SINGAPORE, (Reuters) – Up to 10% of China’s oil refining capacity will close in the next ten years as an earlier peak in Chinese fuel demand squeezes margins and Beijing’s drive to eliminate inefficiencies begins to squeeze older and smaller plants.
Tougher enforcement of U.S. sanctions under the incoming Trump administration could send more factories into the red and accelerate shutdowns, cutting off access to cheap oil like Iran’s, industry players and analysts say.
The world’s second-largest refining industry has long been plagued by excess capacity after expanding to capitalize on three decades of rapid demand growth.
Authorities, including officials at an independent refinery in Shandong province, lack the political will to close inefficient factories that employ tens of thousands of workers, analysts say.
However, China’s rapid electrification of vehicles and the observed economic growth are rendering the weakest operators unviable, forcing a reckoning.
The changes are likely to limit crude imports to China, the world’s largest buyer, which accounts for 11% of global demand. 19, and weaker demand weighed on global oil prices.
Refinery output also posted a rare decline last year.
Poor operating rates are the clearest sign of the industry’s pain. Consultancy Wood Mackenzie estimates that Chinese refineries were operating at just 75.5% of capacity in 2024, the second-lowest utilization rate since 2019 and well below the U.S. above 90% of the refinery.
The worst performing are independent fuel producers known as kettles, based mainly in eastern China’s Shandong province, which account for a quarter of the sector.They operated at just 54% of capacity last year, according to a Chinese consultancy, the lowest since 2017. since out of covid.
To weaker players, Beijing vowed in 2023 to phase out the smallest plants below the national refining capacity cap of 20 million bpd by 2025, up from just over 19 million bpd currently.
The smaller plants have become unusable after four large privately-controlled refineries, which together account for 10% of China’s refining capacity, have come online since 2019, industry players said.
Adding to their challenges, Beijing began pursuing independent refiners in 2021 for unpaid taxes.
Small operators, especially those that do not meet Beijing’s crude oil quotas and survive by refining imported fuel oil, face a further crisis as new tariff and tax policies push up their costs in 2025, industry executives say.
Those plants have a combined refining capacity of more than 400,000 barrels per day, two of the executives added.
Several senior independent refinery managers and analysts estimated that 15 to 20 independent refineries, which account for about half of the kettle’s 4.2 to 5 million bpd capacity, could weather the stress for a decade or more.
“Large-scale and integrated with chemical production, land area for expansion and infrastructure such as pipelines and terminals can be maintained in the longer term,” said Wang Zhao, senior researcher at Sublime China Information, referring to the Shandong teapots.
Wood Mackenzie predicts a capacity shutdown of 1.1 million bpd between 2023 and 2028, or 5.5% of the stated national cap, and another 1.2 million bpd by 2050.
CRITICAL 2025
Already, three oil refineries in Shandong, under the state-owned Sinochem Group, faced bankruptcy last year due to huge unpaid taxes and have been shut down indefinitely.
Even if Sinochem succeeded in restarting them, the plants would operate at a cost disadvantage because Sinochem avoids discounted oil from Iran, Venezuela or Russia due to sanctions, according to Mia Geng, FGE’s China energy consultant.
To cope with deteriorating margins, many kettles have switched almost entirely to discounted oil, particularly from Iran, Reuters reported.
However, the prospect that the US under President-elect Donald Trump could tighten sanctions on Iranian oil, which accounts for more than 10% of Chinese imports, could push up the costs of the kettles even more.
China’s Shandong Port group’s surprise ban on US-sanctioned tankers is already shaking the shipping market and pushing up oil prices.
Shandong plants face a particularly difficult year in 2025, as the $20 billion Yulong Petrochemical plant is set to start up its second 200,000-barrel oil unit in the coming months, exacerbating fuel gluts. say Shandong traders.
HAND OF GOVERNMENT
Local authorities have already forced some industries to upgrade.
For the Yulong plant, Shandong’s cornerstone project, the provincial government has shut down 10 smaller plants with a total capacity of about 540,000 barrels per day by the end of 2022.
In addition, in 2021/2022, Beijing stripped five refineries of their import quotas as a result of a nationwide investigation, contributing to China’s first annual decline in crude oil imports in 2022.
At the same time, state-owned refineries are shifting to higher levels of chemical investment.PetroChina plans to close a 410,000-barrel-per-day refinery in Dalian and replace it with a smaller new plant focused on petrochemicals.
Similarly, refining giant Sinopec Corp will eventually have to close old fuel-focused plants in eastern states where electric vehicle penetration is higher, said FGE’s Geng and a Sinopec trader who declined to be named.
Sinopec had no immediate comment when asked about the prospect of a shutdown.
The senior crude oil procurement manager, who has worked at the Shandong teapot for 16 years, said he is looking for a new job because his plant, which has been stripped of its crude oil quota, is running at 20% capacity and losing money. about 18 months.
“We are on the verge of closing after a very tough 2023 and 2024,” said the person, who did not want to be named or where he works.
“But finding a job in the same field is not easy.”
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