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China's Clampdown On Small Refiners Could Impact Oil Demand

In a bid to reduce refining overcapacity, China is stepping up pressure on independent refiners to uproot illegal tax practices and check if outdated facilities have been closed as required, Bloomberg reported on Tuesday, quoting sources with knowledge of the plans.

China’s National Development and Reform Commission (NDRC) is launching this week inspections and audits at more than 50 private oil refiners, most of which are located in the Shandong province in the east—the home of the independent refiners often referred to as ‘teapots’.

The authorities will check if the private refiners are complying with all laws and regulations when importing and later reporting and booking processing rates and taxes, Bloomberg’s sources said.

The refiners, which are allowed by the government to import crude under government-issued quotas, will also be checked for allegations of tax evasion. According to Bloomberg’s sources, Chinese authorities will also check if some small refiners in the Shandong province had closed in 2020 as required.

A wide clampdown on private Chinese refiners could impact the crude import rates of the world’s top oil importer, considering that the independents have grown to account for around one-fifth of China’s crude oil imports since they were first allowed to purchase oil from abroad in 2015.

Some smaller independent refiners in the Shandong province have struggled after huge private refineries such as Hengli Petrochemical and Zhejiang Petrochemical began operations in 2019.

At the same time, China has seen an overcapacity of refining facilities and increased exports of refined oil products, which depress the refining margins in the rest of Asia.

Surging Chinese oil product exports are set to put pressure on refiners elsewhere in Asia as the global refining industry struggles with overcapacity.

Refiners around the world have been announcing permanent closures of refinery capacity since the pandemic crushed fuel demand worldwide, and significant overcapacity still remains, the International Energy Agency (IEA) said last November.

By Tsvetana Paraskova for Oilprice.com

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