EIA: policy and geopolitical developments affected China’s refinery activity in 2022

According to its General Administration of Customs, an average of 13.5 million bpd of crude oil was processed in China in 2022, a 4% decrease from 2021’s record of 14.0 million bpd. The decrease in crude oil processing in 2022 mostly reflects less refining in the five months from April through to August, when China processed an average of only 12.5 million bpd. In July, the least amount of crude oil (11.3 million bpd) was processed in China since January 2018. In 2022, more crude oil was processed by refiners early and, particularly, late in the year, reaching a record monthly high of 15.1 million bpd in September and then averaging 14.1 million bpd from October through to December. The amount of crude oil processed ranged between 15.1 million bpd in September and 11.3 million bpd in July, representing the widest difference within any calendar year in monthly data going back to 2011.

Less domestic demand for crude oil reduced refining activities in China in 2022. Demand for petroleum products in China weakened under COVID-19 outbreaks and mobility restrictions in major cities, including Shanghai. These restrictions significantly slowed China’s economic activity, as reflected in its GDP in 2Q22.

Lower product export quotas also contributed to reduced refining activities in China during 2022. China releases several sets of fuel export quotas every year, allocating a set amount of exports to a few, mostly state-owned refiners. China began issuing lower export quotas around the second half of 2021 to address policies and trends that could create potential domestic supply concerns, including:

• A new consumption tax policy announced in June 2021.
• Increasing global crude oil prices.
• New tax investigations of independent refiners.
• The retirement of several small and privately owned refineries in Shandong.

These low export quotas, which continued through most of 2022, kept petroleum product exports from China below 1.5 million bpd from July 2021 through August 2022 and subdued refinery demand during that period.

September’s record crude oil processing was likely a response to expectations of new petroleum product export quotas, which China ultimately issued on September 30 to promote economic growth. China’s petroleum product exports also increased sharply in September, perhaps because the expectation of new quotas assured refiners they could use up their old allocations. In addition, industry analysts have suggested that some of the exports counted in September may have actually shipped in October. Following the new export quotas, refinery activity was strong in China during the fourth quarter. The increase in China’s refinery activity at the end of the year was at least partially due to increased exports, which averaged 1.7 million bpd from September through to December, up 0.6 million bpd from the first eight months of the year.

Most refining in China uses imported crude oil, so its crude oil imports tend to follow crude oil processing volumes. This was the case in 2022, when crude oil processing volumes and imports into China decreased from 2021 levels. Crude oil imports into China in 2022 were lowest in June and July, when domestic demand for petroleum products was low, crude oil prices were high, and several refineries were undergoing maintenance. In June, China’s crude oil imports decreased to 8.7 million bpd, the least amount since July 2018, and they remained low at 8.8 million bpd in July. Imports increased following increased refinery demand in response to new product export quotas at the end of the year. In November, 11.4 million bpd of crude oil was imported into China, and 11.3 million bpd imported in December.

In the months following Russia’s full-scale invasion of Ukraine in February 2022, crude oil imports into China from Russia increased. Russia is typically China’s second-largest source of crude oil imports, slightly behind Saudi Arabia. From May through August, when the front-month futures price of Brent crude oil averaged US$108/bbl, a larger share of crude oil imported into China came from Russia. Western economic sanctions have reduced demand for Russia’s crude oil and, as a result, exporters in Russia have discounted crude oil prices and searched for alternative export destinations. Meanwhile, Europe has also been looking for alternative sources of crude oil, driving up prices for Brent crude oil. In response, imports to China have shifted away from more expensive Western sources and toward cheaper crude oil from Russia.

China’s crude oil imports by source country in 2H22, compared with those in 2H21, show how China’s importers changed their crude oil import strategies following Russia’s full-scale invasion of Ukraine. In 2H22, Russia became China’s largest source of crude oil imports at 1.8 million bpd, an increase of 13% from 2021. Imports into China also increased significantly from the UAE and Malaysia, according to China Customs data. Industry analysts indicate that much of the oil that was shipped from Iran to China was relabeled from countries such as Malaysia, the UAE and Oman to escape detection from customs authorities.

Following Russia’s full-scale invasion of Ukraine, crude oil imports into China decreased the most from Angola. Crude oil imports into China from Angola decreased 250 000 bpd (33%) in 2H22 compared with 2H21. According to Kpler trade data, much of the crude oil exported from Angola to China in previous years was diverted to Europe. The relatively high Brent crude oil price associated with Europe’s need to find crude oil imports for the region also likely deterred crude oil imports from North Sea producers in Norway and the UK. In 2H22, compared with the second half of the previous year, crude oil imports into China decreased by 140 000 bpd (75%) from Norway and 120 000 bpd (88%) from the UK. Imports from those two countries were even less prior to the G7 price cap that took effect in December. Imports into China also decreased significantly from Oman, importing 140 000 bpd (16%) less in 2H22 than in 2H21.

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