*China is going to release 7,383,616.78 bbl of bonded crude by online bidding on September 24;

*The crude purchased should be used in production of the feedstock of chemical fibers.

Beijing (JLC), September 15, 2021--China is going to release the first batch of crude from bonded tankers, 7,383,616.78 bbl (about one mln mt), by online bidding on September 24, the National Oil Reserve Center (NORC) said on its website on September 14.

The enterprises participating in the bidding should have enough remaining quotas on imported crude and the qualification to import crude, as the enterprise should use the quotas for customs declaration for the deal. This indicated that refiners that are currently short of quotas will be excluded from this bidding to be launched on September 24, as the fourth-batch crude import quotas are likely to be released at the end of September or early October.

There are about 10% of the refining-chemical integration and traditional independent refineries that may have enough quotas, JLC data showed.

But, if the enterprises have access to unlimited imported crude, such as state-run refineries, they should fill “no limits” in the application forms.

The second requirement is that the crude purchased can be used only for the production of chemical fiber feedstock for captive use, indicating that the refining-chemical integration and state-run refineries have great chance to obtain the crude.

Many traditional independent refineries are also optimizing the industry structure by constructing chemical units, while some of the chemical units have not come online yet. They have a faint chance of joining the bidding.

Thirdly, it is important to note that the crude to be traded is all stored in Dalian New Port and Changxing Island in Dalian and the enterprise may take transport cost into consideration.

Fourthly, the bidding transaction of the crude reserves adopts a margin system, and the buyer shall pay the bidding transaction margin in full according to the standards. At the same time, as for the settlement, the announcement requires that "the buyer should pay the full contract payment to the oil storage center within 5 working days from the date of signing the sales contract." This may become a limiting factor for private refineries with relatively tight capital, especially traditional independent refineries.

The bidding of the crude reserves will be completed through a trading system and then the buyer will be determined. Specifically, the starting price for bidding is regulated by the relevant government departments and announced in the trading system before the bidding starts. After the bidding transaction begins, bidders must start bidding from the starting price, and bid at a positive integer multiple of the minimum price increase ($0.5/bbl). During the bidding process, the trading system will determine the final bidder based on the principle of "price priority, time priority". The starting quantity is the quantity of the seller's pending order, and the whole order is auctioned and cannot be split.

In a summary, JLC believes that the state-run refineries have the most obvious advantage in this bidding. Private refining-chemical complexes have advantages over traditional independent refineries, but they may be limited by the remaining quotas, unless the fourth batch of imported crude quotas is issued before September 24, the bidding date.

Meantime, the crude listed in the table below was mainly stored during April-May 2020, when China imported a lot of crude oil amid relatively low prices of international crude futures. Prices have jumped this year, putting refineries under increasing cost pressure.

As for the crude grade, Qatar Marine crude, Oman crude and Upper Zakum are grades delivered on the Shanghai International Energy Exchange.

A total of around one mln mt of crude reserves for this bidding comes at the back of rising commodity prices this year, and the state government aimed to help chemical producers deal with increasing cost.

While, the bidding volume for this batch is lower than the daily crude run in the country, only accounting for over a half of the average daily crude processing volume from January to August, according to the data from the National Bureau of Statistics. The release of such a small volume of crude will have limited effect on the crude price and domestic refineries’ feedstock supply structure, but it is not known yet whether there will be more batches of crude reserves to be released to domestic refineries.

Among the qualified private enterprises for the bidding, Shenghong in eastern Jiangsu has won the approval to use two mln mt of imported crude in 2021, 15.89 mln mt in 2022 and 16.0 mln mt as from 2023 of imported crude for its 320,000 bbl/day refinery, the company said on September 9. The company is applying for crude import license at present.

Zhejiang Petroleum and Chemical has used 83.75% of 20-mln-mt quotas granted in the first three batches up to August for its phase-I 400 bbl/day refinery, JLC’s data showed. It is heard that ZPC also submitted the application for additional crude import quotas for its phase II 400,000 bbl/day refinery, which is scheduled to launch commercial production by the end of this year. 

Hengli Petrochemical had used 72.64% of 17-mln-mt quotas granted in the first three batches up to August, JLC’s data showed.  Its ceiling quotas for imported crude are 20 mln mt per year.