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China’s independent refineries anxious as government action could plunge sales

China’s independent refineries in Shandong are on tenterhooks about their oil products sales and the overall situation as they await the outcome of a tax investigation by the local government, with related penalties likely to follow, after two Liaoning-based refineries were said to have breached the domestic taxation policy, refinery and trade sources told S&P Global Platts Jan. 21.

The strict policy will continue to batter independent refineries’ margins, lowering their appetite for feedstock crude buying and diminishing their overall output, market sources said.

The three Liaoning-based oil companies found to evade taxes regarding oil products sales include Liaoning Bora Bioenergy Co. and two independent refineries — the 20.5 million mt/year Panjin North Asphalt Fuel Co. Ltd. and the 6.5 million mt/year Panjin Haoye Chemical Co. Ltd. The announcement relating to their alleged malpractice was made by China’s State Taxation Administration late Jan. 19.

The Liaoning provincial taxation bureau has penalized the companies by not only requiring them to pay back the taxes, fines and interests, but also remanding the personnel responsible for tax evasion to the judicial branch for further action, according to the release.

Moreover, the government has also withheld allocating its crude oil import quota to North Asphalt Fuel in the first batch for 2022.

The refinery allegedly expanded its primary capacity by 10 million mt/year illegally to 20.5 million mt/year in April 2021 in addition to the tax issue. Beijing has required crude import quota holders to stop expanding their capacity.

Tax evasion is said to be common among independent refineries, despite being asked by the government to exercise more caution. In recent years, the government has tightened its supervision on such practices.

But refineries are often caught in a dilemma as they perform a tight balancing act between lawful practices and competing with state-owned peers, who are generally equipped with better feedstock resources, integrated facilities, more capacity and wider sales outlets.

Shandong on alert

The government has been investigating tax issues in Shandong since mid-2021, as part of Beijing’s efforts to tighten supervision and standardize the refining sector in the areas of operation, environmental protection and finance.

Shandong is the home for China’s independent refineries, accounting for 50% of the country’s total private refining capacity.

China’s independent refineries have already cut combined feedstock imports to 177.2 million mt in 2021, down 5.8% year on year from the record high of 188.1 million mt in 2020, due mainly to various government checks throughout the year, according to Platts data.

“We expect the investigation result and penalties for Shandong independent refineries would be released as soon as around Jan. 25,” said a source with a Shandong-based refinery.

“Refineries already have been quite cautious in recent months due to the related checks, which [have] curbed their sales of oil products,” the source added.

“Penalties would be in line with Liaoning, do worry about cutting crude import quota,” a second Shandong-based refining source said.

Four Shandong-based independent refiners were deprived of the final batch of crude imports quota allocation for 2021 in October and the first batch for 2022, as they were thought to be associated with illegal quota usage, according to sources.

The government has also cut Shandong-based ChemChina’s crude quota by 29% year on year in the first batch for 2022. ChemChina was found selling gasoil with sulfur content exceeding the national standard cap of 10 ppm, according to a release by the Ministry of Ecology and Environment.
Source: Platts

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