China Oil & Refining Outlook

China Oil & Refining Outlook (covering crude oil, refining, and oil products) August 2018 bancosta blue studies volume China 2018/#12 research www.bancosta.com ; research@bancosta.com Aug 2018 China Oil & Refining Outlook 1

Index 1. Crude Oil page 3 2. Refining Capacity page 24 3. Oil Products page 33 4. Final Words page 55 Aug 2018 China Oil & Refining Outlook 2

Crude Oil (production and trade) Aug 2018 China Oil & Refining Outlook 3

Chinese domestic output remains low, but pace of decline is slowing According to BP, Chinese oil reserves are estimated to be 3.5 billion tonnes, the largest in the Asia Pacific. China s crude oil production is predominantly located in the northeast and north central regions, with CNPC s Daqing field in the northeast accounting for almost 20 percent of the country s crude oil production. In the last 10 years, Chinese crude output has increased only marginally, peaking at around 214 mln tonnes in 2015. However, economic restructuring and limited investment during the period of low oil prices has led to a decline in domestic output since 2016. Territorial disputes in the East China Sea have also scaled back the development of offshore oil fields in the region. With oil prices now strengthening at over $70 per barrel, the pace of output declines have begun to ease: In the first half of 2018, Chinese domestic crude output declined by 2.0 percent year-on-year an improvement compared to the 4.0 percent decrease seen in 2017, and 6.7 percent decrease in 2016. As domestic crude oil production improves further, crude oil imports could potentially see some dampening effects. China National Petroleum Corp (CNPC) has also said in July that it will spend more than 150 billion yuan ($22 billion) by 2020 to boost oil and gas production in Xinjiang, in order to offset falling output from ageing fields in northeast China. The increased spending is expected to push output in the Xinjiang Autonomous Region to more than 50 million tonnes of oil equivalent between 2018 and 2020. In 2017, CNPC s Xinjiang operations had produced 11.45 million tonnes of crude oil, and 17.1 million tonnes of gas from the Tarim basin according to PetroChina s 2017 annual report. Strong demand growth in 1H 2018, but risks of slowdown on the horizon Based on China s production, imports, and exports data, we estimate that the country s apparent crude oil demand increased around 5 percent year-on-year in 2017, mainly from a combination of increasing refinery throughput and continued stockpiling. Aug 2018 China Oil & Refining Outlook 4

While China s refinery throughput has continued to strengthen in the first half of 2018 by 7.1 percent year-on-year, growth in the country s apparent crude oil demand is still at risk of slowing down, due to rising crude prices, a tighter tax regime, continued credit risks, and the government s policy of reducing air pollution. In the first half of 2018, apparent oil demand increased around 3.6 percent year-on-year. After declining to a bottom of around 30 USD/barrel in early 2016, both the WTI and Brent improved as the OPEC implemented oil output cuts. Prices have since risen to above $70/bbl largely due to the relatively strong performance of the global economy, the reining in of OPEC production cuts, and re-introduction of Iranian sanctions by U.S. President Trump. The higher oil prices are expected to cut into the margins of private refiners, which have also had to deal with more stringent enforcement of consumption taxes. Under the new tax system implemented since March 1, independent refiners in China are no longer able to avoid paying consumption taxes on sales of refined products, which had inflated their profits and given them an edge over state-run refineries. Independent refiners had driven the surge in China s oil demand over the last few years, accounting for 85 percent of the country s incremental crude imports in 2017 alone according to Platts. China had also been taking advantage of the period of lower oil prices since 2015 to fill its strategic petroleum reserves (SPR), with plans to develop them until 2020 to contain the equivalent of 90 days worth of net oil imports. The higher oil prices could thus slow such stockbuilding, although the ongoing trade war between the U.S. and China may still take precedence and increase China s urgency to stockpile. China also continues to face credit risks, with several parts of the economy still highly leveraged and struggling to service loans. Government measures to reduce air pollution has also been encouraging a shift to electric cars and trucks power by LNG, which may have some negative impact on crude oil demand. Aug 2018 China Oil & Refining Outlook 5

Teapot refineries allocated higher import quotas in 2018, but unlikely to be fully utilized As a result of declining domestic output, the building of strategic petroleum reserves and commercial stockpiles, and continued strong demand from local refiners, China s crude oil imports have more than doubled over the past decade to reach around 420 mln tonnes in 2017. This was an increase of 10.2 percent year-on-year. In the first half of 2018, China imported 224.9 mln tonnes of crude oil, up 5.9 percent year-on-year. China s independent teapot refineries have played a large role in supporting import volumes, after being awarded import licenses since 2015. Before that, they were only able to operate on domestically sourced crude and on imported fuel oil. According to Platts estimates, China s independent refineries accounted for around 16 percent of China s crude oil imports in 2016, as they enjoyed record profits selling diesel and gasoline through Asia and competed with state firms to expand domestic sales. However, as refining capacity went into oversupply, China barred teapot refineries from exporting oil products in Jan 2017 in favour of its large state-owned refiners, put in a deadline for new applications for crude oil permits, and tightened scrutiny on tax practices. This squeezed margins for independent refineries in an oversupplied domestic fuel market. On top of this, Chinese teapot refiners also faced tight import quotas initially in the first round of allocations in 2017, which pushed them to import as much crude oil as possible in the first half of the year to secure enough quota for the second half. In July 2018, China boosted import quotas for independent refiners by increasing the year-to-date allocation to 129.23 million tonnes, up 31.4 percent compared to the 98.34 million tonnes awarded to 33 independent refineries in the whole of 2017. However, independent refiners are unlikely to be able to fully utilize the import quotas as higher crude prices and stricter tax regulations tighten their margins. Lower crude procurement will impact trade flows, as the independents secured crude from a variety of sources including Latin America, Russia, West Africa and the Middle East. Aug 2018 China Oil & Refining Outlook 6

Chinese refiners continue to diversify crude supply sources Whilst total crude imports have increased significantly, volumes from the traditionally largest supplier Saudi Arabia have stalled in recent years. Instead, as China diversifies its supplies to ensure supply security and optimization, there have been large increases in crude oil imports from Russia, Angola, Iraq, and Brazil. Russia replaced Saudi Arabia as China s main supplier of crude in 2016, and remained the largest supplier in 2017 as shipments increased 13.9 percent to 59.8 mln tonnes. Imports from Angola in 2017 have also grown a strong 15.3 percent year-on-year to 50.4 mln tonnes in 2017. While shipments from Malaysia remain small, they have also increased from 2.1 mln tonnes to 6.6 mln tonnes in 2017. In the meantime, imports from Saudi Arabia rose a slight 2.3 percent to 52.2 mln tonnes. While crude imports from the U.S. saw an encouraging increase from 0.5 mln tonnes to 7.7 mln tonnes in 2017, such imports are unlikely to see the same strength this year as the U.S.-China trade war escalates. On July 6, the US imposed a 25 percent tariff on Chinese imports worth $34 billion, to which China imposed proportional retaliatory tariffs. As the Trump administration threatened to raise the stakes further, China is now considering to impose 25 percent tariffs on another $16 billion of goods, including US crude oil. Aug 2018 China Oil & Refining Outlook 7

million tonnes China Crude Oil Production andconsumption - last 10 years (source: JODI, NBS ; in million tonnes) 700.0 600.0 500.0 400.0 300.0 200.0 100.0 0.0 2010 2011 2012 2013 2014 2015 2016 2017 2018 (1-6) Refinery intake Production In the last 10 years, Chinese crude output has increased only marginally, peaking at around 214 mln tonnes in 2015. Economic restructuring and limited investment during the period of low oil prices has led to a decline in domestic output since 2016. On the other hand, refinery intake has been increasing steadily, reaching approximately 609 mln tonnes in 2017. In the first half of 2018, refinery intake is estimated to have reached 322 mln tonnes. Aug 2018 China Oil & Refining Outlook 8

China Domestic Crude Oil Output by Province 2017 Heilongjiang Jilin Xinjiang Tibet Qinghai Liaoning BEIJING Inner Mongolia Hebei Tianjin Ningxia Shanxi Shandong Gansu Shaanxi Henan Jiangsu Anhui Sichuan Shanghai Hubei Chongqing Zhejiang Jiangxi Hunan Guizhou Fujian Yunnan Hainan Guangxi Guangdong Total Crude Oil Output > 30 mln tonnes 20 30 mln tonnes 10 20 mln tonnes < 10 mln tonnes China s crude oil production is predominantly located in the northeast and north central regions, with CNPC s Daqing field in Heilongjiang accounting for almost 20 percent of the country s crude oil production. China National Petroleum Corp (CNPC) has said in July that it will spend more than 150 billion yuan ($22 billion) by 2020 to boost oil and gas production in Xinjiang, in order to offset falling output from ageing fields in northeast China. Aug 2018 China Oil & Refining Outlook 9

million tonnes 60.0 China Estimated Apparent Crude Oil Demand - Seasonality (estimated from customs, NBS data ; in million tonnes) 55.0 50.0 45.0 40.0 35.0 Jan Feb Mar Apr May Jun Jul Aug Sep Oct Nov Dec 2014 2015 2016 2017 2018 Based on China s production, imports, and exports data, we estimate the country s apparent crude oil demand to have increased around 5 percent year-on-year in 2017, mainly from a combination of increasing refinery throughput and continued stockpiling. However, growth is forecast to slow this year to around 4 percent, due to rising crude prices and continued credit risks. In the first half of 2018, apparent oil demand increased around 3.6 percent year-on-year. Aug 2018 China Oil & Refining Outlook 10

million tonnes 54.0 China Refinery Throughput - Seasonality (source: NBS ; in million tonnes) 52.0 50.0 48.0 46.0 44.0 42.0 40.0 38.0 36.0 Jan Feb Mar Apr May Jun Jul Aug Sep Oct Nov Dec 2014 2015 2016 2017 2018 Continued increases in refinery throughput continue to support Chinese oil demand. In the first half of 2018, refinery throughput increased 7.1 percent year-on-year to 295.0 mln tonnes according to China s National Bureau of Statistics. This follows an increase of 4.9 percent in 2017 to 566.4 mln tonnes. Aug 2018 China Oil & Refining Outlook 11

million tonnes China Crude Oil Imports - last 10 years (source: JODI, customs data ; in million tonnes) 450.0 400.0 350.0 300.0 250.0 200.0 150.0 100.0 50.0 0.0 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 (1-6) As a result of declining domestic output, the building of strategic petroleum reserves and commercial stockpiles, and continued strong demand from local refiners, China s crude oil imports have more than doubled over the past decade to reach around 420 mln tonnes in 2017. This was an increase of 10.2 percent year-on-year. In the first half of 2018, China imported 224.9 mln tonnes, up 5.9 percent year-on-year. Aug 2018 China Oil & Refining Outlook 12

million tonnes 45.0 China - Monthly Crude Oil Imports - Seasonality (source: customs data ; in million tonnes) 40.0 35.0 30.0 25.0 20.0 Jan Feb Mar Apr May Jun Jul Aug Sep Oct Nov Dec 2014 2015 2016 2017 2018 In the first half of 2018, China imported 224.9 mln tonnes, up 5.9 percent year-on-year. Imports have eased slightly in recent months as some state-run independent refineries entered planned maintenance, while shrinking margins and volatile oil prices also led some independent refiners to scale back purchases. Aug 2018 China Oil & Refining Outlook 13

China Crude Oil Imports by Source in 2017 (source: customs data ; in % of import volume) Others 20% Russia 14% UAE 3% Saudi Arabia 13% Kuwait 4% Venezuela 5% Brazil 6% Oman 7% Iran 7% Iraq 9% Angola 12% In 2017, China sourced approximately 14 percent of its crude oil from Russia, followed by Saudi Arabia and Angola with 13 percent and 12 percent respectively. Around 50 percent of China s crude oil imports comes from the Middle East. Imports from the U.S. have also increased significantly to account for around 1.8 percent, compared to just 0.1 percent in 2016. Aug 2018 China Oil & Refining Outlook 14

million tonnes 160.0 China - Crude Oil Imports by Sources (source: customs data ; in million tonnes) 140.0 120.0 100.0 80.0 60.0 40.0 20.0 0.0 Russia Saudi Arabia Angola Iraq Iran Oman Brazil Others 2015 2016 2017 Russia, Angola, and Brazil have seen the strongest pick up in crude oil shipments to China, while supplies from Saudi Arabia increased marginally. Shipments from the U.S. and Malaysia (both not in chart) have also seen strong increases, increasing from 0.5 mln tonnes to 7.7 mln tonnes and 2.1 mln tonnes to 6.6 mln tonnes respectively. Aug 2018 China Oil & Refining Outlook 15

million tonnes China Crude Oil Imports from Russia (source: comtrade, customs data ; in million tonnes) 70.0 60.0 50.0 40.0 30.0 20.0 10.0 0.0 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 Imports from Russia increased 13.9 percent in 2017 to reach almost 59.8 mln tonnes, thanks to increased supplies via the trans-siberian pipeline and strong demand from teapot refineries, which typically favour Russia's ESPO blend due to its better quality, smaller cargoes and shorter transport times. Shipments from Russia are expected to remain strong in 2018, as Rosneft ramps up supplies to China's CNPC by some 50 percent via the expanded trans-siberian pipeline. Aug 2018 China Oil & Refining Outlook 16

million tonnes China Crude Oil Imports from Saudi Arabia (source: comtrade, customs data ; in million tonnes) 60.0 50.0 40.0 30.0 20.0 10.0 0.0 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 Saudi Arabia s volumes to China have stalled in recent years, as China tried to diversify its import sources. Having peaked in 2012, Saudi exports to China in 2016 were stable at around 51 mln tonnes. In 2017, shipments rose a slight 2.3 percent to 52.2 mln tonnes. Aug 2018 China Oil & Refining Outlook 17

million tonnes China Crude Oil Imports from Angola (source: comtrade, customs data ; in million tonnes) 60.0 50.0 40.0 30.0 20.0 10.0 0.0 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 Angola has been a consistent crude supplier to China, with shipments strengthening by 15.3 percent in 2017 to reach 50.4 mln tonnes. Angolan oil is cheaper and deemed to offer a stable supply of heavy to medium sweet crude, which is a popular grade among Chinese refineries. Aug 2018 China Oil & Refining Outlook 18

million tonnes China Crude Oil Imports from Iraq (source: comtrade, customs data ; in million tonnes) 40.0 35.0 30.0 25.0 20.0 15.0 10.0 5.0 0.0 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 Crude oil imports from Iraq have increased consistently over the past decade, rising 1.8 percent to reach 36.9 mln tonnes in 2017. The increase has come from mainly southern Iraq, offsetting lost production in the north where a territorial dispute with its Kurdish region has crippled exports. Aug 2018 China Oil & Refining Outlook 19

million tonnes China Crude Oil Imports from Iran (source: comtrade, customs data ; in million tonnes) 35.0 30.0 25.0 20.0 15.0 10.0 5.0 0.0 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 Chinese crude oil imports from Iran fell a slight 0.5 percent in 2017, but remained near the record level in 2016 at 31.1 mln tonnes. China National Petroleum Corp (CNPC) and Sinopec have joint venture productions in Iran - North Azadegan field and Yadavaran field respectively both of which started production in 2016. Aug 2018 China Oil & Refining Outlook 20

million tonnes China Crude Oil Imports from Oman (source: comtrade, customs data ; in million tonnes) 40.0 35.0 30.0 25.0 20.0 15.0 10.0 5.0 0.0 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 Crude oil imports from Oman in China saw a consistent increase over 2009-2016, reaching a record 35 mln tonnes in 2016. However, the positive trend slowed in 2017, with imports declining 11.6 percent to 31.0 mln tonnes. Oman has reduced its oil production in line with the oil output cut agreement, and the Sohar refinery s expanded capacity is expected to further reduce Oman crude exports. Aug 2018 China Oil & Refining Outlook 21

million tonnes China Crude Oil Exports - last 10 years (source: JODI, customs data ; in million tonnes) 6.0 5.0 4.0 3.0 2.0 1.0 0.0 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 (1-6) China also exports tiny volumes of crude, largely on a short-haul basis to neighbouring countries such as Japan and South Korea. In the first half of 2018, China exported1.6 million tonnes of crude, down 41.5 percent year-on-year. Aug 2018 China Oil & Refining Outlook 22

China Crude Oil Exports by Destination in 2017 (Source: China Customs ; in percent of total volume) Hong Kong 5% U.S. 5% Singapore 4% Indonesia 3% Japan 39% Philippines 6% Thailand 7% Malaysia 9% S. Korea 22% In 2017, crude oil exports from China were directed mainly to Japan and South Korea, which accounted for 39 percent and 22 percent respectively. Aug 2018 China Oil & Refining Outlook 23

Refining Capacity (current and projected) Aug 2018 China Oil & Refining Outlook 24

China second largest refining capacity in the world, largest in Asia According to BP estimates, China s refinery capacity reached 14.5 mln bpd in 2017, accounting for around 15 percent of the global capacity. This makes it the second largest in the world after the United States, which accounted for 19 percent, and around 44 percent of total capacity in the Asia Pacific. In spite of the domestic fuel glut, China is still expected to account for over a quarter of global refinery expansions up to 2022 according to OPEC s World Oil Outlook. According to state-owned China National Petroleum Corp.'s Economics and Technology Research Institute, independent refiners will account for about 69.4 percent of the capacity increase in 2018, bringing the sector's total capacity to 33 percent of the country's total refining capacity. Most capacity dominated by state-owned refineries The Chinese refining sector is dominated by three large NOCs Sinopec, PetroChina and CNOOC accounting for close to 70 percent of the country s refining capacity. PetroChina started its new refinery in Yunnan in June 2017, with a crude processing capacity of 13 mln tonnes per annum (MTPA). Crude oil is supplied via a China-Myanmar pipeline, for which both countries signed an energy cooperation agreement in April 2017. The first oil tanker, a Suezmax, offloaded 140,000 tons of crude at the Made Island oil port, and CNPC pumped the first crude oil through the China-Myanmar oil pipeline in May 2017. In Oct 2017, CNOOC started up its new 200,000 bpd refinery in Huizhou in southern China. The start up was delayed from an earlier timeline of 2Q 2017, due to the domestic fuel glut. In October this year, China s CNPC is expected to start operating the expanded Huabei Petrochemical plant in northern China s Hebei province, with an annual capacity of 10 million tonnes (200,000 barrels per day). The refinery will supply the new Beijing airport with premium gasoline via pipeline, which is expected to be completed end September. Aug 2018 China Oil & Refining Outlook 25

Teapot refineries make up remaining capacity, pressured by higher crude prices and taxes this year The remaining 30 percent or so of capacity is made up of numerous smaller independent refineries, known colloquially as teapots, mostly located in the northeastern province of Shandong. Typically with a capacity of approximately 20,000-100,000 bpd, almost 100 teapot plants are scattered around the country. Teapot refineries earned their name because of their small size and fairly basic equipment. However, most of these refineries have been modernized and expanded in order to avoid being shut, and have since become swing producers of diesel, gasoline, and bitumen. Such refineries are either privately owned, state owned or owned by provincial governments. Long forced to rely mostly on fuel oil as feedstock, teapots were finally allowed access to imported crude in early 2015. In 2016, China s independent refineries accounted for around 16 percent of the 381 mln tonnes in crude oil imports, according to Platts estimates, a large part of this as Aframax cargoes from Russia s Kozmino port. However, 2017 was a tough year for Chinese teapot refineries as China barred teapot refineries from exporting oil products in favor of its large state-owned refiners, put in a deadline for new applications for crude oil permits, and tightened scrutiny on tax practices. On top of this, Chinese teapot refiners also faced tight import quotas initially in the first round of allocations in 2017. In July 2018, China boosted import quotas for independent refiners by increasing the year-to-date allocation to 129.23 million tonnes, up 31.4 percent compared to the 98.34 million tonnes awarded to 33 independent refineries in the whole of 2017. However, independent refiners are unlikely to be able to fully utilize the import quotas as higher crude prices and stricter tax regulations tighten their margins. Lower crude procurement will impact trade flows, as the independents secured crude from a variety of sources including Latin America, Russia, West Africa and the Middle East. Aug 2018 China Oil & Refining Outlook 26

Global Refining Capacity by Region - 2017 (source: BP ; in % of total volume) Middle East 10% S & C America 6% Africa 4% Asia Pacific 34% Other Europe & Eurasia 9% EU 15% North America 22% The Asia-Pacific region is fast emerging as the major refining hub in the world, accounting now for 34 percent of global refining capacity more than the U.S. and EU combined. Aug 2018 China Oil & Refining Outlook 27

million bpd Asian Refining Capacity - Annual (source: BP ; in million barrels per day) 35.0 30.0 25.0 20.0 15.0 10.0 5.0 0.0 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 Refining capacity in Asia has grown by 2.5 percent per annum on average over the past decade with increased investment, driven mainly by China and India which account for close to 60 percent of the region s capacity. In 2017, Asian refining capacity increased 1.7 percent, as Chinese and Indian capacity increased 2.4 percent and 7.6 percent respectively. Aug 2018 China Oil & Refining Outlook 28

Asian Refining Capacity by Country - 2017 (source: BP ; in % of total volume) Thailand 4% Indonesia 3% Taiwan 3% Others 7% China 44% Singapore 4% South Korea 10% Japan 10% India 15% China has the largest refining capacity in Asia accounting for 44 percent of the total, followed by India, Japan, and South Korea accounting for further 15 percent, 10 percent and 10 percent respectively. Aug 2018 China Oil & Refining Outlook 29

million bpd China Refining Capacity - Annual (source: BP ; in million barrels per day) 16.0 14.0 12.0 10.0 8.0 6.0 4.0 2.0 0.0 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 China s refining capacity mostly increased over the past decade, reaching a peak of around 14.5 mln bpd in 2014. However, the country s refining capacity started decreasing over 2015-2016, as China s general rate of economic expansion and demand for refined products slowed. In 2017, China s capacity resumed its upward trend, increasing by 2.4 percent partly due to two refinery expansions in 2H 2017. Aug 2018 China Oil & Refining Outlook 30

million bpd Global Refining Capacity Expansion by Region - Annual (source: IEA ; in million barrels per day) 2.0 1.8 1.6 1.4 1.2 1.0 0.8 0.6 0.4 0.2 0.0 2018 2019 2020 2021 2022 2023 China Middle East Other emerging Asia Developed markets Rest of world Upcoming refinery projects are expected to remain concentrated in the Asia Pacific and the Middle East, although project cancellations or delays could slow the pace of expansion. Aug 2018 China Oil & Refining Outlook 31

Global Refining Capacity Expansion by Region - 2017-2022 (source: OPEC World Oil Outlook 2017 ; in % of total volume) Latin America 2% Africa 5% Russia & Caspian 7% Europe 3% China 28% U.S. & Canada 7% Other Asia Pacific 21% Middle East 27% China is expected to account for around 28 percent of global refinery expansions up to 2022, whilst other Asian countries account for a further 21 percent. The Middle East also remains an area of large growth potential, accounting for another 27 percent. Aug 2018 China Oil & Refining Outlook 32

Oil Products (production and trade) Aug 2018 China Oil & Refining Outlook 33

Domestic demand to slow, but tighter tax rules also lower domestic supplies Oil product consumption in China has traditionally exceeded refining output. However, as Chinese refining capacity expanded in recent years and domestic demand growth slowed, this has not necessarily been the case. Refining output exceeded consumption in 2014, and has continued this trend in 2016-2018. Based on China s refinery throughput, imports, and exports data, we estimate the country s apparent oil product demand to have increased around 5.4 percent in the first half of 2018, compared to a 4.6 percent growth in 2017, as consumption from the industrial and construction sectors was boosted by stronger-than-expected GDP growth. This was in spite of rising crude oil prices and tighter environmental controls. Gasoline demand is expected to face challenges from the rise of new energy vehicles, expansion of the vehicle-sharing business, and slower gasoline-fuelled car sales. According to the China Association of Automobile Manufacturers (CAAM), vehicle sales in China grew 5.6 percent in the first half of 2018 a pick up compared to 3.0 percent in 2017, but still a slowdown compared to the 13.9 percent growth in 2016, as the tax incentives on small engine cars are phased out over 2017-2018. CAAM thus forecasts Chinese vehicle sales to grow 3 percent in 2018. The expanding high-speed train network would also continue to pose a threat not only to gasoline consumption but also to jet fuel demand. Cooling residential construction and the country s shift towards using gas as a replacement for other fuels in the industry and transportation sectors will also push down the country's gasoil demand. However, in March, Beijing adopted tighter tax regulations and closed loopholes that had allowed independent refiners and blenders to avoid paying consumption tax, which in turn boosted their margins. The strong margins had previously allowed independent refiners to significantly undercut their state-owned peers when selling gasoline and gasoil domestically. The stricter tax rules could thus help alleviate the supply glut for gasoline and gasoil, as state-owned refiners divert more barrels to the domestic market amid lower availability from independent refiners and oil blenders. Aug 2018 China Oil & Refining Outlook 34

Nonetheless, domestic oversupply of oil products is still expected to continue in 2018, as domestic refining capacity continues to expand at a quicker pace than demand. According to CNPC's Economics and Technology Research Institute, China is expected to add 36 mln tonnes/ year (723,000 bpd) of refining capacity in 2018 to reach 808 mln tonnes/ year, while apparent demand growth for oil products was forecast at 1.9 percent this year. China also announced a new measure to forbid the sale of diesel with sulphur content higher than 10 parts per million (ppm) from Nov 2017. Such diesel is typically used by tractors and ships, and the new ban could exacerbate the ongoing fuel supply glut, encouraging Chinese refiners to export more diesel. Chinese oil product exports supported by domestic surplus, could slow in 2H 2018 on stricter taxes China s oil product exports have been steadily increasing, continuing to exceed import volumes in the first half of 2018. Oven Jan-Jun 2018, exports have continued to increase 28.4 percent to 30.3 mln tonnes. China, together with the Middle East and India, has dominated new refinery capacity additions in recent years. Originally, most of this increase was supposed to satisfy domestic demand. However, as the economy begun to slow down, Chinese refiners had no choice but to divert increasing volumes onto the international markets, reshaping trade in the Asia Pacific. Independent teapot refineries, which had previously been tightly controlled by regulations, were also allowed to import crude and export refined products for the first time in 2015. However, the Chinese government tightened its regulations since 2017, with no fuel export quotas granted to independent teapot refineries. While teapot refineries could previously sell oil products to state-owned refiners to export on their behalf, tighter tax regulations imposed since March 2018 now require any sale between an independent refiner and state-owned refiner to be accompanied with a valid invoice and consumption tax payment. State-owned refiners are thus expected to divert more barrels to the domestic market amid lower availability from independent refiners and oil blenders a move which is expected to slow oil product exports in the 2H 2018. Aug 2018 China Oil & Refining Outlook 35

In 2017, around 24 percent of China s oil product exports were shipped to Singapore (12.2 mln tonnes, up 17.1 percent year-on-year), with most of these shipments likely re-exported to other countries. Another 19 percent of exports were shipped to Hong Kong (9.7 mln tonnes, up 7.4 percent). The Philippines accounted for 8 percent, with exports surging (4.1 mln tonnes, up 38.9 percent) mainly due to some Japanese and South Korean refinery closures, increased competitiveness of Chinese exporters, and the fast growing economy in the Philippines. Chinese oil product imports showing slight increase, but China remains net exporter Despite a continuous pick up in domestic demand, imports of oil products into China have largely been subdued since 2014, comprising mainly of fuel oil used as a refining feedstock or as fuel for marine vessels. While China s oil product imports grew 9.7 percent to 16.5 million tonnes in the first half of 2018, the country remains very much a net exporter. In 2017, China sourced approximately 30 percent of its oil product imports from Singapore (8.8 mln tonnes, up 71.4 percent). This was closely followed by South Korea, which accounted for another 28 percent (8.2 mln tonnes, down 3.2 percent). Shipments from Malaysia, which account for 6 percent, have been generally subdued compared to the peak level of 4.4 mln tonnes in 2010. although there was an improvement in 2017, increasing 18.2 percent to 1.8 mln tonnes. Aug 2018 China Oil & Refining Outlook 36

million tonnes 600.0 China Product Production andconsumption- last 10 years (source: JODI ; in million tonnes) 500.0 400.0 300.0 200.0 100.0 0.0 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 (1-6) Consumption Production Oil product consumption in China has traditionally exceeded refining output. However, as Chinese refining capacity expanded in recent years and domestic demand growth slowed, this has not necessarily been the case. Refining output exceeded consumption in 2014, and has continued this trend in 2016-2018. Aug 2018 China Oil & Refining Outlook 37

million tonnes 50.0 China Estimated Apparent Oil Product Demand - Seasonality (estimated from customs, NBS data ; in million tonnes) 48.0 46.0 44.0 42.0 40.0 38.0 Jan Feb Mar Apr May Jun Jul Aug Sep Oct Nov Dec 2014 2015 2016 2017 2018 Based on China s refinery throughput, imports, and exports data, we estimate the country s apparent oil product demand to have increased around 5.4 percent in the first half of 2018, compared to a 4.6 percent growth in 2017, as consumption from the industrial and construction sectors was boosted by stronger-than-expected GDP growth. This was in spite of rising crude oil prices and tighter environmental controls. Aug 2018 China Oil & Refining Outlook 38

million vehicles 35 China Vehicle Sales - Annual (source: CAAM ; in million vehicles) 30 25 20 15 10 5 +2.5% +4.3% +13.9% +6.9% +4.7% +13.9% +3.0% +3.0% 0 2011 2012 2013 2014 2015 2016 2017 2018 (f) Vehicle Sales Y-o-Y Growth Gasoline demand is expected to face challenges from the rise of new energy vehicles, expansion of the vehicle-sharing business, and slower gasoline-fuelled car sales. According to the China Association of Automobile Manufacturers (CAAM), vehicle sales in China grew 5.6 percent in the first half of 2018 a pick up compared to 3.0 percent in 2017, but still a slowdown compared to the 13.9 percent growth in 2016. CAAM forecasts vehicle sales to grow 3 percent in 2018. Aug 2018 China Oil & Refining Outlook 39

million tonnes China Oil Product Imports & Exports - last 10 years (source: customs data ; in million tonnes) 60.0 50.0 40.0 30.0 20.0 10.0 0.0 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 (1-6) Imports Exports Imports of oil products into China have been largely subdued since 2014, comprising mainly of fuel oil used as refining feedstock or as fuel for marine vessels. On the other hand, oil product exports have been steadily increasing, continuing to exceed import volumes in the first half of 2018. Slower domestic demand and the addition of new refining capacity have continued to drive Chinese oil product exports. Aug 2018 China Oil & Refining Outlook 40

China Oil Product Exports by Destination in 2017 (source: customs data ; in % of import volume) Others 20% Singapore 24% Vietnam 2% Australia 3% Bangladesh 3% U.S. 4% Malaysia 5% S. Korea 6% Panama 6% Philippines 8% Hong Kong 19% In 2017, around 24 percent of China s oil product exports were shipped to Singapore, followed by Hong Kong and the Philippines at 19 percent and 8 percent respectively. Aug 2018 China Oil & Refining Outlook 41

million tonnes 18.0 China - Oil Product Exports by Destination (source: customs data ; in million tonnes) 16.0 14.0 12.0 10.0 8.0 6.0 4.0 2.0 0.0 Singapore Hong Kong Philippines Panama S. Korea Malaysia U.S. Others 2015 2016 2017 As Chinese oil product exports increased, shipments to Singapore, Hong Kong, the Philippines, S. Korea, and Malaysia have seen a strong pick up. Aug 2018 China Oil & Refining Outlook 42

million tonnes China Oil Products Exports to Singapore (source: comtrade, customs data ; in million tonnes) 14.0 12.0 10.0 8.0 6.0 4.0 2.0 0.0 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 Oil product exports from China to Singapore have increased sharply over the last few years, allowing Singapore to become the largest destination with 12.2 mln tonnes in shipments in 2017. However, being a key trading hub in the region, these shipments to Singapore are typically re-exported to other countries. Aug 2018 China Oil & Refining Outlook 43

million tonnes China Oil Products Exports to Hong Kong (source: comtrade, customs data ; in million tonnes) 12.0 10.0 8.0 6.0 4.0 2.0 0.0 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 Chinese oil products shipped to Hong Kong have also strongly increased in the past few years. In 2017, Chinese exports to Hong Kong have increased 7.4 percent to reach 9.7 mln tonnes. Aug 2018 China Oil & Refining Outlook 44

million tonnes China Oil Products Exports to Philippines (source: comtrade, customs data ; in million tonnes) 4.5 4.0 3.5 3.0 2.5 2.0 1.5 1.0 0.5 0.0 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 After several years of very modest volumes, 2016 registered a strong increase in exports to the Philippines, mainly due to some Japanese and South Korean refinery closures, increased competitiveness of Chinese exporters, and the fast growing economy in the Philippines. Volumes have continued to grow in 2017 by 38.9 percent to 4.1 mln tonnes. Aug 2018 China Oil & Refining Outlook 45

million tonnes China Oil Products Exports to Panama (source: comtrade, customs data ; in million tonnes) 6.0 5.0 4.0 3.0 2.0 1.0 0.0 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 Chinese exports to Panama peaked in 2011 at 5.2 mln tonnes per year, then steadily softened to 3.2 mln tonnes in 2016. Shipments showed some slight improvement in 2017, increasing a slight 3.1 percent to 3.3 mln tonnes. Aug 2018 China Oil & Refining Outlook 46

million tonnes China Oil Products Exports to South Korea (source: comtrade, customs data ; in million tonnes) 3.5 3.0 2.5 2.0 1.5 1.0 0.5 0.0 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 Except for a slight dip in 2016, Chinese oil product exports to S. Korea have increased steadily over the past decade, increasing 6.0 percent in 2017 to reach 3.2 mln tonnes. Naphtha, which is used for the country s sizeable petrochemical and industrial sectors, accounts for about 42 percent of their total oil product demand and is a primary driver of domestic demand growth. Aug 2018 China Oil & Refining Outlook 47

million tonnes China Oil Products Exports to Malaysia (source: comtrade, customs data ; in million tonnes) 3.0 2.5 2.0 1.5 1.0 0.5 0.0 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 Chinese oil product exports to Malaysia saw a sharp spike in 2016, increasing more than 3 times to reach 2.3 mln tonnes. In 2017, volumes have continued to grow another 18.2 percent to 2.8 mln tonnes. Aug 2018 China Oil & Refining Outlook 48

China Oil Product Imports by Source in 2017 (source: customs data ; in % of import volume) Iran UAE 3% Indonesia 4% 3% Venezuela U.S. 2% 2% Others 12% Singapore 30% Japan 4% Russia 6% Malaysia 6% S. Korea 28% In 2017, China has sourced 30 percent of its oil product imports from Singapore, followed by S. Korea and Russia at 28 percent and 6 percent respectively. Aug 2018 China Oil & Refining Outlook 49

million tonnes 12.0 China - Oil Product Imports by Source (source: customs data ; in million tonnes) 10.0 8.0 6.0 4.0 2.0 0.0 Singapore S. Korea Malaysia Russia Japan UAE Indonesia Others 2015 2016 2017 While China s oil product imports have been on the decline, imports from particularly Singapore has still managed to see a pick up in shipments to China. Aug 2018 China Oil & Refining Outlook 50

million tonnes China Oil Products Imports from Singapore (source: comtrade, customs data ; in million tonnes) 10.0 9.0 8.0 7.0 6.0 5.0 4.0 3.0 2.0 1.0 0.0 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 Oil product imports from Singapore have constantly declined since 2011, although their volumes in 2016 picked up slightly to reach 5.2 mln tonnes. In 2017, shipments increased by a strong 71.4 percent to reach 8.8 mln tonnes. Aug 2018 China Oil & Refining Outlook 51

million tonnes China Oil Products Imports from S. Korea (source: comtrade, customs data ; in million tonnes) 12.0 10.0 8.0 6.0 4.0 2.0 0.0 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 Oil product imports from South Korea have been increasing marginally over the last 3 years, but remain well below the peak level of 2011. Imports from South Korea reached 8.5 mln tonnes in 2016, but decreased in 2017 by 3.2 percent to 8.2 mln tonnes. Aug 2018 China Oil & Refining Outlook 52

million tonnes China Oil Products Imports from Malaysia (source: comtrade, customs data ; in million tonnes) 5.0 4.5 4.0 3.5 3.0 2.5 2.0 1.5 1.0 0.5 0.0 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 Shipments from Malaysia have been generally subdued compared to the peak level of 4.4 mln tonnes in 2010. In 2017, imports from Malaysia have improved, increasing 18.2 percent to 1.8 mln tonnes. Aug 2018 China Oil & Refining Outlook 53

million tonnes China Oil Products Imports from Russia (source: comtrade, customs data ; in million tonnes) 9.0 8.0 7.0 6.0 5.0 4.0 3.0 2.0 1.0 0.0 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 Imports from Russia have been decreasingly steadily from the peak level of 8.3 mln tonnes in 2012, to just 2.2 mln tonnes in 2016. In 2017, volumes have decreased a further 19.7 percent to 1.8 mln tonnes. Aug 2018 China Oil & Refining Outlook 54

Final Words (summary and conclusions) Aug 2018 China Oil & Refining Outlook 55

Chinese domestic output remains low, but pace of decline is slowing With oil prices now strengthening at over $70 per barrel, the pace of output declines have begun to ease: In the first half of 2018, Chinese domestic crude output declined by 2.0 percent year-on-year an improvement compared to the 4.0 percent decrease seen in 2017, and 6.7 percent decrease in 2016. China National Petroleum Corp (CNPC) has also said in July that it will spend more than 150 billion yuan ($22 billion) by 2020 to boost oil and gas production in Xinjiang, in order to offset falling output from ageing fields in northeast China. Strong crude demand growth in 1H 2018, but risks of slowdown on the horizon While China s refinery throughput has continued to strengthen in the first half of 2018 by 7.1 percent year-on-year, growth in the country s apparent crude oil demand is still at risk of slowing down, due to rising crude prices, a tighter tax regime, continued credit risks, and the government s policy of reducing air pollution. In the first half of 2018, China imported 224.9 mln tonnes of crude oil, up 5.9 percent year-on-year. Chinese oil product exports supported by domestic surplus, could slow in 2H 2018 on stricter taxes In March, Beijing adopted tighter tax regulations and closed loopholes that had allowed independent refiners and blenders to avoid paying consumption tax, which in turn boosted their margins. The strong margins had previously allowed independent refiners to significantly undercut their state-owned peers when selling gasoline and gasoil domestically. State-owned refiners are thus expected to divert more barrels to the domestic market amid lower availability from independent refiners and oil blenders a move which is expected to slow oil product exports in the 2H 2018. Aug 2018 China Oil & Refining Outlook 56

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