China to surpass US as world's top refiner in 2022 with 18.8 mil b/d capacity: ETRI

China's refining capacity is expected to hit 937 million mt/year, or 18.81 million b/d, overtaking the US to become the world's top refiner in 2022, the country's oil giant CNPC's Economics & Technology Research Institute said on April 12.

At the same time, the refining sector is facing the headwind of high feedstock prices amid the Russia-Ukraine conflict, while the resurgence of COVID-19 dampens domestic oil demand this year.

Adding to the rising market share of new energy vehicles, or NEV, China' oil demand peak would arrive earlier than expected, experts said during ETRI's report release.

The country's refining capacity is expected to rise by around 25.6 million mt/year in 2022, mainly due to PetroChina's new Guangdong Petrochemical with a capacity of 20 million mt/year and Sinopec Hainan Petrochemical's 5 million mt/year expansion, which are to be delivered this year, Wang Jing, senior economist with ETRI said.

Meanwhile, three independent refineries in Shandong province with a combined 7.4 million mt/year capacity will be mothballed. These refineries are: 3 million mt/year Chengda New Energy, the 2.2 million mt/year Haike Petrochemical and the 2.2 million mt/year Kelida Petrochemical.

These private refineries hold a total of 4.56 million mt/year of crude import quotas, which will be transferred to the under-construction integrated 20 million mt/year Yulong Petrochemical, according to the province's refining capacity consolidation plan.

China has speeded up the phasing out of inefficient refining capacities and consolidation of the small-scale private refining sector by tightening supervision of their operations and tax collection. As a result, the proportion of the sector has fallen to 21% of China's refining capacity in 2021 from 23% in 2019, while the share of integrated private complexes rose to 8% from 5% in the same period, Wang said.

"Not only the inefficient capacities from the independent sector are needed to be ruled out, but also those in the state-run sector, to keep the competitive ones," Ke Xiaoming, a senior expert with Sinopec's Economics & Development Research Institute, said during a panel discussion of the release.

China is aiming to cap the country's primary refining capacity at 1 billion mt/year, or 20 million b/d, by 2025 while boosting utilization rates of its refining facilities to above 80%, according to the national carbon peaking action plan released by the State Council in October.

Moreover, a severe market environment would be an opportunity to phase out capacity, Ke added.

Current challenges

China's refining sector is facing multiple challenges as the over-$100/b crude prices cut refining margins, while domestic demand was hit by COVID-19 lockdowns in the first-tier cities and industrial production hubs.

Amid crude price volatility and weak domestic demand, "refineries have to manage their operation paces of stockpiling, feedstock procurement and refining plans according to market changes in order to survive," Yu Jiao, vice dean of Sinopec's EDRI, said.

"The gross refining margins have fallen into negative territory for some time since March," Wang said.

This compared with record-high refining margins at Yuan 381/mt ($53/mt) in 2021, when China's refiners operated at a record high run rates of 77.2% amid strong demand recovery, according to ETRI.

Independent refineries in Shandong have cut their average utilization rate below 50% as of April from about 57% in March, according to local information provider JLC. State-run refineries have also cut their April throughput by 30,000-100,000 mt this month from their initial plans amid wider transportation restrictions to cap the spreading of omicron variant, S&P Global data showed.

Ke called for increasing oil product export quota allocations to offset stock pressures on refineries in the current market situation.

"It's clear that domestic demand for oil products will remain weak in general this year," Ke added.

S&P Global Commodity Insights Platts Analytics has lowered its projection of China's oil demand growth for 2022 by around 210,000 b/d or a less than 2% year-on-year increase from its initial estimation of 3.5%, according to its monthly report dated April 8.

Beijing has set to cut China's oil product exports since late 2021, and slashed quota allocation by 55.9% year on year to 13 million mt in the first batch for 2022.

Oil demand to peak earlier

Looking forward, China's demand for oil products is likely to peak sooner than expected as NEVs expand market share sharply, which would force refiners to adjust their strategy in advance, Ke said.

The State Council's action plan also targeted peak oil consumption for land-based transportation by 2030 and stated that 40% of new vehicles should be powered by clean fuels in 2030.

ETRI in late December forecast China's oil consumption to peak at 780 million mt/year by 2030, falling to 380 million mt/year in 2050 and to around 230 million mt/year in 2060 as demand for transportation fuel drops.

"We had expected that the NEV will account for 25% of the total vehicle sales in 2025, but it already increased to 28% as of March," said Ke.

The retail sales of NEVs in China expanded 137.6% year on year to 445,000 units in March to account for 28.2% of the sales of passenger vehicles, according to the latest data released by China Passenger Car Association.

This came when passenger car sales in the world's biggest car market tumbled 10.5% year on year to 1.57 million vehicles in March, CPCA data showed.