China’s New Fuel Tax Has Refiners Scouring for Alternatives

(Bloomberg) -- A new fuel import tax and Beijing’s crackdown on the reselling of crude quotas has China’s private refiners seeking alternative products such as straight-run fuel oil to process in their plants, according to traders.

At least two Shandong-based refiners have purchased straight-run fuel oil cargoes with arrival dates between mid-June to August, said traders with direct knowledge of the matter who asked not to be identified. That could be used as an alternative to diluted bitumen, which is set to be taxed, they said.

China cited pollution concerns and the need to promote fairness in the refining sector as reasons behind the tax on fuels including light-cycle oil. Independent processors could make inferior and pollutive products at lower prices with LCO and diluted bitumen, drawing the ire of state refiners, which lobbied for an end to tax exemptions. The levy takes effect June 12.

Straight-run fuel oil is also garnering interest from private refiners after Beijing started to scrutinize the reselling of crude import quotas. Processors and domestic trading firms have been able offload surplus oil to those that don’t qualify for allocations. China is yet to release its second batch of quotas for 2021, compared with last year when refiners received them in April.

Prior to private refiners getting permission to import crude in 2015, residual oil including straight-run fuel oil was the main product they processed to make fuels. China only recently became a net fuel oil exporter after relying on overseas supplies for decades.

Straight-run fuel oil, which is usually cheaper than crude, is a residue that comes from a refinery’s distillate unit. It can be processed into diesel or lighter fuels such as gasoline, in some instances, or mixed into fuel oil

(Updates with straight-run fuel oil history in 5th paragraph and chart.)

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