China’s slowing economic growth and transition to energy consumption have led to a decrease in demand for fuels such as gasoline and diesel. Simultaneously, the US sanctions on Iran and Russia have disrupted the supply of low-priced crude oil. As a result, profits for Chinese refining enterprises have plummeted, especially for small-scale local refineries known as “teapot refineries.” Industry insiders point out that in the next decade, dozens of these local refineries may face bankruptcy and closure.
According to Reuters, several senior managers at “teapot refineries” and an analyst estimate that about 15-20 private oil refineries (accounting for about half of the 4.2-5 million barrels per day capacity of “teapot” refineries) could withstand pressure for ten years or longer.
The term “teapot refineries” originates from Western media and refers to some small-scale refineries in China, known to the Chinese as “local refineries” or “small-scale refineries.”
Based on data provided by the Lubricating Oil Information Network in June 2023, by the end of 2022, a total of 74 local refineries in China had a combined annual crude oil refining capacity of 282 million tons. Among them, Shandong Province had 30 refineries, while the remaining 44 were distributed in Liaoning, Hebei, and other provinces.
Local oil refineries, also called private oil refineries, generally have small crude oil processing capacities, single product structures, a high proportion of finished oil, a low share of chemical products, and generally low profitability.
Wang Zhao, a senior researcher at Zhuo Chuang Information, mentioned that large-scale enterprises in Shandong with integrated chemical production, expansion space, and infrastructure like pipelines and terminals can sustain long-term operations.
Industry sources informed Reuters that since 2019, four major private oil refineries (Hengli, Shandong Hongrun, Rongsheng, Hengyi) have successively started operations, accounting for 10% of China’s refining capacity, rendering small refineries increasingly redundant.
As reported in Inner Mongolia Chemical Industry in September 2024, the consolidation of local refineries in Shandong may have just begun. It is foreseeable that in the future, the domestic refining and chemical industry, especially medium and small-sized refineries, may face widespread bankruptcies and liquidations.
Inner Mongolia Chemical Industry is a key academic journal supervised by the Inner Mongolia Institute of Petrochemical Research.
Longzhong Information (formerly known as China Petrochemical Business Network established in 1988) stated in October 2024 that due to soaring international crude oil prices and weak domestic demand for refined oil products, refining profits have drastically declined. In the first half of 2024, profits for state-owned main refineries and Shandong local refineries dropped by 22.94% and 70.62% respectively compared to the previous year.
The sharp decline in profits has led to a decrease in China’s refinery utilization rate, averaging 71.03%, with Shandong’s local refineries dropping to 55.66% and further plummeting to 50.92% by the end of June.
On September 14, 2024, Huaxing Petrochemical Group and Zhenghe Group, two Shandong local refineries, were declared bankrupt and liquidated by the court.
According to public records, both Huaxing Petrochemical Group and Zhenghe Group are subsidiaries of China Chemical Industry with assets worth 11.6 billion yuan, employing over 1400 workers, and an annual crude oil processing capacity of 6 million tons.
Not only local refineries but also large state-owned refineries are among those facing closures.
In October 2024, Reuters cited five sources reporting that PetroChina plans to shut down the Dalian refinery by mid-2025, equivalent to 3% of China’s total refining capacity. This is the largest refinery in China owned by PetroChina and signifies China’s peaking demand for oil, with potential signs of gradual contraction.
By the end of 2022, 10 local refineries in Shandong had withdrawn from refining capacity.
On January 10, 2025, the US Treasury Department imposed sanctions on Russian oil production and exports, targeting two major oil and gas companies and 183 oil tankers, with 155 being “shadow tankers and oil tankers operated by Russian fleet operators.”
Kpler, a global benchmark Brent data analysis company, indicated that based on 2024 data, around 530 million barrels of Russian crude oil will be sanctioned, with 300 million barrels destined for China, accounting for approximately 61% of China’s seaborne imports of Russian oil.
On January 7, Shandong Port Group issued a notice banning ports from allowing oil tankers designated by the US Treasury Department to dock, unload, or use ship services. The ban applies to ports on the east coast of China in Qingdao, Rizhao, and Yantai, which are major crude oil import sources for Chinese “teapot” refineries.
If the incoming Trump administration takes a tougher trade stance against Iran, this situation could worsen. Bloomberg cited Energy Aspects, an energy research consultancy, suggesting that the Chinese government might “be willing to sacrifice teapot refineries by compressing imports of Iranian oil as a concession to the Trump administration.”
Furthermore, on October 11, 2024, the US government announced sanctions on 17 oil tankers transporting Iranian oil, termed the “dark fleet,” in response to Iran’s missile attacks on Israel, subsequently adding 12 more vessels to the list.
Bloomberg reported that “teapot refineries” rely on cheap Iranian oil, accounting for about 90% of Iran’s exports. However, since the US expanded sanctions on “dark ships” carrying oil from Iran to China in October 2024, the supply has decreased, leading to price hikes.