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China's product exports set to rise as Beijing eases restrictions

2018 Oil & Gas Outlook: Asia

By Oceana Zhou

China's oil product exports are expected to grow at a healthy rate in 2018, after a modest rise in 2017, as Beijing relaxes restrictions amid strong lobbying by state-owned oil companies and a forecast increase in refining capacity of around 1 million b/d this year.

  • State-run refiners expect to get enough quotas to meet export needs
  • Some estimates put export growth at 30-40% in 2018
  • Independent refiners unlikely to be issued export quotas

Surveyed sources with state-run oil companies said they expected to get enough quota allocation to meet export demand in 2018 as the government will in all likelihood remove the tight restrictions it imposed in 2017.

Underscoring this, the Ministry of Commerce last Wednesday issued quotas to export 16.24 million mt of gasoil, gasoline and jet fuel under the general trade route in its first round for 2018. This was up 25% from the total quota of 13 million mt allocated under the general and processing trade route in the same round for 2017.

The government is expected to issue quotas for export under the processing trade route in the next few days. The general trade route offers exporters more flexibility than the processing trade route, which comes with conditions, such as the exported product must be produced from imported crude oil and must be from a refinery that has been awarded an export quota.

In early 2017, Beijing said it would maintain China's oil product exports for the year at the same level as 2016. To indicate its seriousness, Beijing cut the export quota allocation in each of the four rounds in 2017 from 2016 levels and ensured that the total quota allocated in the first four rounds was almost equal to the actual export volume of 38.2 million mt in 2016. Beijing typically issues quota by quarter.

This tight quota allocation in the first four rounds resulted in a 15% year-on-year reduction in total gasoline, gasoil and jet fuel exports in September and October to 5.91 million mt as most refiners ran out of quota allocations.

But in early November, the government issued 5 million mt of additional quotas for the three products in a rare fifth round, lifting the total quota allocation for the year to 43 million mt, up 12.6% from 2016 export levels.

Analysis continues below...

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"The first batch quotas for 2018, together with the fifth batch of quotas in 2017, indicate the government is relaxing restrictions on product exports after lobbying by exporting companies," said a Beijing-based trader with a state-owned oil company.


The trader estimated total exports of gasoline, gasoil and jet fuel in 2018 to rise 30-40% from 2017 as it was seemingly easier to get quotas.

The estimate was based on the relatively low base in 2017. Exports saw a slower year-on-year increase in 2017, at around 14%, compared with the 50% jump in 2016, the source added.

Moreover, analysts are expecting an uptick in crude throughput while domestic demand growth is not expected to keep pace.

PIRA Energy Group, a unit of S&P Global Platts, forecasts China's throughput will rise 500,000 b/d year on year in 2018, up slightly from average annual growth of 460,000 b/d between 2011 and 2017.

This could translate to around 14.7 million mt or 316,000 b/d of total increase in gasoline, gasoil and jet fuel production, assuming yields remain unchanged from 2017, which would be for meeting domestic demand growth and/or export, Platts calculations showed.

"Key product exports could rise slightly next year based on domestic supply/demand fundamentals," said JY Lim, a director at PIRA.

China is not a typical oil product exporter and only exports barrels left over after domestic demand has been met.

"But China exporting more and more is becoming a trend as new refining projects come on stream in the next few years while domestic demand growth slows," a second Beijing-based senior trader said.

China is likely to launch 50 million mt/year (1 million b/d) of new refining capacity in 2018, including 20 million mt/year each by Dalian Hengli Petrochemical and Zhejiang Petrochemical.

Meanwhile, Chinese companies have been increasingly tapping into markets further afield -- in the Americas, Africa and Europe -- instead of their traditional markets in Southeast Asia.

"Finding good outlets in the international market is a necessary step to prepare for intensive competition against the traditional exporting countries," the first trader added.

Chinese companies have also been actively looking for retail outlets overseas that can absorb their exports. Both Sinopec and CNPC's PetroChina have petrol stations in Singapore via acquisitions. Sinopec bought a 75% stake in Chevron's South Africa business in March, which included about 800 Caltex-branded service stations. PetroChina is looking at retail and storage projects in Southeast Asia, Africa and South America, according to company sources.


Independent refineries were not issued export quotas in the first round of allocation for 2018.

The quotas under the general trade route for 2018 were allocated to four state-owned oil companies -- CNPC, Sinopec, CNOOC and Sinochem -- and comprised 6.99 million mt of gasoil, 6.55 million mt of gasoline and 2.7 million mt of jet fuel.

"We will still attempt to apply for export quotas, but need to wait until the second quarter to see whether there is opportunity," said a source at an independent refinery in Shandong. "We believe the government will deregulate the market eventually," he added.

In 2016, 12 Chinese refiners that were not part of Sinopec, CNPC, Sinochem or CNOOC were granted export quotas under the processing trade route and exported a total of around 900,000 mt products. But in 2017 the government stopped issuing quotas to them.

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