Lack of experience in local refining; export of refined oil suspended

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International Business Daily: Not long ago, the Ministry of Commerce allocated the first batch of export quotas for refined oil products under the processing trade program for 2017. A total of 12.4 million tons were allocated in this batch, a decrease of 40.76% compared to the same period last year. Of this amount, 3.65 million tons were gasoline, 5.25 million tons were diesel, and 3.5 million tons were aviation fuel; no quotas for naphtha exports have been allocated yet. Xu Peng, an analyst at Jinchuang, said that the companies allocated export quotas this time are only CNPC, Sinopec, CNOOC, and Sinochem; local refineries are not on this list of qualified companies, which confirms the previous rumors regarding the cancellation of export quotas for local refineries. This means that the right granted to local refineries in 2016 to export refined oil abroad is temporarily suspended. In December 2015, Heze Dongming Petrochemical obtained its first export quota of 10,000 tons of gasoline, marking the beginning of a new era in which local refineries began to participate in the export of refined petroleum products. By 2016, the number of local refineries that applied for export quotas had increased to 12, with a total of 1.675 million tons in quotas allocated. According to Jinchuang, the actual volume exported was nearly 1 million tons, representing an implementation rate of around 60%. As the export of refined products from local refineries was still in its exploratory phase, and affected by various factors, progress in exports was slow during the first half of the year; it was only after some experience was gained that exports began to increase gradually in the second half of the year. **To encourage the export of refined oil products, since November 2016, restrictions on such exports have been further relaxed, and full tax rebates have been reinstated for exports via general trade. According to JLCC, some of the key enterprises have applied for 1 million tons of general trade export quotas. Furthermore, market experts say that the general trade method may be allocated only to four state-owned oil companies such as CNPC. Local refineries export refined oil primarily in accordance with the \"Notice on Issues Concerning the Temporary Permission for Eligible Refining Enterprises to Carry Out Business Involving the Import of Crude Oil, Its Processing, and Re-export of Refined Oil.\" The term \"temporary\" takes into account the possibility that such exports by local refineries can be halted at any time if problems arise, though they can also be resumed or continued. Xu Peng learned from industry insiders that the Ministry of Commerce may have doubts regarding the profitability and risk resistance of local refineries when it comes to direct exports. Although a few refineries such as Jingbo Petrochemical have established specialized import and export companies in Singapore, they lack sufficient professional talent and experience in exporting; in fact, some refineries have never even dared to attempt export operations. On the other hand, after local refineries lose their eligibility for direct exports, they may turn to the four major agency companies to handle exports on their behalf. With the introduction of export tax rebate policies, the proportion of exports conducted under normal trade terms is likely to increase gradually. Moreover, there are no restrictions on the source of crude oil used for processing finished oils; therefore, even if local refineries are prevented from exporting directly, it might still be possible to channel their resources abroad by signing supply agreements with major enterprises. From the perspective of the overall development of the market, overseas markets facilitate Chinese companies’ resource integration in the international arena, thereby enhancing their overall resource strength. A manager at a refinery said, “If export quotas are completely removed, this portion of refined oil might be directed toward domestic sales, thereby blocking local refineries’ ability to use exports to alleviate sales pressure.” State-owned enterprises will once again monopolize the export of refined oil products; local refineries that wish to export such products will have to do so in partnership with state-owned enterprises, which will reduce the profitability of these local refineries to some extent. Accordingly, with the support of the restoration of the export tax rebate policy, state-owned enterprises will reap greater benefits from the export of refined oil products. ” Xu Peng said that China’s refined oil industry is currently in a critical period of market-oriented transformation, with a series of policies being introduced, which have a profound impact on the market. In the coming years, the situation of an oversupply of refined oil products in China will continue, and exportation is one of the effective ways to address this issue. Even if the export quotas for local refineries are removed, state-owned refineries will face increased export demands; therefore, the upward trend in refined oil exports in 2017 will not change.