Argus Global Market - Special Report

China’s ‘teakettle’ refiners cut runs on diesel losses

Capacity at China’s small “teakettle” refineries is growing, even though they have had to cut throughputs because of losses in the diesel market.

The capacity of China’s teakettle refineries is officially 600,000 b/d, with most in Shandong province in the northeast. But capacity at Shangdong’s 21 small independent refineries alone has already hit 660,000 b/d and is growing, according to an Argus survey (see table). Several have a capacity of less than 10,000 b/d, but the biggest can run at 75,000 b/d. Some are surprisingly sophisticated and have secondary units, especially residue catalytic cracking.
China’s total refining capacity is 6.2mn b/d, excluding 660,000 b/d of teakettles. The teakettle refineries are switching away from gasoil production. In the past, they concentrated on selling low-quality gasoil to farmers and fishing boats. But state-administered diesel prices below the cost of feedstock have caused losses, forcing many to shut down or run at as low as 30pc of capacity.

The teakettles’ preferred feedstock used to be straight-run M-100 fuel oil from Russia’s far east, and 180cst Venezuelan, South Korean and Singapore straight-run fuel oil. But high import costs are reducing demand for fuel oil as a feedstock, reflected in a 16pc fall in Chinese first-quarter fuel oil imports compared with a year earlier. Premiums to Singapore prices for Russian fuel oil delivered to China have dropped by $10/t since the start of this year.

Some teakettle refiners are turning to acidic crude from CNOOC’s Bohai bay fields. CNOOC sells them heavy crude at around $47/bl, well below the price of other grades because of its poor quality. CNOOC, which previously had no refining capacity, is the major shareholder in five teakettle plants. The switch to relatively cheap local heavy crude feedstock is enabling the teakettle plants to make more asphalt, encouraged by strong demand for road building and local shortages. They can sell asphalt produced from heavy crude at 4,000 yuan/t ($81/bl), prompting some to expand capacity.

Beijing had wanted to close refineries with a capacity of less than 40,000 b/d. The rail system has refused to transport crude and products for teakettle plants since mid-2003, and the central government told PetroChina and Sinopec to stop supplying them with crude. This has had limited effect given their preference for refining straight-run fuel oil or crude from CNOOC. The teakettles’ ability to produce asphalt is leading central government to rethink. China’s asphalt imports grew by 42pc in the first quarter compared with a year earlier to 54,000 b/d.

Shandong teakettles

b/d

Region

Plants

Capacity

Residue cat. cracking

He Ze

1

58,000

27,000

R Zhao

1

6,000

3,000

Qing Dao

1

48,000

10,000

Yan Tai

1

19,000

0

Wei Fang

3

128,000

46,000

Zi Bo

2

75,000

25,000

Dong Ying

7

172,000

90,000

Bin Zhou

2

105,000

18,000

De Zhou

1

38,000

12,000

Ji Nan

2

12,000

4,000

Total

21

661,000

235,000

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