Chinese major refineries all shake off heavy losses this October, thanks to declining international crude futures that recently tumbled below US$90/ barrel and bearish domestic wholesale prices of refined products, C1’ survey found. In addition, refineries located in Northeast China drinking Daqing crude harvested better margin than those based in southern China eating imported crude since this September, first ever, on lower domestic crude purchase cost. In view of the rising refining margins, some marketers believed that government would cancel or cut the refund of crude import tariff for state-owned refiners as from the third quarter.

Positive refining margin reappears
In October, Chinese major refineries all returned to see positive refining margin since they last reaped positive margins in March, 2007.

Northeast China-based refineries, which take mainly domestic Daqing crude as feedstock, reaped circa Yuan 245/mt (equivalent to US$4.81/barral) of margin as of Oct 8, surging Yuan 637/mt from one month earlier. While refineries in southern China which drinking imported crude from Middle East recorded Yuan 25/mt (equivalent to minus US$2.49/barral) of refining margin, sharply up Yuan 616/mt, C1’s data showed.
The above refining margins of Chinese refineries are calculated basing on ex-refinery prices of oil products. If basing on wholesale prices of oil products, the refineries in Northeast and South China can obtain as high as Yuan 658/mt and Yuan 499/mt refining margins respectively in October, indicated C1’s data. These refineries almost realized breakeven in refining in early September calculating with wholesale price of oil products.

The positive refining margin is expected to maintain in the rest of this year, C1 forecasted. Refineries underlying Sinopec could make breakeven when crude prices are at US$95-100 per barrel and PetroChina’s subsidiaries could make breakeven when feedstock costs below US$90-95 per barrel, according to sources with the two refineries. China Petroleum and Chemical Industry Association (CPCIA) forecasts that global crude prices might stay around or below US$90 per barrel in the fourth quarter due to the flagging world economy.

Northeast refineries’ margin overtops those in southern China
Refining margins of Northeast-based refineries exceeded those of refineries in South China since this July, due to lower Daqing crude settlement price. PetroChina, whose refineries are mainly located in Northeast China, started adjusting formula of domestic Daqing crude settlement price as from this April by adding Brent as one of the references. And it linked price of its light crude with Brent in September, while eliminating Tapis, according to C1's data.

PetroChina produced 4.345-mil bbl of crude and processed 4.252-mil bbl in the first half of this year, according to its 2008 interim result. Over 97.86% of the output was consumed by subsidiary refineries.

Besides lower feedstock costs, gasoil/gasoline wholesale prices spreads between southern and northern China narrowed, which relatively supported refining margin of northern China-based refineries. The spread of zero pour point gasoil shrank to around Yuan 80/mt in end September from Yuan 150/mt in early September. Nationwide adequate oil products supply and ample inventories after the Olympics weakened domestic oil products price, especially price in South China, one of oil consumption regions in the region. A source with Sinopec South China Sales Company explained that gasoil/gasoline supply tightness in South China has been easing with more than 10.0-mil-mt/yr topping capacity coming on stream in recent years. Moreover, sluggish demand from industry sector in Pearl River Delta also depressed the wholesale prices of gasoil in South China, he added.



Subsidies on refining losses may be canceled
Since the refining margins improved significantly, market players paid close attention to whether the two state-owned oil giants can still get subsidy for processing imported crude in the second half of this year. A refinery source with PetroChina told C1 that PetroChina has not applied for subsidy for processing imported crude for the third quarter yet. He said the market expected the government might cancel the refund of crude import value-added tax slash it to 40% from 75% as from Jul 1.

However, a source with Sinopec Shanghai Petrochemical believed that the policy of crude import VAT refund would be extended to the third quarter as domestic refineries suffered most severe refining losses in this July and August. Sinopec got Yuan 22.93-bil of subsidy for crude processing losses and Yuan 3.07-bil of refund for oil products import tariff in the second quarter, according to its semiyearly report for 2008.