China’s oil refining sector is bracing for a significant downsizing, with up to 10% of its capacity projected to shut down within the next decade. This contraction is driven by an anticipated earlier-than-expected peak in Chinese fuel demand, shrinking profit margins, and Beijing’s policy push for greater efficiency, targeting older, smaller refineries.
The refining landscape, currently the world’s second largest, has long grappled with overcapacity following decades of aggressive expansion fueled by robust demand growth. Historically, authorities, particularly in Shandong province, a hub for independent refineries, have been reluctant to shutter inefficient plants due to concerns over job losses.
However, the rapid rise of electric vehicles, coupled with slowing economic growth, is rendering the least competitive refineries unsustainable, forcing a necessary industry consolidation. This shakeout has significant implications for global oil markets, as China is the world’s largest crude importer, representing 11% of global demand. In 2024, Chinese crude imports fell by 1.9%, the first decline in two decades excluding the COVID period, exerting downward pressure on global oil prices. Refinery output also experienced a rare decline last year.
Low operating rates underscore the industry’s challenges. Wood Mackenzie estimates that Chinese refineries operated at just 75.5% of capacity in 2024, the second lowest utilization rate since 2019 and considerably below the over 90% rate seen in U.S. refineries.
Independent fuel producers, known as “teapots,” predominantly located in Shandong province, are particularly vulnerable. Constituting a quarter of the industry, these teapots operated at a mere 54% capacity last year, the lowest since 2017, excluding the COVID years, according to a Chinese consultancy.
Beijing signaled its intent to address overcapacity in 2023, pledging to eliminate smaller plants under a national refining capacity cap of 20 million barrels per day (bpd) by 2025, marginally higher than the current 19 million bpd.
The emergence of four large privately-owned refineries since 2019, collectively accounting for 10% of China’s refining capacity, has made smaller refineries expendable. Furthermore, since 2021, Beijing has pursued independent refineries for unpaid taxes, adding to their financial strain.
Smaller operators lacking access to Beijing’s crude oil quotas and relying on imported fuel oil face further pressure from impending tariff and tax policy changes in 2025, which are expected to escalate their operating costs, according to industry executives. These plants represent a combined processing capacity exceeding 400,000 bpd.
Estimates from industry experts suggest that only 15 to 20 independent plants, roughly half of the 4.2 to 5 million bpd teapot capacity, possess the resilience to navigate these challenges for a decade or more. Those with scale, integrated chemical production, room for expansion, and robust infrastructure like pipelines and terminals are better positioned for long-term survival.
Wood Mackenzie projects closures of 1.1 million bpd between 2023 and 2028, representing 5.5% of the national capacity cap, with an additional 1.2 million bpd by 2050.
The year 2025 is shaping up to be a critical juncture for the industry. The impending startup of the second 200,000-bpd crude unit at the $20 billion Yulong Petrochemical plant in Shandong is expected to exacerbate the fuel surplus, intensifying competition.
Local governments have already initiated some consolidation efforts. In preparation for the Yulong plant, Shandong authorities closed 10 smaller refineries totaling approximately 540,000 bpd by late 2022. A nationwide investigation in 2021/2022 resulted in five refineries losing their import quotas, contributing to the first annual decline in China’s crude oil imports in two decades in 2022.
Concurrently, state-owned refineries are pivoting towards higher-value chemicals production. PetroChina plans to shutter a 410,000-bpd refinery in Dalian this year, replacing it with a smaller, petrochemical-focused facility. Similarly, Sinopec Corp is anticipated to eventually close older, fuel-centric plants in eastern provinces where electric vehicle adoption is more prevalent.
The industry downturn has left many workers facing uncertain futures. A senior crude oil procurement manager at a struggling Shandong teapot refinery, operating at just 20% capacity and incurring losses for nearly 18 months, described the difficulties of finding new employment within the shrinking sector.
In conclusion, the confluence of peaking fuel demand, government policies, and intensifying competition is forcing a profound transformation of China’s oil refining industry. The resulting wave of closures will reshape the sector’s landscape and have significant repercussions for global energy markets.
