There is trouble brewing in the Chinese teapot refining industry. Since a liberalisation drive in 2015 allowed the network of private refiners dotted across China’s eastern coastline to import crude directly (based on strict government-issued quotas), the industry has proliferated quickly and wildly. Regulation was loose to begin with and therefore unable to keep up with the new explosion of activity. Fiscal and operational indiscipline set in, as the teapots indulged in a wild scramble that changed China’s fuel balance. But a crackdown has begun. The latest victim is the most high profile one yet – Liaoning Bora Enterprise Group, one of the largest of all teapots – and the consequences of the ongoing drama could shape and reshape all of China’s teapots.
The rise of Chinese private refiners has a rich history that is linked to the delicate state-capitalist balance that China has attempted to thread since Deng Xiao Peng’s economic reform pragmatism of the 1980s. That liberalisation turned China into a manufacturing powerhouse, with thousands upon thousands of factories springing up across the coastline, producing everything from plastic toys to synthetic fabrics to solar panels that were shipped worldwide through giant ports. At that point, supply chains in China’s manufacturing industries were fairly specialised. Raw materials were imported, converted and then exported as finished products. But even within the confines of communism, capitalist tendencies sprung up. The manufacturing entrepreneurs gradually realised that they could greatly boost profit margins and diversify operations if they exerted greater control over their supply chain. So companies that were dependent on hydrocarbon-based raw materials – petrochemicals, textiles, plastics, fertilisers, paints – starting setting up oil refineries of their own, instead of being beholden to state oil refiners for supply. The first private refineries were simple affairs – straightforward CDUs that processed light crudes straight mainly for naphtha, hence the name ‘teapots’. As time went by, sophistication set in. Some began installing more advanced technology such as hydrocrackers to process heavier (and therefore cheaper) crudes. Gradually this changed the makeup of China’s fuel markets. In parallel with the vast processing capacity added by state refiners Sinopec and Petrochina, the teapots were producing increasing quantities of gasoline and diesel. Bit by bit, this surge in crude capacity flipped China into a net exporter of certain fuels, which had ramifications across the Asia-Pacific refining industry across the 2000s.
Up until 2015, teapot refiners were forbidden from procuring crude supplies on their own. But a liberalisation drive change that, with China’s central government introducing a crude import quota system for private refiners that allowed direct sourcing for the first time. Since then, growth in teapot refining (a term that is increasingly incorrect) has been explosive, rivalling even China’s state-owned giants. But with that growth has come mischief. Environmental standards and rules were flouted as teapots expanded their operations. And – even more egregious in the eyes of the Party – taxation loopholes were highly exploited to boost profits. Much of this lies in the fault of loose regulation that allowed the industry to get ‘too big for its britches’, prompting government clampdowns and the introduction of new rules to curb such flouting. It is part of a drive by the Party to re-assert control over an economy that it views as too liberalised, with the tech and finance sectors also coming under increased scrutiny. As just as Alibaba’s Jack Ma was humbled by Xi Jin Ping’s forces, so too have the teapots.
Already in 2021, teapot refineries in Shandong – home to one of the largest concentrations of teapots in China – were brought to heel with the introduction of new financial, fiscal and environmental regulations that all refiners had to sign up to. And then in August, the tax probe initiated against Liaoning Bora Entreprise culminated in a management takeover by government officials from Panjin City, ahead of even heavier possible repercussions such as heavy fines and insolvency. Although Bora is not the only refiner in Panjin being targeted, it is by far the most high profile. With a total crude processing capacity exceeding 400,000 b/d, Bora is one of China’s largest teapots with assets valued at over US$14 billion. In 2019, Bora broke grown on a US$2.5 billion petrochemicals plant in a joint venture with US chemicals giant LyondellBassell Industries – then the largest petrochemicals investment project by far by a teapot refiner. The amount of unpaid taxes is undisclosed but it said to be ‘vast’ and dating back several years. But insolvency may not be the answer sought by the party. Bora is a major employer in Panjin and a collapse could lead to a huge financial and workforce risks. Instead, the government is attempting to restructure Bora while reassuring investors and preserving operations in a continuation of Bora’s own efforts: in July 2021, the company had already sold its stake in a chemicals unit to raise cash. It is unknown at this point what Bora’s fate is, but it is definitely true that a once-jewel of teapot refiners is now severely tarnished.
The fallout of Liaoning Bora Entreprise Group is being closely watched by traders and processors that have a stake in China’s downstream industry. It is clear from Beijing’s actions that it will no longer tolerate fiscal abuses or the expansion of private firms into conglomerates that could threaten state entities (as well as wealthy individuals building up cults of personalities). But is also clear that Beijing cannot just wipe out the teapot refining industry. There is too much at stake, as the teapots in Shandong and Liaoning now account for a quarter of the country’s overall refining capacity, and have deep integration with crucial industries downstream of petrochemicals and fuels. But the Party can bring them to heel.
If the threat of tax probes and government investigations aren’t enough, then the Party has an even more potent weapon: crude import quotas. Beijing has already begun scaling this back, with the largest round of quota approvals in July being the smallest since 2015. The makeup of the quota allocations is also interesting: some old, more established private refiners haven’t been awarded any volumes this year, while some of the newer generation of teapots – dubbed teapots 2.0 – have been receiving regular new quotas. All this is important because it affects China’s overall appetite for imported crude, particularly lighter grades that have higher yields for petrochemicals feedstock. This could affect everything from US shale exports to freight rates originating from China. After several years in a free-for-all (and rather profitable) wilderness, the crows are coming home to roost for China’s teapot refiners. Some may survive, some may not. But those that remain will live in caution, since the Party is now watching.
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After the OPEC+ club met on September 1st, and confirmed that it would be sticking to its plan of increasing its crude supply by 400,000 b/d a month through December, China made a rather unusual announcement. It announced that it was going to release some crude oil from its strategic petroleum reserves, selling it to domestic refiners that were grappling with crude’s heady price rise over 2021. The release of strategic oil reserves isn’t news in itself. What is news is that the usually secretive China did it and did it publicly.
And it did it to send a message to OPEC+: attempts to create artificial scarcity to maintain crude prices will not be tolerated. China has a right to feel that way. Even though great strides have been made to ease the effects of the Covid-19 pandemic worldwide, the virus is still exerting major effects on the global economy. Not least a massive ripple through the health of global supply chains that has seen the price of almost everything – plastics, semiconductors, agricultural commodity, lumber, steel – spike due to supply issues. In some cases, the prices of raw materials are at historic highs. Crude oil is still nowhere near its peak of above US$100/b, but it is high enough to be concerning, especially since it is happening within a major inflationary environment. And for a manufacturing-heavy economy like China, that matters. That matters a lot. So China’s National Food and Strategic Reserves announced that it would be releasing some of the country’s crude stocks to ‘better stabilise domestic market supply and demand, and effectively guarantee the country’s energy security’, a month after the country’s producer price inflation – ie. the cost of manufacturing – hit a 13-year high.
China made good on that promise, releasing 7.38 million barrels from its stockpile to domestic bidders on September 24 with more tranches expected. This was the first ever recorded release from China’s Strategic Petroleum Reserves (SPR), which began back in 2009 in serendipitous response to crude oil prices exceeding the US$100/b mark for the first time in 2008. But curiously, it may not have been the first ever release. So secretive is the SPR that China does not reveal the size of the reserve, although analysts have estimated it at some 300-400 million barrels with total capacity of 500 million barrels using satellite imaging. It has been speculated that batches of crude from the SPR have been released before on the quiet. But this is the first time China has gone public. Compared to the country’s overall oil consumption, 7.38 million barrels is small, almost tiny. And even if additional supplies are released, it will not make a major impact on China’s oil balances. But the message is what is important.
It is a message that China is not alone in sending. US President Joe Biden has already called on OPEC+ to accelerate its supply easing plans, given indications that the crude glut built up over 2020 has been all but erased. It is a notion that would be supported by some OPEC+ members – Russia, Mexico, the UAE – but so far, the discipline advocated by Saudi Arabia has held. The US too has attempted to release of its own crude reserve stocks – the largest in the world with a capacity of 727 million barrels – but this was also in response to the devastating impact of Hurricane Ida. India, China’s closest analogue to size and stage, has been complaining too. As a major oil importer and with a shakier economic situation, India is particularly sensitive to oil price swings. US$70/b is way above what New Delhi is comfortable with. But since India’s appeals to OPEC+ have fallen on deaf ears, it is attempting domestic directives instead. India’s state refiners have been ordered to reduce crude purchases from the Middle East, but with supply tight, there aren’t many other people to buy from. India has also been selling oil from its strategic reserve – officially stated to be for clearing space to lease storage capacity to refiners – although since India is more transparent about these announcements, the announcement isn’t as surprising.
Will it work? At least immediately, no. Crude prices did come under pressure in the wake of China’s announcement, but then recovered with Brent hitting US$75/b. But the fact that China timed the announcement of the September 24 auction to coincide with peak global trading time and with a lot of details (again an unusual move) shows that Beijing is serious about wielding its strategic reserves as weapons. If not to moderate crude prices, then to at least stabilise it. But this is a war of attrition. China may very well have a planned schedule to release more crude reserves over 2021 and 2022 if prices remain high, but its supplies are finite. And they will have to eventually be replenished, possibly at an even higher cost if the attempt to quell crude price inflation fails. Thus far, the details of the SPR release hint that this is a tentative dip in the pool: the volume of 7.38 million barrels was far lower than the 35-70 million barrels predicted by some market participants. And because successful bidders can lift the oil up to December 10, it seems unlikely that a second auction for 2021 is in concrete plans at this point.
But, at the very least, the message has been sent. Beijing has a tool that it can wield if crude prices get out of hand, and it is not afraid to use it. The first step might have been small, and it is a giant leap in what mechanics are available to influence crude prices. And as history has proven, China can be very quick to scale up and very single-minded in its approach. Over to you, OPEC+.
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In 2021, the makeup of renewables has also changed drastically. Technologies such as solar and wind are no longer novel, as is the idea of blending vegetable oils into road fuels or switching to electric-based vehicles. Such ideas are now entrenched and are not considered enough to shift the world into a carbon neutral future. The new wave of renewables focus on converting by-products from other carbon-intensive industries into usable fuels. Research into such technologies has been pioneered in universities and start-ups over the past two decades, but the impetus of global climate goals is now seeing an incredible amount of money being poured into them as oil & gas giants seek to rebalance their portfolios away from pure hydrocarbons with a goal of balancing their total carbon emissions in aggregate to zero.
Traditionally, the European players have led this drive. Which is unsurprising, since the EU has been the most driven in this acceleration. But even the US giants are following suit. In the past year, Chevron has poured an incredible amount of cash and effort in pioneering renewables. Its motives might be less than altruistic, shareholders across America have been particularly vocal about driving this transformation but the net results will be positive for all.
Chevron’s recent efforts have focused on biomethane, through a partnership with global waste solutions company Brightmark. The joint venture Brightmark RNG Holdings operations focused on convert cow manure to renewable natural gas, which are then converted into fuel for long-haul trucks, the very kind that criss-cross the vast highways of the US delivering goods from coast to coast. Launched in October 2020, the joint venture was extended and expanded in August, now encompassing 38 biomethane plants in seven US states, with first production set to begin later in 2021. The targeting of livestock waste is particularly crucial: methane emissions from farms is the second-largest contributor to climate change emissions globally. The technology to capture methane from manure (as well as landfills and other waste sites) has existed for years, but has only recently been commercialised to convert methane emissions from decomposition to useful products.
This is an arena that another supermajor – BP – has also made a recent significant investment in. BP signed a 15-year agreement with CleanBay Renewables to purchase the latter’s renewable natural gas (RNG) to be mixed and sold into select US state markets. Beginning with California, which has one of the strictest fuel standards in the US and provides incentives under the Low Carbon Fuel Standard to reduce carbon intensity – CleanBay’s RNG is derived not from cows, but from poultry. Chicken manure, feathers and bedding are all converted into RNG using anaerobic digesters, providing a carbon intensity that is said to be 95% less than the lifecycle greenhouse gas emissions of pure fossil fuels and non-conversion of poultry waste matter. BP also has an agreement with Gevo Inc in Iowa to purchase RNG produced from cow manure, also for sale in California.
But road fuels aren’t the only avenue for large-scale embracing of renewables. It could take to the air, literally. After all, the global commercial airline fleet currently stands at over 25,000 aircraft and is expected to grow to over 35,000 by 2030. All those planes will burn a lot of fuel. With the airline industry embracing the idea of AAF (or Alternative Aviation Fuels), developments into renewable jet fuels have been striking, from traditional bio-sources such as palm or soybean oil to advanced organic matter conversion from agricultural waste and manure. Chevron, again, has signed a landmark deal to advance the commercialisation. Together with Delta Airlines and Google, Chevron will be producing a batch of sustainable aviation fuel at its El Segundo refinery in California. Delta will then use the fuel, with Google providing a cloud-based framework to analyse the data. That data will then allow for a transparent analysis into carbon emissions from the use of sustainable aviation fuel, as benchmark for others to follow. The analysis should be able to confirm whether or not the International Air Transport Association (IATA)’s estimates that renewable jet fuel can reduce lifecycle carbon intensity by up to 80%. And to strengthen the measure, Delta has pledged to replace 10% of its jet fuel with sustainable aviation fuel by 2030.
In a parallel, but no less pioneering lane, France’s TotalEnergies has announced that it is developing a 100% renewable fuel for use in motorsports, using bioethanol sourced from residues produced by the French wine industry (among others) at its Feyzin refinery in Lyon. This, it believes, will reduce the racing sports’ carbon emissions by an immediate 65%. The fuel, named Excellium Racing 100, is set to debut at the next season of the FIA World Endurance Championship, which includes the iconic 24 Hours of Le Mans 2022 race.
But Chevron isn’t done yet. It is also falling back on the long-standing use of vegetable oils blended into US transport fuels by signing a wide-ranging agreement with commodity giant Bunge. Called a ‘farmer-to-fuelling station’ solution, Bunge’s soybean processing facilities in Louisiana and Illinois will be the source of meal and oil that will be converted by Chevron into diesel and jet fuel. With an investment of US$600 million, Chevron will assist Bunge in doubling the combined capacity of both plants by 2024, in line with anticipated increases in the US biofuels blending mandates.
Even ExxonMobil, one of the most reticent of the supermajors to embrace renewables wholesale, is getting in on the action. Its Imperial Oil subsidiary in Canada has announced plans to commercialise renewable diesel at a new facility near Edmonton using plant-based feedstock and hydrogen. The venture does only target the Canadian market – where political will to drive renewable adoption is far higher than in the US – but similar moves have already been adopted by other refiners for the US market, including major investments by Phillips 66 and Valero.
Ultimately, these recent moves are driven out of necessity. This is the way the industry is moving and anyone stubborn enough to ignore it will be left behind. Combined with other major investments driven by European supermajors over the past five years, this wider and wider adoption of renewable can only be better for the planet and, eventually, individual bottom lines. The renewables ball is rolling fast and is only gaining momentum.
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