China’s new crude quotas signal intent to push imports into top gear

China’s move to issue a hefty second round of revised crude import quotas for 2023 even before the first round allocation was exhausted signals Beijing’s intention to accelerate feedstock inflows at a time when Asia’s largest oil consumer is hoping for a revival in demand having been under a long spell of pandemic-related restrictions.

Analysts told S&P Global Commodity Insights that while the government wants to ensure sufficient crude inventories to support transport and industrial revival, oil hovering below $100/b has created an opportunity to replenish crude inventories at home.

“We expect the government to continue encouraging imports and refining activities to boost the economy in the post-COVID era. So, there won’t be a problem for Beijing to allocate more quotas to meet incremental demand from refineries, at least in H1 of 2023,” said Sun Sijia, an analyst with S&P Global Commodity Insights.

According to a document seen by S&P Global on Jan. 9, China’s Ministry of Commerce released the second batch of crude import quotas to the country’s 33 qualified refineries, totaling 108.78 million mt, or 797 million barrels.

The new allocation, which enables refineries to carry on importing crude going forward, accounted for 60.6% of combined annual crude quota ceiling, higher than the 58.4% share after the first allocation for 2022.

Several quota holders told S&P Global that with the allocation of the second round of quotas for 2023, the first round, which was allocated in October 2022, was no longer applicable irrespective of whether they had been partly or fully utilized.

A source with Norinco’s Huajin Refinery said the company was no longer allowed to use its first batch of quotas, which amounted to 2.01 million mt. Norinco had not used any of its quotas from the first round to import cargoes at end-2022.

Beijing in October 2022 allocated 33.49 million mt of crude import quotas to 23 refineries in the first batch for 2023 to encourage the import of more barrels before the new year.

Analysts estimated that by end-2022, refineries had only used 30%-40% of their first 2023 allocation.

They also said that since Beijing was planning to issue a revised round of import quotas, the first batch that expired end-2022, created uncertainties about future allocations.

Allocation rises

Shared by 33 qualified refineries, the fresh batch was 1.3% higher than the first batch of 107.4 million mt issued to 36 plants in January 2022.

Most independent refineries received roughly 50%-70% of their respective quota ceilings in the new batch, almost the same as that of the first batch for 2022, the document showed.

Among this, 12 refineries received slightly higher volumes than the first batch of 2022, with 19 allocated volumes similar to a year ago. Yatong Petrochemical and Hongrun Petrochemical were the two refineries allocated a lower volume of import quotas compared with their first 2022 batch.

The new allocations go to 33 qualified refineries, including state-backed ChemChina, Huajin Refinery and Yanchang Petroleum, three new integrated refining complexes as well as small sized independent refineries, mostly located in eastern Shandong province.

Refiners said the second round of quotas will be sufficient to sustain their current operations.

“Our expectation is that COVID-19 cases will start to fall and bottom out in Q1,” said Lim Jit Yang, advisor for Asia-Pacific oil markets at S&P Global. “As demand improves, this could cause more oil products to be diverted into the domestic market, with crude runs improving amid a slight increase in product exports.”
Shenghong and ZPC’s contribution to imports

Shenghong Petrochemical, the latest refinery to have been added to the allocations list, together with Zhejiang Petroleum & Chemical, are expected to boost growth of crude imports in 2023.

Both the 320,000 b/d greenfield refining complex Shenghong Petrochemical in Jiangsu province and the 800,000 b/d ZPC will need more crude in 2023 as opposed to 2022. Shenghong, which started commercial operations in November 2022, will require more feedstock for operations, while ZPC will need more crudes after kicking off its fourth 200,000 b/d CDU at end-September 2022.

Shenghong’s refinery was allocated 8 million mt of crude import quotas in the new batch, about half of its ceiling volume of 16 million mt/year, compared with a ceiling quota of 15.89 million mt/year in 2022.

The refinery imported around 3 million mt of crudes in 2022, S&P Global data showed, against its first round quota allocation of 7.95 million mt.

At the same time, three Shandong-based independent refineries, which had a combined ceiling quota of 4.56 million mt/year, have been removed from the allocation list.

The three refineries, namely Haike Petrochemical, Kelida Petrochemical and Chengda New Energy, have had their respective CDUs mothballed by end-2022.

S&P Global expects China’s crude imports, excluding bitumen blend, to average 10.31 million b/d in 2023, or up on the year by an average of 225,000 b/d amid some destocking in H2, after two years of contraction.
Source: Platts