OPEC's Crude Is Too Sour for This Oil-Market Upstart

Are Oil Prices Poised to Go Higher Next Year?
  • High-sulfur crude not suitable for its refineries: Dongming
  • Chinese refiner gets more than 50% of oil from Africa, Latam

OPEC’s biggest producers are playing second fiddle to smaller suppliers in a coveted corner of the oil market.

Crude with a lot of sulfur, including supply from Saudi Arabia and Iran, is too sour to be processed easily at its plants, said Zhang Liucheng, director and vice-president at Shandong Dongming Petrochemical Group, the biggest among China’s private refineries. Most of the independent companies, which have been courted by sellers since they were granted access into international oil markets last year, are instead seeking ‘sweeter’ cargoes with lower sulfur content, he said.

Such crudes are typically pumped in regions such as Africa, Latin America and Russia, meaning producers there could gain the most from purchases by the private refineries, which now account for a fifth of demand in the world’s second-biggest oil consumer. The processors, known as teapots, have contributed to China’s record imports this year and helped revive global benchmark prices. Shandong Dongming says it’s open to buying cargoes from state oil companies or international trading houses.

“We did take a look at crude from Saudi Arabia but found its quality to be a bit too sulfurous and not economic to refine,” Zhang said in an interview in Singapore, adding that Iranian cargoes are also not suitable. “We have no preference when it comes to purchasing oil from state-owned producers and trading houses. State-owned sellers can provide secure supplies, while international traders can give us more flexibility in terms of prompt cargoes, financing and logistics.”

The company owns two refineries, one with processing capacity of 240,000 barrels a day in Heze in the eastern Shandong province, where most of the private processors are clustered, and another of 60,000 barrels a day in Lianyungang in Jiangsu province, according to its website. It is one of the firms that were granted approval to use foreign oil last year as part of the Chinese government’s efforts to liberalize its energy industry.

Shandong Dongming has bought about 5 million metric tons of overseas crude in the first eight months of 2016, versus a similar amount for all of last year, according to Zhang. It plans to fully use up its annual crude-import quota of 7.5 million tons, or about 150,000 barrels a day, in 2016. About a third of its purchases came from Africa, with similar amounts from South America and the Middle East, he said.

The company’s trading arm, Pacific Commerce Holdings Pte, on Tuesday signed a supply deal with Unipec, a unit of state-run China Petroleum & Chemical Corp., known as Sinopec, the world’s biggest refiner. Under the agreement, the private company will get 8 million barrels a year of overseas crude starting 2017 from the government-run firm.

Oil Deal

That’s the second such deal for Shandong Dongming, which also has a long-term supply agreement with BP Plc. It may use the crude from Unipec at its own refineries, or sell to one of the other processors that are part of an industry alliance, Wu Wei, deputy general manager of Pacific Commerce, said in Singapore on Tuesday.

While most independent refiners prefer low-sulfur crude varieties, that doesn’t mean the processors aren’t open to testing supplies from producers such as Saudi Arabia. The world’s biggest exporter has shipped oil to at least one of the companies this year, while Iran is said to be in talks with trader Trafigura Group to try and break into the market.

Brent crude, the benchmark for more than half the world’s oil, traded 0.9 percent higher at $47.69 a barrel by 6:04 p.m. Singapore time. While prices are up almost 30 percent this year, they are still less than half the level in mid-2014.

Infrastructure Investment

As Shandong Dongming buys more crude from overseas, it’s facing hurdles to sell its refined products abroad. It’s managed to export only “very little” of the 30,000 tons of diesel the government allowed it to ship earlier this year, according to Zhang. While the teapots have also received licenses to export fuel cargoes, a lack of facilities to transport products from plants to ports has hindered such plans.

Shandong Dongming hasn’t made any decision to invest in or expand infrastructure as its export quota is valid only for 2016, and the government hasn’t approved volumes for next year, Zhang said, adding that the private-refining industry wants more clarity from authorities on the matter so that they can make longer-term plans.

Fuel Discount

Gasoline that isn’t sent abroad is sold to state-run PetroChina Co. and Sinopec at 2,600 yuan a ton below retail prices, said Zhang. For diesel, the discount is 1,500 yuan a ton. The private refiners are still selling some products to government companies because they currently don’t have enough of their own pumps to directly supply retail customers, he said.

Shandong Dongming will have 150 to 200 retail pumps in nine provinces including Shandong and Jiangsu by the end of this year, and plans to operate about 1,000 stations in 3 to 5 years, according to Zhang.

“We want to be recognized as one of the significant players and we’re pushing for more equal opportunities for crude procurement and access to infrastructure and retail markets,” he said.

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