significant as many people expect. "What we want is just a fair market in importing, exporting, sales and taxation."
Other headwinds for the processors include tougher competition among independent refiners as well as fuel-quality upgrades and environmental-protection requirements, he said.
The allure of the teapots was highlighted earlier this year when one of them purchased a spot cargo from Saudi Arabia, which broke from its usual policy of selling only under long-term contracts. Iran's state-run oil company is said to be in talks to sell more crude to Trafigura in a strategy that may help it break into the market to supply the independent refiners.
"The advent of the Chinese private refiners as major buyers of crude and exporters of product has been the biggest change in the market since the shale revolution," said Chin Hwee Tan, the CEO for Asia-Pacific at Trafigura. "We're doing significant business with them."
China's oil imports have averaged an unprecedented 7.5 million barrels a day so far this year, boosted by the teapots, government data show. The purchases, along with production outages in Nigeria and Canada, helped benchmark Brent crude jump almost 90 per cent from mid-January to June.
Brent fell 1.2 per cent to $47.05 a barrel on the London-based ICE Futures Europe exchange at 10:07 a.m. local time on Tuesday. Prices exceeded $115 a barrel in mid-2014.
But, as well as the potential impact of increased scrutiny over taxes, teapots face other headwinds. With port and pipeline infrastructure not developing as fast as oil purchases, imports are at risk of slowing because of ship traffic and lack of storage capacity. Concern about creditworthiness and lack of experience in international trade are also challenges. Slowing refining profits have forced cuts in processing rates, while the implementation of higher fuel-quality standards could force some of them to shut.
"Some refineries are very well-placed, some have sophisticated configurations, but no balance sheet so credit is a bit of a challenge there," Andy Milnes, BP's CEO of integrated supply and trading for the Eastern Hemisphere, said in Singapore on Monday. "Others may have a balance sheet but have a less sophisticated refining system."
After boosting processing rates in June to the highest level since at least 2011, the refiners are now operating at less than half their capacity, with processing sliding to the lowest level in more than seven months in late August, according to data compiled from Oilchem.net.
BP is still optimistic about the Chinese market, Milnes said. Shandong Dongming last year got crude from the company as part of a long-term supply contract.
And in spite of China's clampdown, the government is still working toward "liberalising oil markets, and would continue to encourage the operations of independent refiners," according to Unipec's Wang. "Many of them perhaps account for 70 to 80 per cent of tax revenue in their cities, so the local government will want to keep them alive."