China: Chinese Teapots - The Game Changer In China's Oil Industry

Last Updated: 6 April 2017
Article by Patrick Phua and Jean Woo

China's privately owned refineries are the new force in the crude oil market. 

Once sidelined due to Chinese regulations, these refineries (known as "teapots" because of their small size in comparison with giant state-owned companies) are now importing as much as 1.2m barrels of crude oil per day into China. This accounts for as much as 15 per cent of the country's total crude oil imports. The incremental demand has catapulted China into the position as the world's largest oil importer, above the United States.1

The impact has been felt both upstream and downstream. At least two of these teapots have announced plans to invest in refineries in Asia this year. Hengyuan Petrochemical purchased Royal Dutch Shell's 51 per cent stake in the Port Dickson refinery in Malaysia, while Myanmar granted Guangdong Zhenrong the right to build a US$3bn refinery and oil port along the Indian Ocean coast. Recent reports also state that the Chinese teapots are pooling together their financial resources to fund acquisitions of upstream assets outside of China.2

Who are they?

The Chinese teapots are privately owned unaffiliated refineries which are small in comparison to the major Chinese state-owned oil companies.3 Around 80 per cent of Chinese teapots are based in Shandong (an eastern province well known also for its gold deposits).

Previously, all privately owned refineries were restricted from directly importing crude oil. Their crude oil feedstock had to be routed through the state-owned oil companies at a margin above market rates.4 Over the years, the monopoly held by the state-owned oil companies has seriously eroded profits earned by these independent refineries – many have since been forced out of business.5

This changed dramatically last year when the Chinese Government started liberalising its energy sector. Crude oil import quotas and licences were allocated to these teapots for the first time starting with Shandong Dongming Petrochemical (the biggest teapot refinery in the eastern Shandong province) and Beifang Asphalt Fuel in the northeastern Liaoning province.

In April this year, as a signal of its growing influence, Shandong Chambroad Petrochemicals – a leading Chinese teapot - managed to secure the purchase of 730,000 barrels of crude oil directly from Saudi Aramco, the world's biggest oil exporter.6

The challenges

While the Chinese teapots have grown in influence, some concerns surrounding their creditworthiness and experience remain. Recently, two crude oil cargoes at Qingdao Port had to be diverted or resold because of the refineries' inability to open letters of credit for payment for the cargoes. Many traders are still cautious when they deal directly with Chinese teapots, as these companies do not have state backing and are relatively new to the crude trading market.

To address these issues, 16 Chinese teapots have formed an industry association known as the China Petroleum Purchase Federation of Independent Refineries led by Shandong Dongming Petrochemical, the biggest of the Chinese teapots, to increase their crude purchasing power and their bargaining strength for chartering tankers. Separately, the Chinese Government has also moved quickly to plug the current shortcomings in their infrastructure. There are reports that a group of Chinese companies led by Qingdao Port International plan to build new pipelines and storage facilities in eastern Shandong province, to support the increase of crude imports into the region.7

Is this a flash in the pan?

Some critics do not believe that the growth of the Chinese teapots is sustainable. They believe that the surge in domestic demand in China could be temporary – much of it fuelled by China's stockpiling in an effort to maintain its energy security in the face of growing tensions in the region. As China's stockpiling efforts stop or slow down, some fear the growth of the Chinese teapots will decelerate significantly.

On the other hand, the growth of Chinese teapots has attracted much needed foreign investment into the local real economy. Qatar's Qatra for Investment & Development (QID Group) and Hamad Bin Suhaim Enterprises signed a deal in 2015 to acquire 49 per cent of China's Shandong Dongming Petrochemical Group - in direct competition with state-owned oil companies - worth US$5bn. It is reported that the cash will be used to finance the building of 1,000 petrol stations across six provinces in China and an LNG terminal in Qinzhou.8

For now, China seems determined to sustain the growth of the Chinese teapots. After relaxing the import quotas for Chinese teapots, Beijing pushed through more reforms earlier this year by granting export quotas for the first time to ten independent refineries. Under these export quotas, a refinery can export refined oil products from China (including gasoil, gasoline, jet/kerosene and naphtha) up to its allocated quota.

It will, however, take time for exports from these refineries to have a significant impact on the international oil market as a number of them still do not have access to key infrastructure such as export terminals. They also lack experience of dealing in the global oil market. Nonetheless, the history of Chinese reforms informs us that, despite these challenges, a few private-sector champions are likely to arise from the ashes of China's state-sponsored oligopolies. Players in the global oil market will stand to profit from these new champions' arrival on the global stage.


1. In April 2015 China overtook the United States as the world's largest oil importer with imports of 7.4 million barrels per day – 200,000 more than the United States. Kevin McSpadden, 11 May 2015 "China Has Become the World's Biggest Crude Oil Importer for the First Time",

2. By Meng Meng and Chen Aizhu, Boxing, China/Beijing, 25 May 2016, "From hinterland to wonderland: China's 'teapot' refinery boomtowns",

3. Such as China National Offshore Oil Corporation (CNOOC), China National Petroleum Corporation (PetroChina) China National Refinery Corporation, and China Petroleum & Chemical Corporation (Sinopec).

4. These Chinese teapots were sometimes charged 400-500 yuan (US$64-81) per tonne above market rates when they purchased feedstock from Chinese state-owned oil companies. Florence Tan, Singapore, 29 April, 2015, "China's biggest private refiner eyes crude import quota in third quarter",

5. By the end of 2000, more than 80 per cent of Shandong-based Chinese teapots had closed. By Meng Meng and Chen Aizhu, Boxing, China/Beijing, 25 May 2016, "From hinterland to wonderland: China's 'teapot' refinery boomtowns",

6. Jenny W. Hsu, updated 30 May 2016, "'Teapot' Refineries Shore Up China's Demand for Crude", The Wall Street Journal.

7. The project, estimated to cost more than 1.5 billion yuan (US$229 million), is undergoing an environmental assessment prior to a final investment decision.

8. Reporting by Amena Bakr; editing by David French, 30 March 2015, "Qatari investors to pay $5 billion for 49 percent Shandong Dongming Petchem stake",

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

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