World's Hottest Oil Market Gets A Jolt From China's Taxman

(Bloomberg) -- Everyone wants a share of the world’s hottest oil market, including China’s taxman.

Purchases by the country’s independent refiners, granted permission last year to buy foreign crude, have soaked up some of the global oil glut and helped revive prices after the biggest collapse in a generation. Sellers from Saudi Arabia to BP Plc have been supplying the plants known as teapots, which account for a third of the nation’s processing capacity. Now a government tax crackdown threatens to constrain this new source of demand from China, which rivals the U.S. as the world’s biggest importer.

The emergence of the private refiners as major buyers of crude and exporters of refined products represents the biggest change in international oil markets since the U.S. shale revolution, according to Trafigura Group’s Asia head. Their future will be a hot topic at the annual Asia Pacific Petroleum Conference, which gathers traders, executives and bankers in Singapore this week. At stake is as much as 1.4 million barrels a day of demand, more than Saudi Arabia supplies to the world’s second-biggest user.

The government crackdown "is sort of a warning to independent refiners," said Wang Pei, a senior analyst at Unipec, the trading unit of China’s largest state-run processor, Sinopec. "It has been tough to implement proper tax compliance among independent refiners."

Teapots started getting licenses to import foreign crude last year as part of a government effort to boost private investment in China’s energy industry. The refiners previously had to rely on state-owned oil majors including PetroChina Co. and Sinopec for supplies of crude. They still have to adhere to a quota determining how much they can import.

Licenses Targeted

Now, the authorities are clamping down on anyone skirting the rules. The National Development and Reform Commission on Aug. 23 said the government will disqualify license applications or revoke import quotas if companies evade tax or falsify documents. Nobody replied to a fax seeking more details sent to China’s NDRC after regular working hours on Monday or answered calls to the press office.

While local authorities in Shandong province, where the refineries are clustered, will support the industry, import licenses granted by the government may drop by the equivalent of 400,000 barrels a day next year to 1 million barrels amid the crackdown on tax evasion, according to consultant Energy Aspects Ltd.

Processing rates at teapots "will be curbed by the government’s regulation on taxation and operations," Zhang Liucheng, director and vice-president of Shandong Dongming Petrochemical Group, the biggest Chinese private refiner, said in an interview in Singapore on Monday. The company is tax complaint, having paid 1.7 billion yuan ($255 million) in tax last year and 2.6 billion yuan in the first eight months of 2016 as it started refining imported crude, Zhang said.

Fair Market

"We independent refineries as well as privately owned companies in China won’t ask for any preferential policies from the government," Zhang said, adding that the impact on output from the tax crackdown won’t be as significant as many people expect. "What we want is just a fair market in importing, exporting, sales and taxation."

Other headwinds for the processors include tougher competition among independent refiners as well as fuel-quality upgrades and environmental-protection requirements, he said.

The allure of the teapots was highlighted earlier this year when one of them purchased a spot cargo from Saudi Arabia, which broke from its usual policy of selling only under long-term contracts. Iran’s state-run oil company is said to be in talks to sell more crude to Trafigura in a strategy that may help it break into the market to supply the independent refiners.

Biggest Change

"The advent of the Chinese private refiners as major buyers of crude and exporters of product has been the biggest change in the market since the shale revolution," said Chin Hwee Tan, the CEO for Asia-Pacific at Trafigura. “We’re doing significant business with them.”

China’s oil imports have averaged an unprecedented 7.5 million barrels a day so far this year, boosted by the teapots, government data show. The purchases, along with production outages in Nigeria and Canada, helped benchmark Brent crude jump almost 90 percent from mid-January to June.

Brent crude was little changed at $47.65 a barrel by 10:31 a.m. Singapore time on the London-based ICE Futures Europe exchange. Prices were at more than $115 a barrel in mid-2014.


View Full Article


Generated by readers, the comments included herein do not reflect the views and opinions of Rigzone. All comments are subject to editorial review. Off-topic, inappropriate or insulting comments will be removed.