Sure, these refiners are eventually set to get squeezed out once China implements the new National Phase III standard, equivalent to Euro 3, for gasoline and gasoil.
These are typically refineries smaller than 20,000 b/d, cracking fuel oil to produce mostly off-spec, low-quality distillates mainly meant for the rural markets.
Over the past 20 years, Beijing has time and again called for the shutdown of of these plants -- most of which are partly owned by provincial governments -- but they have continued to survive. Most likely the goal to eliminate them will still be intact in the country's next Five-Year Plan, starting 2011.
But before they get snuffed out -- if they do -- these refineries might get a shot in the arm thanks to a six-month grace period for full implementation of the new fuel specifications. What the transition could create is a two-tier market: one for gasoline and gasoil meeting the National Phase III requirements and another for low quality products.
Integrated state oil giants Sinopec and PetroChina have been on a drive to upgrade and expand their refineries in recent months. Most of their refineries -- as well as the two owned by CNOOC and WEPEC -- should be well placed to meet the more stringent specs next year. Beijing and Shanghai cities already have adopted Euro 4-equivalent specs, while eight cities in Guangdong province already are following National Phase III.
Any incremental demand for the cleaner fuel will be driven by the automobile sector and should easily be met by the Chinese oil giants as they strive to retain control of the lucrative retail market while honoring the government-set quality guidelines.
The retail prices of the higher-quality gasoil and gasoline are expected to be higher, reflecting the higher costs involved, and would likely be passed on to the consumers.
The situation would create a supply gap for lower quality and cheaper products, particularly gasoil, for use in the industrial, agricultural and commercial transportation sectors....a perfect market profile for the teapot refineries.
And then there is the question of enforcement of the stricter fuel specifications in the rural areas. Presumably, there will be the usual random sample checks at retail stations. But unless Beijing deploys enough officials to grab every poor farmer when he fills his tractor with the low-quality high sulfur gasoil, demand for the cheaper product should flourish.
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