China oil refineries face reckoning as Beijing tackles overcapacity

CHINA’S independent oil refineries face a reckoning this year as Beijing tackles overcapacity in the industry, and the crude they rely on becomes a lot scarcer.

Over a fifth of the country’s oil refining is handled by smaller, privately owned outfits, many of them housed in the eastern province of Shandong. These independents, dubbed teapots, have a reputation as wily operators used to navigating razor thin margins. Some may now be at a tipping point where none of their old tricks to stay profitable will work.

China is the world’s biggest crude importer and the teapots are a cornerstone of a market that has driven gains in global oil demand for over a decade. But three firms in Shandong went bankrupt late last year and more company failures are predicted.

“This year, oversupply in China’s oil market will grow further,” said Mia Geng, an analyst at industry consultant FGE. “We could see more teapot shutdowns, both temporary and permanent.”

The teapots are at this pass because China’s economy is slowing and getting greener. Blame electric vehicles, but demand for the fuels they produce, such as petrol and diesel, is shrinking. Fiscal constraints mean that local authorities are no longer willing to shield them from their tax responsibilities. And tighter restrictions on cheaper, sanctioned oil from places such as Russia and Iran is choking off much of their supply.

China’s attempt to shift its economic growth away from smokestack industries has seen refiners saddled with a nationwide capacity cap of one billion tonnes a year for 2025. Room has been made for super-efficient, integrated mega-refineries such as the Shandong Yulong Petrochemical facility that began operating in September, which means that smaller, less profitable outfits are likely to be the casualties of meeting the target. Older teapots in Shandong are top of that list.

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