(The opinions expressed here are those of the author, a columnist for Reuters.)
By Clyde Russell
LAUNCESTON, Australia, Feb 4 (Reuters) - - The new entrants to China's crude market will not only boost the amount of oil imported, but are also likely to affect the supply sources and method of delivery.
There is little doubt that the granting of increased quotas to smaller, private refineries will increase the amount of crude bought by the world's second-largest importer.
But what is less certain is exactly how these new entrants will go about sourcing and delivering the crude they will be able to purchase.
China more than doubled the non-state crude import quota for 2016 to 87.6 million tonnes, equivalent to 1.75 million barrels per day (bpd), part of efforts to boost competition and attract new entrants to an industry that had been dominated by state-controlled majors such as PetroChina and Sinopec.
This meant that private refining companies, often referred to as teapots because of the smaller and simpler units they operate, could become significant players in the crude oil market.
If teapots use all their additional allowance, it could add between 1 and 1.2 million bpd to Chinese import demand, adjusting for the crude they were already receiving from state-owned traders, consultants Energy Aspects said in a research note on Feb. 3.
This implies a possible 18 percent increase on the 6.71 million bpd China imported in 2015, which would likely be enough to see it overtake the United States as the world's top importer.
However, there have been concerns recently that the new entrants that they may a touch out of their depth when it comes to participating in the rough and tumble of oil trading.
A recent example was the failure of a private refiner, Baota Petrochemical Group, to obtain letters of credit for two crude cargoes, worth about $50 million, that it bought from traders Vitol and Mercuria, Reuters reported on Jan. 22. such as those experienced by Baota may lead to a tightening of rules for the new entrants, including credit standards, according to the China Petroleum and Chemical Industry Federation.
DIFFERENT STRATEGIES
What does appear likely is that the new crude importers will adopt different strategies to the existing state-controlled giants.
Energy Aspects expects they will opt for more diverse crude grades, buy smaller cargoes given their limited port access and buy more pipeline supplies, such as Russia's ESPO grade.
Given the teapots struggle to get credit and they lack the financial muscle and experience to use hedging programmes, they will most likely seek quick deals, with short delivery periods as this will minimise their exposure to adverse movements in crude prices.
This implies an increase in Chinese imports using smaller tankers carrying crude from relatively nearby producers, such as Brunei, Indonesia, Malaysia and Australia.
In turn this will provide increased opportunities for producers, shippers and traders prepared to be flexible and opportunistic, with the likely reward of higher prices for cargoes, albeit with higher risk of default.
Overall, the rise of the teapots will contribute to increased volatility in China's crude imports, making it harder to discern trends and patterns.
It's also likely that the teapots will increase their run rates in order to maximise the benefit of being allowed to use crude rather than lower quality fuel oil as they did previously.
This in turn should lead to more refined products being available in China, possibly to the point of significant oversupply, assuming the state-owned majors don't cut their run rates.
The logical consequence should be rising exports of refined products, especially middle distillates, given the slowing and changing nature of China's economic growth.
But it's not certain that the state-controlled large refiners will be willing to cede domestic market share to teapots and export their surplus products.
The teapots are unlikely to be major fuel exporters, given their lack of export quotas and suitable infrastructure.
With China still regulating retail prices, the incentive is for both the teapots and the state refiners to maximise domestic sales, meaning that if the majors don't export surplus fuel, inventories are likely to build.
While this doesn't appear to be on the cards as yet, perhaps Beijing may consider a truly competitive domestic retail market at some point.
Overall, it's likely that 2016 will be a steep learning curve for the new entrants to China's crude trading, with missteps likely.
(Editing by Ed Davies)