China’s export quota for refined oil products will continue to decline over the medium term, driving industry consolidation and containing long-term carbon emissions, says Fitch Ratings. However, we believe the drop will have a limited credit impact on Fitch’s rated Chinese national oil companies (NOCs).
Refined oil production in China is mainly for domestic consumption, with the export quota used to balance downstream demand and supply over the short-to-medium term. Exports of refined oil products account for a small proportion of total refined oil production, falling to 11% in 2021 from 14% in 2020. The export quota granted for 2021 and the actual export volume decreased by 35% and 12%, respectively, while market sources reported the first batch of 2022 quota allocation declined by 56% yoy. The diesel export quota in 4Q21 was cut to address a domestic diesel shortage, as diesel production rose 3% yoy, falling short of apparent diesel consumption’s 9% increase due to the economy’s recovery in 11M21. This resulted in actual diesel exports slumping to 1.49 million metric tonnes (MT) during the quarter from 5.6 million MT in 4Q20.
Fitch expects the export quota allocation to continue to trend down over medium-term during China’s 14th five-year plan for 2021 to 2025 to direct most of the country’s refined oil production towards local consumption. However, export quota may still increase temporarily to ease domestic surplus when required. China is likely to have an ample domestic supply of refined products as more refining capacity is coming onstream amid stiff competition. This, together with a reduction in the crude oil import quota and tighter tax regulation oversight, will speed up consolidation among independent refiners, which are less efficient as they have dated facilities with low complexity. Independent refiners still account for about 35% of total refining capacity in China. Long-term carbon emissions would theoretically be reduced on more efficient refining capacities and reduced exports.
The NOCs’ integrated operations and their lower dependence on export earnings would buffer the impact of the quota reduction. This is even though the NOCs – China National Petroleum Corporation (A+/Stable, Standalone Credit Profile (SCP): aa-) and its key subsidiary PetroChina Company Limited (A+/Stable, SCP: aa-), China Petroleum & Chemical Corporation (Sinopec, A+/Stable, SCP: a-) and China National Offshore Oil Corporation – are the main beneficiaries of the export quota, accounting for 75%-90% of the total allocation.
The NOCs’ refining capability also gives them operational flexibility to adjust refining throughput and product slates. Petrochina and Sinopec said net profit more than doubled in 2021 from a year earlier, buoyed by stronger oil and gas prices and a recovery in local demand for refined products. Rising domestic consumption of refined products helped absorb higher local production volume, mitigating the decline in exports.
Source: Fitch Ratings