Explainer: How will China’s latest oil probe affect the world’s largest importer of crude?

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SINGAPORE (Reuters) – This year, the Chinese government has gradually stepped up control over its sprawling oil industry, strengthening its authority with new taxes on refined products while investigating crude imports from energy giants and refiners independent.

FILE PHOTO: A Sinochem logo is seen outside a Sinochem office building in Beijing, China February 21, 2017. REUTERS / Damir Sagolj

On Tuesday, the country’s leading economic planning agency gave five state-owned companies just two days to report on their historic use of imported oil, as part of a broader effort by the world’s largest oil importer to control inbound shipments as domestic supplies increase.

HOW IMPORTANT IS CHINA IN GLOBAL OIL MARKETS?

China is the world’s largest importer of crude oil and the second largest consumer after the United States. Chinese crude imports jumped 7.3% in 2020 – the only major market where demand for oil has increased during the COVID-19 pandemic.

Strong economic growth, new refining capacity and changes in fuel taxes could boost crude imports by 7.2 percent, or 775,000 barrels per day, up this year, said Seng Yick Tee, analyst at SIA Energy.

(Graphic: China’s record crude oil imports have exceeded domestic needs and generated an increase in fuel exports 🙂

But the country’s refining sector is grappling with overcapacity and excess fuel supplies that Beijing is keen to contend with. The authorities are also aiming to crack down on tax evasion, as well as the blending and sale of fuels that do not meet emission standards.

Guangdong province, China’s largest oil-consuming region, investigated the illicit trade in mixed fuels in February and arrested several people in connection with the investigation.

WHAT IS THE CRUDE IMPORT SURVEY?

Beijing is investigating whether Sinopec Group, China National Offshore Oil Corp (CNOOC), Sinochem Group, ChemChina, and China North Industries Group – which together account for over 60% of China’s total imports – have resold oil to other companies from the country. . It is also examined whether their imports have been processed in refineries under a toll system that reduces the tax burden on businesses.

The request for information is part of a larger investigation Beijing began earlier this year into a growing domestic fuel surplus and loss of tax revenue, in part due to the uncontrolled flow of imported crude oil to refiners. that do not fall under the country’s official quota system.

It follows a separate inspection by China’s National Development and Reform Commission (NDRC) in April of independent refiners in eastern Shandong Province who had vowed to shut down aging and inefficient facilities in exchange for obtaining import quotas.

(GRAPHIC: Evolution of Chinese crude transported by refiner in 2020 🙂

This inspection also covered the use of import quotas. Several independent factories in Shandong were found to have sold quotas to other refiners who were not qualified to process the imported crude.

WHAT IS THE QUOTA SYSTEM?

Since the end of 2015, China has authorized more than 40 independent refiners to process imported crude under a quota system. But the government found that smaller factories were sourcing additional crude oil and other raw materials such as diluted bitumen, in excess of quota limits, resulting in a glut of domestic fuel.

Beijing to start levying heavy taxes on imports of light cycle oil (LCO), mixed aromatics and diluted bitumen from June 12, a move that is expected to reduce fuel imports and improve sales and profits. interiors of local refiners.

WHAT IS THE IMPACT OF THESE PROBES ON THE OIL MARKETS?

China is expected to release a second batch of crude import quotas in the coming months, and these inquiries could prompt Beijing to cut volumes allocated to independent companies.

While this may dampen the appetite of independent buyers for more supplies, SOEs, which are not subject to quota management, should lead the procurement.

In December last year, China issued the first batch of crude import quotas for non-state companies at 122.59 million tonnes in 2021, up 18% from the first round of 2020.

Reporting by Chen Aizhu and Shu Zhang; Writing by Florence Tan; Edited by Kenneth Maxwell

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