Broken ice

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On October 14, 2015, when the ship Xuanwu Lake, carrying 56,000 tons of crude oil, slowly berthed at the port of Dongying in Shandong Province, Indonesia, the chains that had been around Yatong Petrochemical Co., Ltd. (hereinafter referred to as “Yatong Petrochemical”)’s neck were finally cut. 　　“This is the first batch of crude oil imported by Yatong Petrochemical on its own, following its acquisition of the qualification and quota to import 2.76 million tons of crude oil. ”Tang Xingdang, general manager of Yatong Petrochemical, said that this is an important step for the company as it moves into the international market. 　　For many years, what has put local refineries at risk has been the near absence of oil to refine. In 2000, **21 local refining enterprises in Shandong (hereinafter referred to as “local refiners”) were retained, and a total quota of 1.222 million tons was allocated to them. Yet today, the capacity of local refineries in Shandong, which struggle to survive in such challenging conditions, has reached 130 million tons, accounting for 70% of the country’s total local refining capacity. Lacking the qualifications to use and import crude oil, and with existing quotas being utterly insufficient, local refiners are forced to feed inferior fuel oil to the newly installed processing units. 　　Since June 2015, the oil monopoly system began to show signs of cracking – seven local refineries, including Yatong Petrochemical, Dongming Petrochemical, Lijin Petrochemical, and Baota Petrochemical, were granted the permission to import crude oil. Meanwhile, four companies—HSBC Petrochemical, Wanda Tianhong Chemical, Shouguang Luqing Petrochemical, and Jingbo Petrochemical—have also submitted applications and are now in the public announcement phase. To date, domestic refineries across the country have secured a total of 49.1888 million tons in import crude oil allocation quotas. 　　However, domestic refineries that have obtained quotas and qualifications for importing crude oil have also paid a heavy price. 　　Breaking free from constraints In the view of the Tangxing Party, obtaining crude oil quotas and usage rights is merely like having the chains around one’s neck cut, but the shackles still haven’t been completely removed. Due to the lack of qualifications for crude oil imports, the oil tanker “Xuanwu Lake” still has to have CNOOC import the cargo on behalf of Yatong Petrochemical. “Through large state-owned enterprises as intermediaries, the process is lengthy and costly, with control still remaining in the hands of others.” 　　After obtaining its quota in August this year, Yatong Petrochemical sought to break free from another constraint by applying for the \"qualification for the import of crude oil through non-state-owned traders.\" On October 22, an approval from the Ministry of Commerce finally granted it full autonomy in import operations; Yatong Petrochemical’s next oil tanker is set to arrive at Dongying Port in mid-November. 　　Huaxiang Petrochemical, a wholly-owned subsidiary of Yatong Petrochemical, is one of the 82 local oil refining enterprises retained nationwide in 2000. After years of development, the enterprise now has a primary processing capacity of 3 million tons per year, with an overall processing capacity reaching 6 million tons per year. 　　However, in 2000, the National Development and Reform Commission allocated a total of 1.222 million tons in existing quotas to 21 local refineries in Shandong, amounting to only 50,000 tons per refinery on average, with no increase at all over those 15 years. This creates a huge discrepancy with the company’s actual production capacity. 　　To survive, Yatong Petrochemical had to process fuel oil. So-called fuel oil is, quite simply, the residue left over after crude oil has been processed. A technical supervisor at Yatong Petrochemical explained to the Economic Observer that while the price of fuel oil is not low, the processing costs are 50 yuan per ton higher than those of crude oil. Moreover, in order to meet emission standards, companies must invest heavily in environmental protection equipment. More importantly, the quality of the refined products obtained from fuel oil is significantly lower than that of crude oil, which has become the biggest drawback affecting the sales of locally produced oil. 　　Based on a savings of 50 yuan per ton in processing costs, Yatong Petrochemical can save 138 million yuan annually thanks to its 2.76 million-ton quota for imported crude oil. Liu Aiying, president of the Shandong Province Refining and Chemical Industry Association, pointed out that if there is a crude oil import quota system in place, local refineries would not need to pay consumption tax when purchasing crude oil, which could save them around 1,000 yuan per ton of crude oil. Based on this calculation, Yatong Petrochemical can save another 2.76 billion yuan. This also highlights the original difficulties faced by local refineries. 　　In fact, Yatong Petrochemical is just a microcosm of local refineries across the country. For over a decade, in order to obtain oil rights and break free from the shackles that constrained them, many local refineries have even resorted to exchanging equity for oil rights, sacrificing their autonomy in order to survive. This also provided CNPC and CNOOC, which acquired its shares, with an opportunity to compete with Sinopec for the Shandong market. 　　Once upon a time, on the oil map, Shandong was always Sinopec’s territory. The crude oil quotas for local refineries are allocated by Sinopec on their behalf, and the refined oil products must be sold through Sinopec’s distribution network. Restricted at both ends, local refineries are often in opposition to Sinopec. In 2004, Sinopec invested in a large-scale oil refining project with a capacity of 10 million tons in Qingdao, but it demanded that Shandong Province shut down 10 local refineries in order to free up a market capacity of 10 million tons. As soon as the news became known, 21 companies in Shandong urgently jointly submitted a petition to the relevant authorities, complaining about Sinopec’s various unfair competitive practices such as reducing the amount of crude oil allocated to local refineries and imposing arbitrary fees. 　　Starting in January 2008, CNOOC took the lead in launching an offensive against Shandong. CNOOC first signed a strategic cooperation agreement with Shandong Province; thereafter, it used crude oil as leverage to acquire equity in local refineries, purchasing Dongying Petrochemical, CNOOC Asphalt, and Shandong Haihua. Together, these entities possess a processing capacity of 7.6 million tons. CNOOC formulated a plan to build refinery projects with a capacity of 10 million tons, using these local refineries as a foundation in order to make use of the crude oil production capacity from the Bohai Sea oil fields. 　　In 2010, CNPC also entered the competition in Shandong, joining this energy struggle. Acquiring local refineries allows for rapid market penetration in a short period of time. CNPC also first entered into a partnership with Shandong Province, and subsequently chose to form a joint venture with Dongming Petrochemical, the largest local refinery in Shandong, to build the Rizhao–Dongming oil pipeline, thereby supplying crude oil to Dongming Petrochemical. At that time, rumors circulated that CNPC might acquire a stake in Dongming Petrochemical, but there is still no final decision on this matter. 　　For a time, Shandong became home to the three major oil giants, as well as the largest and most powerful local refineries in the country, resulting in an unprecedentedly fierce competition in the oil sector. This pattern arises precisely because local refineries do not have the right to use crude oil or to import it. 　　A high price to pay: For over a decade, Shandong’s local refineries have repeatedly applied to **for permission to increase their quotas and obtain the necessary qualifications for importing crude oil, but each application has been dismissed without any response. After Guo Qingshu took office as governor of Shandong Province in June 2013, he advocated for oil rights for local refineries in Shandong at various meetings of the State Council, explicitly expressing the hope to obtain an import quota of 20 million tons first. 　　Subsequently, media reports indicated that ** in Shandong Province took the lead in collaborating with local refineries and PetroChina to establish a joint venture; the three parties jointly applied to ** for policies regarding crude oil allocation. 　　In October 2013, the **Energy Bureau issued an urgent document titled \"Qualification Requirements for Refining Companies to Import Crude Oil (Draft for Comment)\”), aiming to establish principles and plans for the allocation of imported crude oil to local refineries. It proposed lifting the restrictions on local refining companies in Shandong Province to process imported crude oil, granting them the authority to import 10 million tons of crude oil per year through non-state-owned trade channels. However, as soon as this plan was proposed, it faced strong opposition from the two major oil companies, and its implementation was delayed for a long time. 　　Until April 2015, the media reported that Wanda Tianhong Chemical Co., Ltd. (hereinafter referred to as “Tianhong Chemical”) intended to have CNOOC take a 40% stake in the company in order to obtain 5 million tons of marine oil per year. 　　Finally, after two months and through efforts by various parties, Dongming Petrochemical, Shandong’s only locally-owned listed oil refinery, was the first to obtain the permission to import 7.5 million tons of crude oil. Subsequently, 7 companies including Yatong Petrochemical were granted the qualification to import crude oil. 　　An insider at Tianhong Chemical revealed that there have been no further reports recently regarding CNOOC’s investment in the company. 　　However, local refineries obtain the **allocated import crude oil quotas and qualifications, but at a high cost. The \"Notice on Issues Related to the Management of Imported Crude Oil Use\" stipulates that for units with a designed crude oil processing capacity of 2 million tons per year or less that are phased out, the quota for crude oil usage is equal to twice the actual processing capacity of those units being phased out; in other words, in principle, one ton of outdated production capacity phased out corresponds to one ton of crude oil quota (this quota may be increased accordingly in cases involving cross-provincial operations or no expansion). 　　To obtain oil rights, some must cut costs and eliminate outdated assets, while others have to invest money to acquire production capacity in order to do the same. This time, in order to obtain a crude oil quota of 2.76 million tons, Yatong Petrochemical had to shut down 2.3 million tons of outdated production capacity, retaining 3.5 million tons of production capacity. Among the capacity that was phased out, some came from the subsidiaries of Huaxiang, while another part consisted of one production unit each acquired from Shandong Shengkai and Longgang. The 3.42 million tons of production capacity that Tianhong Chemical has committed to phasing out consists of outdated facilities from other local refineries that were acquired. 　　Merging with other outdated production capacities requires huge amounts of capital, and eliminating such capacities also forces local refineries to make difficult sacrifices. Among the existing local refineries that have obtained oil processing rights, the retained capacity and the capacity that will be phased out are approximately in a 6:4 ratio. This means that in order to obtain oil rights, refineries must cut back on 40% of their outdated production capacity. 　　Shi Linlin, an energy analyst at Gold and Silver Island, pointed out that refinery capacity has been increasing over the years, yet efforts to phase out outdated production capacity have not yielded results. **There was a requirement to phase out refining capacity of less than 2 million tons by 2013, but due to protection from local authorities, this policy was never properly implemented in local refineries. Today, there is a severe overcapacity in the country’s refining industry; **they choose to trade the oil rights desired by local refineries in exchange for the outcomes they want. 　　At the same time, local refineries must also be brought under a **regulatory framework; they can no longer grow unchecked as they used to. According to the regulations, \"new oil-using enterprises must sign a commitment letter, pledging to strictly abide by the **refining industry policies; no new refineries or expansions may be carried out without approval from the investment authority under the State Council.\" 　　Liu Zhonghua, general manager of Dongming Petrochemical Sales Company, believes that currently the refined oil market is in a downturn. The operating rate of local refineries has remained at 30%-40% for years; therefore, shutting down some outdated production capacities has little impact on business performance. Companies have been using CNPC’s imported crude oil; phasing out production capacity and striving for oil rights is aimed at gaining greater autonomy so that the companies’ development can receive ** recognition. 　　But not all companies are willing to accept such a price in exchange for oil rights. A sector insider who wished to remain anonymous expressed skepticism, saying, “Although the market is sluggish in the short term and refineries are reluctant to expand, in the long run, once companies obtain quotas and qualifications for importing crude oil, will they face **stricter regulations and constraints?” 　　Furthermore, domestic refineries face uncontrollable market risks when importing crude oil independently from overseas. Yuan Chongjing, head of the sales department at Lijin Petrochemical, pointed out that the quality of imported crude oil varies greatly, and whether it is suitable for use in the company’s refining facilities represents a significant challenge. 　　Shi Linlin, an energy analyst at Jin Yin Dao, said that even if some local refining companies obtain oil rights, they may not necessarily use them, depending on the cost-effectiveness of imported crude oil. On the one hand, importing crude oil from abroad, including shipping costs and agency fees, makes the cost likely to exceed CNOOC’s offshore oil prices ； On the other hand, the time period is usually more than half a month as well, and one has to bear the risk of fluctuations in international oil prices at any time. 　　According to data from Business Society (a commodity data provider), since obtaining a quota of 5.3 million tons of imported crude oil in July 2015, Sinochem Hongrun has not used it to date. http://www.100ppi.com/news/detail-20151109-681713.html