China’s Oil Refining Industry: From Quantity to Quality

Market Dynamics

Starting from 1978, China’s oil refining industry experienced four major development stages: After an early stage, the scale of SOE’s refining capacity expanded rapidly in the 2020s due to rising demand and extensive new construction (esp. Sinopec and PetroChina). Afterwards, the industry developed steadily, and so-called Teapot refineries entered the picture as China opened the crude oil import quota to private refineries in 2015. Nowadays, the capacity of private refineries accounts for around 30% of overall 920 million tons. Recently, the government has been starting to limit capacity expansion due to environmental and profitability concerns, but still targets to reach a capacity of 1 billion tons by 2025.

Four key trends are shaping the industry in the coming years:

• Capacity Integration: New refining projects with a capacity less than 10 million tons will be strictly limited, and small teapots will either be gradually combined or eliminated.
• Consumption Shift: China’s oil demand is expected to peak in 2030 and then to gradually decrease. Thus, the oil consumption focus gradually shifts from fuels to feedstock for petrochemical production (e.g. Naphtha).
• Refining-Chemical Integration: Flat demand for transportation fuels and rising need for petrochemical raw materials also leads to integrated refinery developments being encouraged by the government – oriented towards demand, profitability and sustainability (China targets to be carbon neutral by 2060).
• Import Decrease: China’s crude oil demand mainly relies on import and its dependency continued to increase until 2021, when crude oil imports decreased for the first time in the past 20 years.

Government Policies

Some of these trends are encouraged and supported by government policies in China’s various regional and industry-specific 14^th Five-Year Plans as well as in the Action Plan for Carbon Dioxide Peaking Before 2030.

• Limited Capacity Expansion: “Until 2025, domestic primary processing capacity of crude oil should not exceed 1 billion tons and capacity utilization rate for main oil products should be >80%.”
• Stricter Control on Pollution: “Improve the ability of utilizing and disposing hazardous wastes such as spent catalyst.”
• More Support on Pilot Refineries: “Develop an array of pilot enterprises with ecological guiding force and core competence in petrochemical, chemical and other industries.”
• “Refining-Chemical” Integration: “Effectively promote ‘fuel decreasing & chemical increasing’ and extend the industrial chain of the petrochemical industry.”

Already being one of the major oil refining countries worldwide, these developments will further alter China’s industrial structure and domestic petrochemical capabilities on its way towards self-sufficiency and a greener future. But capacity upgrading and integration will not always be easy: Refining clusters in Shandong, Liaoning and Zhejiang will feel the effects the most.