China’s oil-refining industry earned US$10.7 billion last year due to a new fuel-pricing mechanism introduced by the government in 2008 that guaranteed profits. This came after losses of US$21 billion in 2008. China refined a record volume of crude oil in 2009 and therefore may face a minor oversupply situation this year, even as processing volume increased 29% in January due to increased demand.
Despite the price reforms, the fortunes of China’s refiners remain strongly linked to import costs. Imports accounted for 52% of total oil consumption in 2009, in excess of the 50% considered as a warning level. The Chinese Academy of Social Sciences predicts imports will comprise 64.5% of domestic oil consumption by 2020. As demand continues to rise, Chinese oil companies will increasingly look to develop foreign prospects, intensifying international competition and reducing margins for all players. This would eat into the higher domestic profits from refining.
In order to meet its oil needs, China will likely seek to diversify international prospects and build closer ties with its three primary providers of oil imports – Saudi Arabia, Angola and Iran. This may prove profitable for foreign governments offering to sell oilfield prospects, but again, Chinese participation will just drive up the bidding.