About 150,000 b/d of refining capacity could close in China by 2020, due to tight operating environment, according to a recent analysis from Wood Mackenzie.
“Chinese refineries did not face crude supply issues in 2018 but there were other challenges,” said WoodMac consultant Rui Hou.
In addition to squeezed margins due to higher crude prices and volatility in 2018, the independent refiners are additionally affected due to a new taxation system that requires online filing of fuel transactions. It raises input costs and the teapots have struggled to sell, which in turn lowers utilization affecting margins further.
On the other side, the state-owned refiners benefit with reduced competition leading to improved utilization and margins. Currently, average utilization for state-owned refiners is 78% and that for teapots is 58%. This compares with 90% in the US.
The quality parameters for refined products also are becoming stringent. At sea, China will extend three designated emission control areas along its entire coastline from January. In addition, the 0.5 wt % sulfur content limit is expected to be applied to vessels sailing within 12 nautical miles of the coast.
On land, the government will nationally enforce the China VI (equivalent of Euro 6) fuel specification for both gasoline and automotive diesel from next year. This demonstrates the strong commitment to fighting pollution from mobile sources.
The combined impact of these measures means Chinese refineries will need more investment and technology to upgrade and that is possible if prices are deregulated. A level playing field and tight operating environment will weed out inefficient plants, which could lead to the refining capacity closure.
