Sinochem may keep bankrupt refineries as auctions draw scant interest, sources say

Sinochem Group may keep three bankrupt oil refineries located in eastern China after auctions to sell them drew little interest from other companies, sources familiar with the matter said.

The lack of interest in the plants illustrates the woeful state of the refining sector in China, the world's biggest oil importer and second-largest consumer. Beset by flagging fuel demand amid slower economic growth that has eroded margins, the country's plants are processing less crude than the year before.

The Sinochem plants, which are smaller, older and less sophisticated refineries known as teapots, are also contending with greater regulatory scrutiny that threatens the survival of other companies in Shandong province, where the majority of the teapot plants are located.

Failure to sell the refineries during their individual auctions may mean state-owned Sinochem will retain them by writing down debts to creditors and renegotiating taxes owed, according to two sources familiar with Sinochem's thinking.

Sinochem declined to comment.

The exact amount of the debt could not immediately be ascertained, but tax administration records for the cities in Shandong where the refineries are located show that by mid-2024 the plants had accumulated combined unpaid consumption taxes of about 13.2 billion yuan ($1.82 billion).

The plants, Changyi Petrochemical, Huaxing Petrochemical Group and Zhenghe Group Co, have combined crude processing capacity of 380,000 barrels per day, or 3% of national output, and were put up for auction in October through the government-backed Shandong Property Right Exchange Centre.

Huaxing was offered at 8.7 billion yuan, Changyi at 6.4 billion yuan and Zhenghe for 6.3 billion yuan, data on the Centre's website showed.

Sinochem, which separately runs a refinery and petrochemical complex in the southeastern province of Fujian, inherited the troubled Shandong refineries in a Beijing-orchestrated merger in 2021 with their previous operator, state-owned ChemChina.

The auctions followed local court orders in September declaring all three companies bankrupt after reorganisation procedures were called off.

Documents on the Centre's website show that the plants do not have crude oil import quotas and that a new owner would need to re-apply for all operating licenses.

That would be a deterrent to would-be buyers, said several sources at other independent refiners operating in Shandong.

Without crude import quotas, the plants must rely on processing imported fuel oil, a costlier feedstock because of tariffs and the consumption tax, the sources said.

Unlike rival independent refiners in Shandong, Sinochem's plants have shunned discounted crude from Russia, Iran and Venezuela because of Western sanctions, putting them at a competitive disadvantage.

Dismantling the plants is an unlikely option that could mean the loss of thousands of jobs, something social stability-obsessed local authorities would be wary of, said the two sources familiar with Sinochem's thinking.

Sinochem halted operations at Zhenghe and Changyi in mid-2024 as high crude oil costs and weak fuel demand reduced margins. The third plant, Huaxing Petrochemical, was closed in recent weeks, according to local consultancy Sublime China Information.

In late 2021, the Shandong government ordered the three plants to "self-rectify" any irregular fuel tax practices, part of a national clampdown on independent refiners related to quota usage and tax payments.