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Oil demand growth in the world’s biggest oil importer—China—is at risk of slowing down, at least in the coming months.
Higher oil prices play a role in this, but the main culprit is a new tighter tax regime on independent Chinese refiners, which is already choking the refining margins and profits of the so-called ‘teapots’ who have grown over the past three years to account for around a fifth of China’s total crude imports.
The teapots have become instrumental in China’s growing thirst for crude oil after the government started allocating import quotas to the independent refiners in 2015.
Under the stricter tax regulations and reporting mechanisms effective March 1, however, the teapots now can’t avoid paying consumption tax on refined oil product sales—as they did in the past three years—and their profit bonanza is coming to an end.
Despite ample government-approved crude import quotas, independent refiners are now losing money on refining, cutting utilizations rates, and closing for maintenance to cut exposure to the unfavorable market conditions. With higher oil prices this year and the hefty taxes they now can’t avoid paying, the teapots are expected to reduce their imports, threatening China’s oil demand growth and ultimately, global oil demand growth.
Last year alone, the independents accounted for 85 percent of China’s crude oil import growth, according to data by S&P Global Platts.
Although China issued last week its second batch of crude oil import quotas to independent refiners for 2018, the teapots are unlikely to use up all their quotas this year, because it wouldn’t make business sense to refine crude at a loss just to have quotas fully utilized to make sure that they would qualify for quotas next year.
“Refining is a business. If processing crude results in losses now, it is unwise to take more crude just for securing quotas for the coming year,†a Guangzhou-based trader told S&P Global Platts. (continued on page 2)
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Refining is indeed a business, and it’s a losing one for the independent refiners now.
According to data by Zibo Longzong Information Group, as carried by Reuters, independent refiners were losing US$45 (300 yuan) per ton of crude oil processed in May, compared to a profit of US$135 (900 yuan) per ton at the beginning of 2016.
“We expect much weaker margins in June and July as more orders booked at peak crude prices arrive,†Gao Jian, crude oil analyst with China Sublime Information Group, told Reuters.
In response to the losses, a few teapots shut for maintenance in May and June to avoid exposure to the unfavorable market conditions, and some of them may not reopen at all if those conditions persist, according to Reuters.
Platts data shows that crude oil imports by the independent refiners hit a 20-month low last month, as a record-high inventory had piled up at major ports in the Shandong province, home of most of the teapots.
China’s overall crude oil imports in June dropped for a second consecutive month and hit their lowest level since December 2017, on the back of trimmed purchases by the teapots. Chinese imports stood at 8.36 million bpd last month, down by 9 percent from May’s imports of 9.2 million bpd, and down compared to the 8.8 million bpd imports in June 2017, data from the General Administration of Customs compiled by Reuters shows.
China’s imports for the first half of 2018 were still up compared to last year, by 5.8 percent to around 9.07 million bpd.
Yet, independent Chinese refiners could further trim imports in the coming months as their refining business is now at a loss, due to the hefty taxes and the higher and volatile crude oil prices.
“The oil price volatility is certainly not helping as not many independent plants are doing sophisticated hedging,†Seng Yick Tee with consultancy SIA Energy tells Reuters.
The higher import and tax expenses are now leading to the teapots cutting purchases in order to keep afloat in their once-lucrative refining business. Lower purchases from the chunk of the Chinese market accounting for one-fifth of the country’s oil imports could spell trouble for Chinese—and global—oil demand growth.
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Valaris Limited announced new contracts awarded subsequent to issuing the Company’s most recent fleet status report on February 21, 2023. Three-year contract with Petrobras for drillship VALARIS DS-8. The rig will be reactivated for this contract. The total contract value is approximately $500 million, including a $30 million mobilization fee. 100-day contract with a TotalEnergies affiliate for drillship VALARIS DS-12. The contract is expected to commence in second quarter 2023. 70-day contract with Beach Energy offshore New Zealand for heavy duty modern jackup VALARIS 107. The contract is expected to commence in third quarter 2023. The total contract value is approximately $26 million. President and Chief Executive Officer Anton Dibowitz said, “We are particularly pleased to have secured the award for preservation stacked drillship VALARIS DS-8, for a contract that is expected to generate a meaningful return over the firm contract term, and we remain focused on exercising our operational leverage in a disciplined manner. This most recent award represents the sixth contract awarded to one of our high-quality stacked floaters since mid-2021, and speaks volumes about our demonstrated track record of project execution when reactivating rigs.” Dibowitz added, “Following the reactivation of VALARIS DS-17 and DS-8, we will have ten floaters working across the golden triangle, including four drillships in Brazil, a market where we expect to see continued growth over the next several years.” Updated Guidance As a result of the contract awarded to VALARIS DS-8, which will require the rig to be reactivated from preservation stack, we are updating our first quarter 2023 and full-year 2023 guidance provided on our fourth quarter 2022 conference call on February 21, 2023. First Quarter 2023 Contract drilling expense is expected to increase by approximately $5 million to $385 million to $395 million. Adjusted EBITDA is expected to decrease by approximately $5 million to negative $5 million to breakeven. Adjusted EBITDAR, which adds back one-time reactivation expense, is expected to be $25 million to $30 million, unchanged from the guidance provided on our fourth quarter 2022 conference call. Full-Year 2023 Revenues are anticipated to be $1.8 billion to $1.9 billion, unchanged from the guidance provided on our fourth quarter 2022 conference call. Contract drilling expense is expected to increase by approximately $60 million to $1.49 billion to $1.59 billion. Adjusted EBITDA is expected to decrease by approximately $60 million to $180 million to $220 million. Adjusted EBITDAR, which adds back one-time reactivation expense, is expected to be $280 million to $320 million, unchanged from the guidance provided on our fourth quarter 2022 conference call. Capital expenditures are expected to increase by $60 million to $320 million to $360 million. Source: Valaris Join our mailing list here We are #1 on Google and Bing for the "Largest Mobile Energy Network" Come join our community! Download the Rig Lynx app here
Seadrill Limited announced that the West Neptune has executed approximately six months of term extensions with LLOG Exploration Offshore, L.L.C in the US Gulf of Mexico. The extensions will commence in direct continuation of the existing term, and will keep the rig busy until Q3 2024, furthering Seadrill and LLOG’s long-term association. Total contract value for the extension is approximately $79 million. Source: Seadrill Join our mailing list here We are #1 on Google and Bing for the "Largest Mobile Energy Network" Come join our community! Download the Rig Lynx app here
Semisub rig owner Dolphin Drilling has inked a new contract with Peak Petroleum in Nigeria for its 1974-built Blackford Dolphin. The firm contract, which follows the letter of award in January, gives the Euronext Growth-listed owner of three rigs the potential to extend the unit’s backlog by a minimum of 120 days and up to 485 days. The deal adds to and will be a direct continuation of the previously announced 12-month contract with General Hydrocarbon Limited (GHL). Øystein Stray Spetalen-backed company said the effective dayrate associated with the minimum firm period of the contract is $325,000, including the mobilisation fee. “The final award of the contract for Blackford Dolphin shows the opportunities in Nigeria at a strong dayrate, in addition to building on the backlog for the rig. It also underlines the attractiveness of our assets, and we look forward to returning to revenue-generating operations in 2023,” noted Bjørnar Iversen, CEO of Dolphin Drilling. Source: Dolphin Join our mailing list here We are #1 on Google and Bing for the "Largest Mobile Energy Network" Come join our community! Download the Rig Lynx app here
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