Sept. 25, 2016 3:49 a.m. ET
When oil ministers from the Organization of the Petroleum Exporting Countries gathered at the start of the oil-price crash two years ago to take stock of an industry in crisis, they banked on demand from Chinese state oil companies and Beijing’s efforts to fill the country’s strategic reserves to boost prices.
Today, OPEC is increasingly counting on a new and far less predictable force to increase exports: private oil refiners in China, known as “teapots,” whose demand for foreign crude is helping to reshape global oil markets.
As the oil bust shows little sign of reversing, independent refiners in China have emerged as perhaps the most important, and little-known, force in oil markets today. They accounted for the vast majority of the 13.5% surge in imports this year by China, which now rivals the U.S. as world’s largest crude importer.
A few years ago, private refiners were merely bit players in the state-dominated industry. Their origins were so humble that more than 20 years ago many relied on business models in which workers lined country roads in coastal Shandong province, south of Beijing, hawking gasoline directly from jerrycans, says Luo Wenbo, general manager of Sunshine Oil, the Singapore trading arm of Shandong Chambroad Petrochemical.
Now, the streets of Shandong are lined with gas stations owned by teapots—Chambroad alone owns around 200—and crude-oil imports to the province have soared more than 60% so far this year, leading to a weekslong queue of tankers at Shandong’s port of Qingdao this spring.
“All the teapot refineries, no matter how big they are right now, started with a humble beginning,” said Mr. Luo.
Winning these refiners over as new customers and securing market share in China has become an imperative for OPEC members, who gather in Algeria this week for a closely watched meeting that may yield clues on the cartel’s future output.
The 14-nation organization that controls a third of the world’s oil once helped set crude prices globally by regulating its production levels. But an American oil boom made OPEC’s output less crucial. It also reduced the U.S.’s oil imports, setting off a battle for market share elsewhere in the world—with China taking center stage.
Within OPEC, there is competition to tap teapots’ demand. In particular, Angola has benefited from offering Chinese teapots crude grades with lower sulfur content, which can be easier to refine. In the first eight months this year, China’s imports of Angolan crude rose 14.6% to more than 900,000 barrels per day, or around half of the West African nation’s total production.
By comparison, China’s imports from Saudi Arabia rose just 1% so far this year, to about 1.05 million barrels per day. Saudi Arabia has long preferred to deal with China’s state-run oil refiners such as China Petroleum & Chemical Corp., or Sinopec. Saudi Arabia tested the teapot market in April, selling one spot cargo to Shandong Chambroad Petrochemical, but hasn’t repeated the experiment.
The changes confronting OPEC and the industry show how policy moves by China’s government ripple globally. The new demand by China’s private refiners stems from a change in government policy last year, allowing them to begin importing foreign crude for the first time.
That effectively broke a monopoly by state-run oil giants over China’s imports. Since then, many have scoured oversupplied markets for deals, at times shirking OPEC powerhouses in the Middle East for Russian and other suppliers.
“For others it’s an opportunity; for OPEC it’s a challenge,” said Michal Meidan, a China analyst at consultancy Energy Aspects. “They are creating an opening for other suppliers, other traders, and OPEC has to rise up to that challenge.”
At a recent oil conference in Singapore, energy executives from the Persian Gulf to the U.S. packed in a hotel ballroom to hear from Zhang Liucheng, vice president for trading and marketing at Dongming Petrochemical Group, China’s biggest teapot refiner by capacity.
“Independent refiners are still much smaller than the state-owned enterprises but we are flexible and we can easily adjust to changes,” Mr. Zhang said.
China’s independent refiners have been big buyers of Russia’s oil. The latest customs data show Chinese imports of Russian crude in August soared 50% year-over-year to more than 1.1 million barrels per day, topping the Saudis that month as China’s biggest supplier.
The surge is partly due to less stringent terms imposed by the Russians, who allow refiners to make payments within four months of delivery, said Nelson Wang, an analyst at brokerage CLSA, instead of the typical one to two months required by Middle East suppliers.
Middle East suppliers such as Saudi Arabia and Iran are far more expensive and inflexible on pricing, said Dongming’s Mr. Zhang. “What the teapots care about most is still prices,” he said.
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