Argus China Petroleum News and Analysis on Oil Markets, Policy and Infrastructure
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Argus China Petroleum News and analysis on oil markets, policy and infrastructure Volume XII, 1 | January 2018 Yuan for the road EDITORIAL: Regional gasoline The desire to avoid tax has been a far more significant factor underlying imports markets are so far unmoved by a of mixed aromatics than China’s octane deficit. potential fall in Chinese exports The government has announced plans to make it impossible to buy or sell owing to stricter tax enforcement gasoline without producing a complete invoice chain showing that consumption tax has been paid, from 1 March. And gasoline refining margins shot to nearly $20/bl, their highest since mid-2015. Of course, Beijing has tried to stamp out tax evasion in the gasoline market many times before. But, if successful, this poses Mixed aromatics imports 2017 an existential threat — to trading companies and the blending firms that use ’000 b/d Mideast mixed aromatics to produce gasoline outside the refining system, largely avoiding US Gulf 4.39 the Yn2,722/t ($51/bl) tax collected on gasoline produced by refineries. Around 22.59 300,000 b/d of gasoline is produced this way. And that has caused the surplus that forces state-owned firms to market their costlier fuel overseas. Europe But there is little panic outside south China, where most blending takes place. 77.69 The Singapore market is discounting any threat that a crackdown on tax avoidance might choke off Chinese exports — gasoline crack spreads fell this month. China’s prices are now above those in Singapore, yet its gasoline exports show no sign of letting up. Most of China’s mixed aromatics come from Asia-Pacific, where refiner- Asia-Pacific ies are running flat out. Supply from European refineries is shrinkingsee ( chart). 130.84 China has long had an octane shortage, partly because its manufacturing sector absorbs so much naphtha. The problem became more acute with the introduction of the China 5 gasoline standard, which cut manganese and sulphur content, further lowering the octane rating of gasoline. But China’s resilience to a halt in mixed aromatics imports has vastly improved in the past 18 months. Were China to halt imports of mixed aromatics from March — and loadings data suggest this may well happen — its new fleet of naphtha reformers should forestall any domestic fuel supply crisis. Refiners have been adding butane-fed alkylation and isomerisation units, too, producing still more high-octane components for the gasoline pool. And local governments are stepping up their scrutiny of ethanol blending in gasoline, which will also mitigate the octane shortfall. China imported CONTENTS around 200,000 b/d of mixed aromatics with an octane rating of around 99 last year. But, over the course of 2017, refiners opened 250,000 b/d of naphtha reform- High stocks pressure demand 2 ing capacity — more than enough to replace those imports. Surplus ends gasoline boom hopes 3 Technology key to tax crackdown 4 Money matters Export quotas adjust to new policy 5 The devil will, as ever, be in the detail. Blending firms are hunting for loopholes. ‘Non-state’ import quota swells 6 The central government will need co-operation from local administrations to ensure Refiners turn to Mideast producers 7 that the invoice system is strictly enforced and officials are not paid to turn a blind Expansions drive storage growth 8 eye. One way of achieving this would be to allow revenue-starved provinces to PdV woes raise Jieyang concerns 9 keep some or all of the consumption tax revenue they collect, rather than remit- Company restructuring continues 10 ting it to the centre. Beijing is wary that this would further skew the imbalance China turns to LNG amid shortages 11 between wealthy regions, where car ownership is highest, and poorer ones in which Products 12-16 vehicle penetration is relatively slight. But the central government should set aside Crude data 17-27 these concerns. It would be relatively straightforward to redistribute tax revenue Refinery throughputs 28-30 from other sources collected centrally. But it is likely to prove impossible to collect Import/export data 31-44 consumption taxes unless provincial bureaucrats climb on board. Copyright © 2018 Argus Media group Argus China Petroleum January 2018 DEMAND High stocks pressure December demand Crude output fell back to October Chinese apparent oil demand fell last month as refiners digested high stocks. But levels, which were the lowest demand growth over the whole year was nearly double that of 2016. since the 2009 financial crisis Apparent oil demand, the sum of crude production and net oil imports, fell to 12.04mn b/d in December from nearly 13mn b/d in the previous month, and averaged 12.7mn b/d for the year. Crude output last month fell back to October levels, which were the lowest since the 2009 financial crisis. Dominant upstream firm PetroChina hopes to revive production this year, but it is unclear how realistic this will be. But demand last year grew by 6.3pc from 2016 levels, with rising imports more than offsetting declining crude production see( table). Shandong crude balance December crude imports were down by 900,000 b/d — with Shandong prov- ince, centre of the country’s independent refining sector, accounting for 35pc of mn bl Shandong bonded crude stocks (LHS) mn b/d 18 Shandong crude imports (RHS) 3.6 the decline. Liaoning, where another two large independents, Huajin and Panjin 3.4 16 Northern Asphalt, are based, also cut imports in December, mainly from Iraq and 3.2 14 Oman. And imports to Fujian on the southeast coast fell by a hefty 230,000 b/d 3 12 2.8 from November levels, as state-owned Sinochem carried out maintenance at its 2.6 10 240,000 b/d Quanzhou refinery. Quanzhou has reopened this month. 2.4 8 Iraq accounted for the most precipitous decline in supply month on month, 2.2 6 2 more than halving to 470,000 b/d. This comparison is skewed by record receipts Jan Apr Jul Oct Jan of more than 1mn b/d in the previous month. Kuwaiti deliveries to south China 17 18 also fell. Guangdong province, dominated by state-controlled Sinopec’s refineries, cut imports of heavy sweet grades by around 150,000 b/d month on month, with imports from Angola declining by 100,000 b/d, but increased imports of medium sour crude by 230,000 b/d. Deliveries of Venezuelan crude to Guangdong province rose by 90,000 b/d to nearly 500,000 b/d in December, despite Venezuelan production problems. Mixed aromatics imports ’000 b/d The concertina effect 450 Crude stocks in bonded storage tank farms around Shandong’s coastline, where 400 350 trading companies hold crude before selling it on to independents, fell from over 300 17mn bl in October, when many refiners were close to exhausting their import 250 200 quotas, to 13.8mn bl last month. Tight diesel supplies and a spike in gasoline 150 margins encouraged crude buying last month. 100 But port stocks began to tick higher again this month, reflecting both Decem- 50 0 ber’s lower imports and a drop in withdrawals by refiners see( graph). Diesel Oct Jan Apr Jul Oct Jan Apr Jul Oct 15 16 17 margins are coming down, and gasoline has retreated from its highs. These factors, as well as the closure of many businesses for the lunar new year public holidays from 15 February, are likely to drive crude runs lower next month. And that should cause bonded crude stocks to rebuild, with vessel tracking data China apparent demand mn b/d indicating a substantial increase in January deliveries. Dec Nov 2017 ±% 17/16 China’s net oil product imports rose to 410,000 b/d last month, boosted by record imports of mixed aromatics. Many gasoline blending companies feared that Net imports 8.33 9.20 8.95 11.1 the government would ban the use of untaxed mixed aromatics in gasoline Crude 7.92 8.85 8.33 9.7 production from 1 January, and maximised imports last month to get blendstocks Products 0.41 0.35 0.62 28.2 in ahead of the ban. Imports last reached comparable levels in April last year, Production 3.71 3.77 3.78 -3.6 when rumours of a ban on mixed aromatics first surfaced. Beijing subsequently Apparent 12.04 12.97 12.74 6.3 demand confirmed that the new gasoline invoicing system will come into effect from 1 Refinery runs 11.56 12.03 11.33 5.7 March. South China is now awash with mixed aromatics, traders say. The arrival of so much in December added pressure to gasoline margins and kept exports high. State-run refiners also exported large amounts of ultra-low sulphur diesel last month, boosting domestic prices. Combined gasoline, diesel and jet fuel exports set a fresh record of 1.2mn b/d in December. Copyright © 2018 Argus Media group Page 2 of 46 Argus China Petroleum January 2018 PRODUCTS Surplus dashes gasoline boom hopes Independent refinery utilisation China’s independent refiners are slashing product prices and cutting runs to rates are starting to fall, in maintain their competitiveness with state-owned refining companies. response to weakness in gasoline Gasoline refining margins rose strongly this month after the government announced plans for a supposedly foolproof system of logging tax invoices that may make it uneconomic to use imported mixed aromatics as a blendstock. The move is chiefly aimed at gasoline blending companies in south China, but refiners Shandong arbitrage in Shandong fear it will also increase their consumption tax payments.