Oil report

China's "teapot" refiners say able to ease diesel shortages

* Teapots hit by fuel oil price rise and consumption tax

* Sell stakes in exchange for crude oil supplies

* Can help ease diesel shortages if given enough crude

QINGDAO, China, Nov 25 (Reuters) - China’s independent refiners are key to easing the country’s frequent diesel shortages, provided they are given access to more crude feedstock, industry officials said.

China’s giant state-run refiners had blamed their independent counterparts, called teapots because of their relatively small size, for a recent diesel shortage in the world’s second largest oil market.

Diesel supplies, which have been tight for several months, got even more scarce after the government lowered gasoline and diesel prices on October 9. The shortage has eased lately because state refiners ramped up production and rushed to ship in diesel from overseas.

State refiners had said the teapots had reduced runs or shut down because they were unwilling to put up with negative margins.

Several independent refiners, however, said the real problem was a lack of feedstock.

“We closed our plant not due to refining losses, but on the lack of feedstocks,” said a sales executive with a small refinery that had no ties to state refiners.

“It would be unwise to stop production when demand was high and a shortage existed.”

The independents largely refine fuel oil as feedstock because crude oil imports are tightly controlled by the state-run refiners.

Fuel oil is a residual in crude oil distillation, and users have been hit hard since January 2009 when China introduced a hefty consumption tax of 0.8 yuan a litre. The government waived the charges for fuel oil used in ethylene and aromatics production, but this is beyond the capability of most teapots.

An official with an independent refinery in east China’s Shandong province said its plant had cut back operations to 30 percent of capacity recently from an average of about 60 percent so far this year.

“We were restricted by both high cost and limited fuel oil import quotas,” the official said. “We would be much better off if we can use crude.”

Independent refiners account for more than 20 percent of national refining capacity.

Zhu Jiasheng, an analyst with C1 Energy, told an industry conference that these smaller refiners had lost over 200 yuan ($31.41) for each tonne of straight-run fuel oil they processed in the first ten months of this year, in part due to a surge in cost after Japan’s deadly earthquake in March.

Some teapot refineries have sold stakes to state refiners such as PetroChina and China National Offshore Oil Corp (CNOOC) in exchange for crude oil supplies.

National oil and chemical firms have so far acquired around a quarter of independent refining capacity and these teapot refiners have received plentiful crude supplies this year, according to C1 Energy’s Zhu.

“The business environment is becoming less and less favourable,” said a official with a second teapot refiner which also has no ties to the state refiners. “We’re not treated fairly.”

Major teapot refiners in Shandong have long had a combined crude supply quota of some 34,000 barrels per day from Sinopec Corp’s Shengli oilfield, an amount that it too small for even a mid-size single plant.

“Nationalisation is gaining pace in many sectors in China, I doubt China is heading for a liberalised oil market any time soon,” said an official with a foreign firm looking for business opportunities in China. ($1 = 6.3680 Chinese yuan) (Editing by Miral Fahmy)