Analyst sees lag in Chinese market for imported petroleum products

May 30, 2002
Earlier excitement over China's promise to open its market to more imports of lighter petroleum products besides fuel oil is fading after a slow start and a fast shuffle by Chinese authorities.

By OGJ editors

HOUSTON, May 30 -- Earlier excitement among international marketers over China's promise to open its market to more imports of lighter petroleum products besides fuel oil—as its price for membership in the World Trade Organization—is fading after a slow start and a fast shuffle by Chinese authorities, said a market analyst.

The result may be fewer imports of petroleum products into the Chinese market this year, said Fereidun Fesharaki, president and founder of Honolulu-based Fesharaki Associates Consulting & Technical Services (FACTS) Inc.

Obligations, delays
"China has two obligations related to imports of refined products under WTO: increasing the import quota each year by 15% and allocating 20% of the import quota to companies other than designated state oil companies," Fesharaki said.

At the time of its entry into WTO last December, China also promised to lift its "temporary" ban on imports of foreign gasoline and diesel, imposed in 1998 to protect its domestic refineries.

Instead, Fesharaki said, Chinese officials waited 4 months before finally issuing a detailed 2002 import quota for refined products at the end of April.

Of the total 420,400 b/d of imported petroleum products authorized under this year's quota, 80% will be brought into China by four firms designated by a government commission as the official state oil trading companies: —China National Chemical Import & Export Co. (Sinochem), United International Petroleum & Chemicals Co. Ltd. (Unipec), China National United Oil Co. (Chinaoil), and Zhuhai Zhenrong Co.

However, Fesharaki said, competition for the remaining 20%, or 85,000 b/d, also is open to "any other Chinese state and local oil company other than the four designated state oil trading companies." That includes other large Chinese firms such as state-owned China National Petroleum Corp. (CNPC), its PetroChina Co. Ltd. subsidiary, and China Petrochemical Corp. (Sinopec).

"Before all the details became available, the speculation was that the 85,000 b/d quota would be equally split between gasoline and diesel that was to be imported by foreign companies, which would have a significant impact on China's product trade. That did not happen," said Fesharaki in a May report. "It is clear now that the majority of the 85,000 b/d goes to fuel oil."

Because China already is the second largest importer of fuel oil in Asia, behind Singapore, he said, the 25%, or 79,000 b/d, of fuel oil imports allocated to "nonstate" importers will have minimal impact on that market, especially if divided among many competitors.

The 2002 gasoline import is restricted to a "meager" 5,000 b/d, allocated entirely to the four designated state companies that also get 70% of the allotted 20,000 b/d of light diesel imports and all of the 18,000 b/d of waxy vacuum gas oil and atmospheric gas oi, which are normally used as refinery feedstock in China.

Imports decline
With the late start and China's "unique definition" of state oil trading companies with the largest quota, imports of petroleum products into China may actually decrease this year, said Fesharaki, an economist specializing in oil and gas market analysis and the downstream petroleum sector, with special emphasis on the Asia-Pacific region.

Among the four designated state trading companies during the first quarter of this year, "gasoline imports were zero, and light diesel imports were only 4,000 b/d, lower than the 6,000 b/d imported during the first quarter of 2001 [and] far below their quotas," he said.
"If the past is any guide," said Fesharaki, the four companies "may or may not import gasoline and diesel to the fullest extent permitted by the quota, perhaps not even close"—especially if under government orders to protect Chinese refiners.

Because of its slow start toward ramping up its imports this year, Fesharaki said, "China would have to import an average of over 25,000 b/d [of] light diesel—or a total of 50,000 b/d if waxy oil is included—and nearly 350,000 b/d of fuel oil [through] December to be able to use up the entire quota."However, if China imports its full 2002 quota of gasoline, waxy oil, and light diesel, he said, "Sinopec and CNPC-PetroChina will be under substantial pressure to lower the growth of their crude runs. If this happens, as compared to 2001, the result will be more imports of not only gasoline and gas oil but also fuel oil, owing to lower-than-normal crude runs."

Increasing runs
Analysts at Energy Security Analysis Inc. (ESAI), Boston, recently said they expect Chinese refiners to increase their runs in order to prevent a jump in gas oil imports. An early growing season in China had already bolstered diesel demand in the agricultural sector, resulting in increased refinery runs, they said (OGJ Online, Apr. 11, 2002).

"In response to these pressures, several Chinese refineries have announced run increases ranging up to 17% from first quarter levels, which will produce a large surplus of gasoline for the Singapore market," said Rick Mueller, analyst with ESAI.

"January saw [Chinese] gasoline exports reach their lowest level in over a month, but in February exports nearly doubled," Mueller said. "We expect gasoline exports to rise still further through the second quarter."

Import licenses
Chinese officials started accepting applications for import licenses from private companies following its entry into the WTO in early December (OGJ Online, Dec. 11, 2001). Within the final weeks of 2001, they issued fuel oil import licenses to 52 Chinese companies.

Sinopec earlier announced plans to build 450 retail stations with foreign companies this year, the first of about 1,500 such sites to be built with Royal Dutch/Shell Group, ExxonMobil Corp., and BP PLC over the next 3 years (OGJ Online, Mar. 21, 2002).

Under terms of China's entry into the WTO, foreign firms would be allowed to own up to 49% of retail marketing ventures for petroleum products within 3 years. China also agreed to open its oil wholesale markets 5 years after its entry into WTO.

In the first 11 months of last year, China imported 16.08 million tonnes of fuel oil, up 56% from the previous year, while domestic production during the period fell by 9.8% to 16.75 million tones (OGJ Online, Jan. 10, 2002).