The Challenges Facing Chinese Refineries as Crude Oil Costs Rise

The Pressure on China's Teapots: A Look at the Rising Costs of Crude Oil.

Share:

petrole raffinerie

Gain full professional access to energynews.pro from 4.90$/month.
Designed for decision-makers, with no long-term commitment.

Over 30,000 articles published since 2021.
150 new market analyses every week to decode global energy trends.

Monthly Digital PRO PASS

Immediate Access
4.90$/month*

No commitment – cancel anytime, activation in 2 minutes.

*Special launch offer: 1st month at the indicated price, then 14.90 $/month, no long-term commitment.

Annual Digital PRO Pass

Full Annual Access
99$/year*

To access all of energynews.pro without any limits

*Introductory annual price for year one, automatically renewed at 149.00 $/year from the second year.

The challenges faced by Chinese refineries in the face of rising crude oil costs underline the need to adapt in a constantly evolving market. Fierce competition for limited supplies of Russian oil and the lifting of US sanctions on Venezuelan crude oil are creating considerable challenges for China’s independent refineries, known as “teapots”. These facilities account for around one-fifth of global imports by the world’s largest crude oil importer. They played a key role in importing crude oil mainly from Iran, Russia and Venezuela, all countries facing Western sanctions, saving billions of dollars thanks to affordable raw materials.

Falling margins

The profitability of “teapots” has been seriously affected, with average refining margins falling to around 450 yuan ($61.50) per tonne in October, from a peak of almost 1,200 yuan in March. This fall came as the price of Brent crude oil, the world’s benchmark, topped $90 a barrel, and strong demand for Russian oil drove up ESPO prices, with premiums instead of discounts. ESPO Russian light sweet crude for December arrival is now offered at a premium of around $1 per barrel to ICE Brent, a reversal from the $7 per barrel discount at the start of the year.

Lifting Sanctions on Venezuela

But a recent announcement has added another element to this complex equation. On Wednesday, in what is the most far-reaching easing of US sanctions imposed by the Trump era on Caracas, the Biden administration largely lifted restrictions on Venezuela’s oil sector. This decision follows an agreement between the Venezuelan government and opposition parties ahead of the 2024 elections. In response, Venezuela’s state oil company PDVSA has already begun contacting customers with crude oil supply contracts.

Consequences for Teapots

The possible detour of supplies to China by Venezuela is a source of concern for the “teapots”. Since the US imposed sanctions in 2019, Chinese refineries have become the main buyers of Venezuelan oil, importing just over 400,000 barrels per day (bpd).

Observers expect supplies from Venezuela to decline over the coming months. Caracas may favor sales to Europe and the United States, as well as to major oil companies, to the detriment of Chinese “teapots”. Prices for Venezuelan Merey 16, a heavy crude with a high sulfur content, have already risen to a discount of around $31 a barrel on Brent ICE, just after the sanctions were lifted. This represents a reversal of the discount of around $38 a barrel at the time of the sanctions, on a free-on-board (FOB) basis.

Market and Consumer Challenges

However, bids for Merey remain stable at a discount of around $22 a barrel to Brent ICE, on a delivered-ex-ship (DES) basis in China. This is partly due to the fact that buyers and sellers remain on the sidelines, preoccupied by the current uncertainty.

Chinese “teapots” have traditionally used Venezuela’s Merey and Boscan crude oils because of their low prices, particularly for bitumen production. The heavy quality of these Venezuelan oils enables refiners to circumvent the limited quotas for crude oil imports.

Official Chinese data do not provide exact figures on Venezuelan imports, but it is important to note that the majority of oil originating from Venezuela, as well as Iran, is repackaged by traders as crude oil or “other heavy oil” from Malaysia.

Current trends indicate that the price of Merey will certainly rise in China as teapot supplies become tight due to sustained demand. The situation is constantly evolving, and its impact on the profit margins of China’s independent refineries deserves close attention.

Impact on the market and consumers

The situation of Chinese refineries, or “teapots”, in the face of rising crude oil costs is a clear example of the complex challenges facing global economies. The interconnection of oil markets, international sanctions and political decisions have a direct impact on industry players and consumers alike.

For China’s “teapots”, the current situation highlights the need to rapidly adapt their business models to cope with the growing uncertainty of crude oil supplies. The repercussions of lifting sanctions on Venezuela, for example, could translate into higher crude oil prices on the Chinese market, potentially affecting energy and petrochemical costs for local consumers.

Ultimately, this situation underlines the importance of stable and diversified energy supplies for national economies. It also reminds us that fluctuations in world crude oil markets have repercussions on corporate profit margins and the daily lives of millions of people.

 

Ayatollah Ali Khamenei calls for modernising the oil industry and expanding export markets as Tehran faces the possible reactivation of 2015 nuclear deal sanctions.
The Ukrainian president demanded that Slovakia end its imports of Russian crude, offering an alternative supply solution amid ongoing war and growing diplomatic tensions over the Druzhba pipeline.
The United States cuts tariffs on Japanese imports to 15%, while Tokyo launches a massive investment plan targeting American energy, industry, and agriculture.
Brazil’s Cop 30 presidency aims to leverage the Dubai commitments to mobilise public and private actors despite ongoing deadlock in international negotiations.
Brasília has officially begun the process of joining the International Energy Agency, strengthening its strategic position on the global energy stage after years of close cooperation with the Paris-based organisation.
During a meeting in Beijing, Vladimir Putin called on Slovakia to suspend its energy deliveries to Ukraine, citing Ukrainian strikes on Russian energy infrastructure as justification.
Vladimir Putin and Robert Fico met in China to address the war in Ukraine, regional security and energy relations between Russia and Slovakia.
Slovak Prime Minister Robert Fico plans to meet Vladimir Putin in Beijing before receiving Volodymyr Zelensky in Bratislava, marking a diplomatic shift in his relations with Moscow and Kyiv.
The three European powers activate the UN sanctions mechanism against Iran, increasing pressure on the country's oil exports as Tehran maintains high production despite Western measures.
Iran once again authorises the International Atomic Energy Agency to inspect its nuclear sites, following a suspension triggered by a dispute over responsibility for Israeli strikes.
First suspect linked to the Nord Stream pipeline explosions, a Ukrainian citizen challenged by Berlin opposes his judicial transfer from Italy.
Ukrainian drones targeted a nuclear power plant and a Russian oil terminal, increasing pressure on diplomatic talks as Moscow and Kyiv accuse each other of blocking any prospect of negotiation.
A Ukrainian national suspected of coordinating the Nord Stream pipeline sabotage has been apprehended in Italy, reigniting a judicial case with significant geopolitical implications across Europe.
Russia continues hydrocarbon deliveries to India and explores new outlets for liquefied natural gas, amid escalating trade tensions with the United States.
Azerbaijani energy infrastructure targeted in Ukraine raises concerns over the security of gas flows between Baku and Kyiv, just as a new supply agreement has been signed.
The suspension of 1,400 MW of electricity supplied by Iran to Iraq puts pressure on the Iraqi grid, while Tehran records a record 77 GW demand and must balance domestic consumption with regional obligations.
Beijing opposes the possible return of European trio sanctions against Iran, as the nuclear deal deadline approaches and diplomatic tensions rise around Tehran.
The United States plans to collaborate with Pakistan on critical minerals and hydrocarbons, exploring joint ventures and projects in strategic areas such as Balochistan.
Around 80 Russian technical standards for oil and gas have been internationally validated, notably by the United Arab Emirates, Algeria and Oman, according to the Institute of Oil and Gas Technological Initiatives.
Baghdad and Damascus intensify discussions to reactivate the 850 km pipeline closed since 2003, offering a Mediterranean alternative amid regional tensions and export blockages.

Log in to read this article

You'll also have access to a selection of our best content.