The Fuse

International Implications of the Rise of China’s Teapot Refineries

by Nick Cunningham | September 14, 2017

In 2015, the Chinese government opened the door to small, independent refineries to import crude oil and compete with their giant state-owned national oil companies (NOCs). The policy change has had global implications, affecting crude and refined product trade flows. A new report from Columbia University’s Center on Global Energy Policy argues that the rise of China’s independent refineries is the most pivotal factor behind the sharp increase in Chinese crude oil imports over the past two years, as well as a signification reason why refining margins in Asia have deteriorated.

The rise of independent “teapot” refineries has led to China increasing its crude imports by more than 1 million barrels per day.

The rise of independent “teapot” refineries has led to China increasing its crude imports by more than 1 million barrels per day (mbd), which has helped soak up some excess barrels on the global market over the past two years. However, China’s independent refiners have exacerbated the glut in refined products, particularly for diesel, much to the chagrin of refiners elsewhere in Asia that are struggling with shrinking margins.

The rise of the “teapots”

Before 2015, the Chinese government tried to build up its national oil companies (NOCs)—large, state-owned behemoths that control much of the energy sector in China. In an effort to strengthen its national champions, longstanding government policy restricted crude access to independent refiners as a way of stifling competition. But beginning two years ago, Beijing took the opposite approach, hoping that competition would improve the performance of the NOCs.

China’s independent refineries, known as teapots, vary in size and structure, but the average capacity stands at about 70,000 barrels per day (b/d). Before 2015, they struggled from poor margins and restricted access to crude, putting them at the mercy of the NOCs. At the end of 2016, the Chinese government had approved quotas to 19 independent refineries, authorized to import 1.48 mbd of crude oil, adding a significant new source of demand on the global market. The crude imported by the teapots, for instance, exceeded the net crude imports of Spain in 2014, which Columbia University notes was the seventh largest importer at the time.

Teapots drive China’s oil imports, products exports

The independent refineries were responsible for the 14 percent surge in crude oil imports in China in 2016, the strongest growth rate since 2010, Columbia University wrote. The teapots also facilitated large increases in refined product exports.

The teapots facilitated large increases in refined product exports.

The refineries benefitted from favorable market conditions. The government gave them access to crude imports soon after oil prices collapsed, lowering their feedstock costs. At the same time, because prices for gasoline and diesel in China are regulated, the teapots could import cheap crude and then sell gasoline and diesel at above-market prices.

Profits soared for the teapots and their market importance grew. Collectively, the teapots account for a total refining capacity of 4.18 mbd as of 2015, or nearly a third of China’s total, up from just 10 percent in 2005.


The growth of China’s teapot refineries also resulted in higher refinery utilization rates. Refinery runs jumped by 380,000 b/d in 2016, for example. That led to a huge spike in China’s exports of gasoline and diesel, sparking a downward spiral in product prices in Asia. Diesel exports surged by 115 percent last year while gasoline exports jumped by 64 percent. The growth has continued through in 2017.

Diesel exports have grown at an explosive rate amid structural changes in the Chinese economy.

The exports of diesel have occurred at the same time structural changes are underway in the Chinese economy. The shift from heavy industry to consumption and services has translated into a slow move away from diesel and toward gasoline. Against this backdrop, diesel exports have grown at an explosive rate.

Consolidation coming in China’s downstream sector

The teapots thrived in 2015 and 2016, but the road ahead looks bumpier.

The teapots thrived in 2015 and 2016, but the road ahead looks bumpier. Crude oil prices are trading above $50 per barrel, erasing the gap between market prices and regulated prices gasoline and diesel. Beijing has also cut import quotas and zeroed out export quotas for refined products this year in order to gain more control over the independents. Some analysts fear the crackdown would amount to a rollback of the policy liberalization in the refining sector that began in 2015.

While Beijing hoped to drive reform through competition, the government has not abandoned its objective of having a strong downstream sector in the hands of the state. The use of import licenses, the Columbia University report argues, is intended to reward independent refineries that meet Beijing’s standards. The teapots that do not meet the requirements will be barred from obtaining an import license, and thus, will eventually have to be acquired or shut down. The result will likely force consolidation among the independents, seeking to promote a “smaller number of larger plants with higher utilization rates.”

Some analysts fear the crackdown would amount to a rollback of the policy liberalization in the refining sector that began in 2015.

“The government does not want dozens of refineries running at 40-50 percent capacity,” Erica Downs, the author of the Columbia University report, told the FT. “Beijing is correcting a course for an industry that has gotten out of control.” The consolidation effort appears to already be underway. In early September, the government of Shandong province, where most of the teapots are clustered, approved a plan to merge major teapots into one conglomerate in an effort to compete with the NOCs.

The consolidation of the independent refining sector will result in a handful of larger teapot refineries that compete alongside—but do not supplant—the NOCs. The policy still forces the NOCs to continue to become more efficient. At the same time, the best of the independents will continue to operate.

It is still unclear at this point if consolidation will halt China’s refined product export boom. Beijing’s new approach on import and export quotas could leave a vacuum in the refining sector, although the NOCs will probably step into the gap. The FT notes that newfound restricted access from Beijing has led to a glut of refined products trapped within China. But the NOCs are clamoring for higher export quotas in the fourth quarter. In that sense, there is probably some room for global competitors—whether from the Middle East or North America—to take advantage of the momentary setback for China’s refineries to compete for market share in Asia.