South China's non state-owned, independent refiners and importers have started importing a rare cocktail blend called "power kerosene" -- a blend of kerosene and gasoil -- as they look at ingenious ways to make up for their lack of access to crude oil and boost margins in the face of rising fuel oil prices.
"It's real. One such cargo is arriving this month," a Guangzhou-based trader, who declined to be named, said.
Even though independent refineries, commonly known as teapot refineries in China, are an indispensable part of the country's oil industry, they lack competitiveness and suffer from negative margins as state-owned oil giants control their crude supply.
State-owned Sinopec and PetroChina, the country's top two refiners, are authorized by the government to import crude and reallocate it to these private refiners. But according to a recent report, the independent refiners get crude oil equal to only around 10% of their capacity.
These refiners supplement their feedstock needs with straight-run fuel oil. But this model is not always sustainable, especially when fuel oil prices go up, as has been happening recently, and in the face of the high fuel oil consumption tax Beijing imposes.
The price of imported 3.5% sulfur fuel oil on a ship-to-ship basis in South China's Huangpu port has risen 4.95% between July 1 and December 10, from $441.79/mt to $463.64/mt, according to Platts data. Meanwhile, the price of FOB Singapore 180 CST high sulfur fuel oil has risen 17.76% from $430.83/mt to $507.34/mt over the same period, the data showed.
End-users, including teapot refineries, also need to pay Yuan 812/mt as consumption tax for using fuel oil.
Refiners are, meanwhile, not able to pass these costs to consumers as that would erode their competitiveness, given that PetroChina and Sinopec anyways price their fuels below international levels.
China's 60-plus teapot refineries have a total capacity of over 80 million mt/year (1.6 million b/d), accounting for one quarter of the country's total, according to an estimate by an official from the All-China Federation of Industry and Commerce. While a bulk of these refineries are located in east China, some are located in south China.
These refineries process crude or fuel oil into gasoline, gasoil and other refined products, which they sell to industrial users and local wholesalers, who then sell it on to fuel retailers.
In China, only companies approved by the government and granted import licenses can import gasoil, while state-owned China National Aviation Fuel Group is the only organization allowed to import jet/kerosene to supply the aviation industry.
"Power kerosene" falls into no-mans land as it is neither kerosene nor gasoil, and importers and refiners have been taking advantage of this loophole.
The cargoes are usually brought to the private refineries in south China, where kerosene and gasoil are extracted from the blend and sold to the local markets.
"Teapot refiners and Chinese oil trading houses are using their offshore companies to buy the cargoes from international traders," a Singapore-based Western trader said.
Companies that are based in Singapore and actively engage in trading middle distillates include, among others, BP, Chevron, ConocoPhillips, Vitol, PetroChina, Reliance, and Shell.
Many of the traders that Platts spoke to said that they have heard of "power kerosene" that the Chinese are importing, but noone would confirm if their company was involved in any such trade.
According to sources, the Chinese have been buying this cocktail blend from Western trading houses and oil majors based in Singapore on a fixed price basis, instead of the typical floating price.
"Even if they pay a few dollars above MOPS (Mean of Platts Singapore) price, they will still make money," a Chinese trading source said, explaining that by importing "power kerosene", these refiners straight away save Yuan 812/mt, or $18.90/barrel, that they would pay if they had imported straight-run fuel oil as feedstock for processing into gasoil.
Some of the parcels are sold as blended cargoes while some Western traders sell kerosene and diesel stored in separate tanks, which the Chinese buyers blend onboard the vessel en route to China.
According to sources, about 100,000 mt of "power kerosene" has been imported into Guangzhou every month in the past four-five months, bringing total imports to around 500,000 to 600,000 mt. Some industry sources estimate the volume could have hit 1 million mt.
This is not the first time that teapot refiners have had to circumvent Chinese customs regulations to get their hands on feedstock, or refined products, to continue operating as a viable business.
A special blend of fuel oil mixed with crude oil was the rage about three to four years ago, with the blended oil containing as much as 70% crude oil.
Still, the latest spate of "power kerosene" imports is expected to be curtailed soon. Sinopec is believed to have filed a formal protest to the customs department, which means the loophole will likely be plugged soon.
When contacted, a trader at Unipec (the trading arm of Sinopec) declined to comment.
--Calvin Lee
"It's real. One such cargo is arriving this month," a Guangzhou-based trader, who declined to be named, said.
Even though independent refineries, commonly known as teapot refineries in China, are an indispensable part of the country's oil industry, they lack competitiveness and suffer from negative margins as state-owned oil giants control their crude supply.
State-owned Sinopec and PetroChina, the country's top two refiners, are authorized by the government to import crude and reallocate it to these private refiners. But according to a recent report, the independent refiners get crude oil equal to only around 10% of their capacity.
These refiners supplement their feedstock needs with straight-run fuel oil. But this model is not always sustainable, especially when fuel oil prices go up, as has been happening recently, and in the face of the high fuel oil consumption tax Beijing imposes.
The price of imported 3.5% sulfur fuel oil on a ship-to-ship basis in South China's Huangpu port has risen 4.95% between July 1 and December 10, from $441.79/mt to $463.64/mt, according to Platts data. Meanwhile, the price of FOB Singapore 180 CST high sulfur fuel oil has risen 17.76% from $430.83/mt to $507.34/mt over the same period, the data showed.
End-users, including teapot refineries, also need to pay Yuan 812/mt as consumption tax for using fuel oil.
Refiners are, meanwhile, not able to pass these costs to consumers as that would erode their competitiveness, given that PetroChina and Sinopec anyways price their fuels below international levels.
China's 60-plus teapot refineries have a total capacity of over 80 million mt/year (1.6 million b/d), accounting for one quarter of the country's total, according to an estimate by an official from the All-China Federation of Industry and Commerce. While a bulk of these refineries are located in east China, some are located in south China.
These refineries process crude or fuel oil into gasoline, gasoil and other refined products, which they sell to industrial users and local wholesalers, who then sell it on to fuel retailers.
In China, only companies approved by the government and granted import licenses can import gasoil, while state-owned China National Aviation Fuel Group is the only organization allowed to import jet/kerosene to supply the aviation industry.
"Power kerosene" falls into no-mans land as it is neither kerosene nor gasoil, and importers and refiners have been taking advantage of this loophole.
The cargoes are usually brought to the private refineries in south China, where kerosene and gasoil are extracted from the blend and sold to the local markets.
"Teapot refiners and Chinese oil trading houses are using their offshore companies to buy the cargoes from international traders," a Singapore-based Western trader said.
Companies that are based in Singapore and actively engage in trading middle distillates include, among others, BP, Chevron, ConocoPhillips, Vitol, PetroChina, Reliance, and Shell.
Many of the traders that Platts spoke to said that they have heard of "power kerosene" that the Chinese are importing, but noone would confirm if their company was involved in any such trade.
According to sources, the Chinese have been buying this cocktail blend from Western trading houses and oil majors based in Singapore on a fixed price basis, instead of the typical floating price.
"Even if they pay a few dollars above MOPS (Mean of Platts Singapore) price, they will still make money," a Chinese trading source said, explaining that by importing "power kerosene", these refiners straight away save Yuan 812/mt, or $18.90/barrel, that they would pay if they had imported straight-run fuel oil as feedstock for processing into gasoil.
Some of the parcels are sold as blended cargoes while some Western traders sell kerosene and diesel stored in separate tanks, which the Chinese buyers blend onboard the vessel en route to China.
According to sources, about 100,000 mt of "power kerosene" has been imported into Guangzhou every month in the past four-five months, bringing total imports to around 500,000 to 600,000 mt. Some industry sources estimate the volume could have hit 1 million mt.
This is not the first time that teapot refiners have had to circumvent Chinese customs regulations to get their hands on feedstock, or refined products, to continue operating as a viable business.
A special blend of fuel oil mixed with crude oil was the rage about three to four years ago, with the blended oil containing as much as 70% crude oil.
Still, the latest spate of "power kerosene" imports is expected to be curtailed soon. Sinopec is believed to have filed a formal protest to the customs department, which means the loophole will likely be plugged soon.
When contacted, a trader at Unipec (the trading arm of Sinopec) declined to comment.
--Calvin Lee
