BEIJING: Beijing will allow independent refineries to export refined fuel next year for the first time, sources said, freeing up 20 percent of China's refining capacity for sales abroad as the government aims to cut a local glut and boost investment.
The move will allow independent refineries, also known as "teapots" such as Dongying Yatong Petrochemical and Panjin Beifang Asphalt Fuel, to enter the lucrative international market for the first time, raising concerns about a fresh flood of excess diesel and other fuels into Asia.
Currently only state-owned refiners, Sinopec Corp and PetroChina and some smaller state oil firms are allowed to sell abroad.
In a rare meeting last week, attended by several provincial trade officials and teapot refinery executives, the Ministry of Commerce told the plants they can now apply for first-quarter fuel export quotas, according to three sources with direct knowledge of the matter.
"It's an encouraging development as we will be allowed the same playing field as the big firms to export fuel," said a refinery executive who was at the meeting.
The ministry did not immediately respond to requests for comment.
The move will likely add further pressure to Asian oil product prices that are already sagging under the weight of excess barrels from mega Middle Eastern plants.
China had this year also raised the dominant state refiners' export quotas for diesel, jet fuel and gasoline to thin swelling domestic inventories as refinery output outpaced demand in a cooling, manufacturing-heavy economy.
While it's not clear how many teapots will apply for permits, traders estimated it could mean an additional 3 million-5 million tonnes (24 million-40 million barrels) of products will be sold abroad next year, in addition to the roughly 30 million tonnes assigned to the country's state-owned refiners this year.
The combined exports of about 700,000 barrels per day (bpd) would be equivalent to nearly 7 percent of China's total oil use.
"The message has been sent that there will be no ceiling for the amount they (the teapots) want to ship out," said one senior trader who was briefed on the meeting.
"The curtain has been raised for the face-off between the big and small refineries."
The government, however, will police the new system by checking if shipments actually take place and withdrawing any permits that companies don't fully use, according to a briefing document on the meeting seen by Reuters.
Teapot exports will fall under the same category as that applied to state-oil companies' shipments, meaning they will be exempt from consumption and value-added taxes, the document also showed.
Some sources downplayed concerns about the impact of the potential onslaught of teapot exports, as most of the smaller refineries don't have facilities such as export terminals and lack experience dealing in the global market.
Coming after Beijing opened crude oil imports to independent refiners this year, the move towards fuel exports could pave the way for China's long-awaited crude futures contract, and eventually towards benchmark pricing for oil products, market participants say.
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