(EnergyAsia, November 30 2012, Friday) — Far from being extinguished by official policy and competition from the large state-owned players, some of China’s small oil refineries are thriving as their owners plot expansion as well as take on a direct role in importing crude oil.

The “teapot” refineries, each of less than 40,000 b/d in capacity, account for about a fifth of the country’s 11 million b/d of capacity, and have been targeted for closure and merger over the past decade. The government is aiming to shut down dozens of these ageing plants across the country by next year as part of a wider plan to raise the efficiency and profitability of the downstream oil sector.

Instead, the deadline has spurred some plant owners to embark on capacity expansion to escape their “teapot” status. According to energy media Argus, the teapot capacity could more than double from 2.6 million b/d to 5.23 million b/d by 2015.

One of the main teapot operators, China National Chemical Corp (ChemChina), has advanced its survival chances by applying for the coveted licence to directly import crude from abroad, threatening the control held by the three state-owned companies of PetroChina, Sinopec and CNOOC.

If ChemChina succeeds, it will strengthen its case to expand and upgrade its refineries, boosting China’s ability to compete for crude and export products on the international markets. Traditionally designed to produce low-grade fuel oil, these refineries are being upgraded to produce a wider range of higher quality fuels to meet tougher environmental requirements and demands of export markets.

The International Energy Agency (IEA) has made a note of the paradoxical impact of Beijing’a attempt to shut down these teapots. Instead of eliminating or reducing their numbers, official policy has led the small refiners to expand and grow stronger.

Importantly, the teapot owners and operators have the backing of provincial and regional governments which view them as vital to the local economies as they are an important source of fuel and employment.

Despite the weak outlook on refining margins, the IEA expects China to provide more than 40% of the increase in the world’s refining capacity over the next five years.