Chinese private chemical producer Hengli Group has won state approval to import 400,000 barrels per day (bpd) crude oil, the largest quota ever for a private refiner, as it challenges the country's smaller independent plants in an oversupplied Chinese fuel market.
The group's listed unit Hengli Petrochemical said in an exchange filing late on Thursday that the National Development and Reform Commission (NDRC), the state economic planner, had approved the quota.
The firm aims to start trial runs in October at a newly built refinery in the northeastern port city of Dalian that will be among the five biggest refineries in China.
"We will start using our quota this year," said a senior Hengli official, who declined to be identified because he was not authorised to speak to the media. "We hope to get enough allowances for the refinery to start trial operations in October."
Another private chemical firm, Zhejiang Ronsheng Group, is also expected to start operating a new 400,000-bpd refinery in the eastern city of Zhoushan later this year.
The additional production capacity in China is likely to add to pressure on the country's small, independent, or "teapot", refineries, which are vulnerable to increased competition because of their modest output. Many "teapot" refineries produce less than 100,000 bpd.
"Hengli's world-class scale, sophisticated refinery configuration that favors high-end petrochemicals and its location means it will be a killer competitor to teapots," said Harry Liu of consultancy IHS Markit.
With the government stepping up scrutiny over their tax and environmental practices, Liu predicted some of the smaller of the independents close in the next two years as a result of the competition.
Hengli started as a small chemical fiber maker and operates a 6.6 million tonnes per year plant making purified terephthalic acid (PTA), the world's largest. PTA is a feedstock for producing polyester.
Although the NDRC grants approval for quotas, the Commerce Ministry determines how much of a quota can be put to use.
"For next year, we are confident of getting 20 million tonnes of allowances from the government," the senior Hengli official said.
He said the refinery's two crude distillation units (CDU) are designed to process 30 percent of Saudi Arabia's Arab Medium crude, 60 percent of Saudi Heavy and 10 percent Qatar Marine crude.
The company has recently applied for a quota to export fuel oil.
The senior Hengli official and another company official said Hengli would market its refined fuel to state-owned Sinopec and PetroChina, as well as independent wholesalers and distributors. There is no near-term plan to build its own retailing network because of the cost.
In January, Hengli signed a framework deal with state-run Sinochem Group to cooperate on imports of crude oil and the marketing of refined fuel.
