How will China’s latest oil probe affect the world’s biggest crude importer?

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SINGAPORE — This yr China’s authorities has been regularly ramping up scrutiny of its sprawling oil trade, reinforcing its authority with new taxes on refined merchandise whereas investigating crude imports by state vitality giants and unbiased refiners.

Final Tuesday, the nation’s prime financial planning company gave 5 state-owned firms simply two days to report on their historic use of imported oil, a part of a broader effort by the world’s largest oil importer to regulate inbound shipments as home provides swell.

HOW IMPORTANT IS CHINA IN GLOBAL OIL MARKETS?

China is the world’s largest crude oil importer and the No. 2 client after america. China’s crude imports surged 7.3% in 2020 – the one main market the place oil demand grew throughout the COVID-19 pandemic.

Robust financial progress, new refining capability and modifications in gas taxes may spur crude imports 7.2%, or 775,000 barrels per day, larger this yr, stated Seng Yick Tee, SIA Power analyst.

However the nation’s refining sector is saddled with overcapacity and extra gas provides which Beijing is eager to sort out. Authorities additionally intention to clamp down on tax evasion, in addition to the mixing and sale of fuels that don’t meet emission requirements.

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Guangdong province, China’s prime oil-consuming area, led the probe into illicit trades of mixing fuels in February and detained a number of folks in reference to the investigation.

WHAT IS THE CRUDE IMPORT INVESTIGATION ABOUT?

Beijing is trying into whether or not Sinopec Group, China Nationwide Offshore Oil Corp (CNOOC), Sinochem Group, ChemChina, and China North Industries Group – which collectively make up greater than 60% of China’s whole imports – have resold oil to different firms within the nation. Additionally beneath examination is whether or not their imports have been processed at refineries beneath a tolling scheme that reduces the businesses’ tax burden.

The knowledge request is a part of a broader probe the Beijing started early this yr right into a rising home gas surplus and misplaced tax revenues, partly due to unchecked flows of imported crude oil to refiners which can be exterior the nation’s official quota system.

It follows a separate inspection by China’s Nationwide Growth and Reform Fee (NDRC)in April of unbiased refiners within the jap province of Shandong that had pledged to shut ageing, inefficient amenities in return for profitable import quotas.

That inspection additionally lined utilization of import quotas. A number of unbiased crops in Shandong have been discovered to have offered quotas to different refiners who not certified to course of imported crude.

WHAT IS THE QUOTA SYSTEM?

China has since late 2015 allowed greater than 40 unbiased refiners to course of imported crude beneath a quota system. However smaller crops have been discovered by the federal government to be sourcing extra crude oil, and different feedstocks equivalent to diluted bitumen, past quota limits, resulting in a home gas glut.

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Beijing to begin levy hefty taxes on imports of sunshine cycle oil (LCO), combined aromatics and diluted bitumen from June 12, a transfer that’s anticipated to curb gas imports and enhance native refiners’ home gross sales and income.

HOW WILL THESE PROBES IMPACT OIL MARKETS?

China is predicted to launch a second batch of crude import quotas within the coming months, and these probes might immediate Beijing to scale back allotted volumes to unbiased firms.

Whereas this might curb unbiased consumers’ urge for food for extra provides, the state-run corporations, which aren’t topic to quota administration, are anticipated to steer the purchases.

In December final yr, China issued the primary batch of crude import quotas for non-state firms at 122.59 million tonnes in 2021, up 18% from the primary spherical for 2020.

(Reporting by Chen Aizhu and Shu Zhang; Writing by Florence Tan; Modifying by Kenneth Maxwell)