China looks to independents to fill supply gap

China’s usual summer power shortages, coupled with a major drought, is making for tighter fuel supply.  The country’s two major state-owned oil firms China National Petroleum Corp. (CNPC) and China Petrochemical Corp. (Sinopec) are looking toward independent refiners or “teapot refiners” to make up for the shortfall. Diesel usage is up both because of the drought which is affecting hydroelectric output and because of increased demand from industrial users.  The government has responded to the diesel shortage by placing a ban on exports.  Independent refiners normally process straight run fuel oil, but CNPC and Sinopec are selling crude oil to the independents in an effort to help boost their output.  Independent refiners currently hold approximately 20-25% of the country’s refining capacity.  Analysts like Zhang Liu Tong, a consultant with FACTS Global Energy, state that, “China’s refining capacity itself is actually enough to meet demand.  More production from teapots helps but the root of the problem is the incentives.”   Government fuel regulations mean refiners often have to sell their fuel at a loss in order to control inflation and these controls cause lower profitability and periodic product shortages.  (June 3, 2011)