(MENAFN- Gulf Times) Chinese industry body said it could review rules covering the import of crude by new entrants after a private refinery failed to secure financing for 1.5mn barrels of crude it bought, in a blow to Beijing's moves to open up its oil market.
Baota Petrochemical Group Co could not get letters of credit for two crude cargoes worth more than $50mn it bought from commodity merchants Vitol and Mercuria, two traders with direct knowledge of the transactions said.
The oil arrived at China's east coast but had to be resold or diverted, they said, causing concern about dealing with private entrants under Beijing's ambitious plans to open up the sector to more competition.
Asked about why it had not been able to get finance, Zheng Yi, a Baota company official, said: "We made adjustments (to our crude oil purchases) according to changes in the market."
Such private companies, often nicknamed "teapot" refineries due to their small size and basic equipment, now have quotas accounting for about a fifth of China's crude imports so any threat to their ability to buy crude will be watched closely.
Unlike energy giants such as Sinopec, they cannot rely on state backing and are entering the market at time when the trading environment is particularly tough.
Asia's Dubai crude benchmark lost close to a quarter of its value between October, when Baota's deals were agreed, and when the cargoes arrived in December.
"After friendly negotiations, we came to an agreement with Vitol and Mercuria and the contracts which we've signed are still valid," said Zheng, deputy general manager of Baota's international department.
Swiss traders Mercuria and Vitol sold one 730,000-barrel Russian ESPO crude cargo each to Baota, and had to either resell or divert oil into storage, the sources said.
A Mercuria trader involved in the deal said: "Disputes with Baota have been solved in an amicable manner. The deal has subsequently been cancelled."
Vitol said it did not comment on trading activity.
Victor Shum, an oil consultant at IHS, said any problems with deals were likely to make sellers more careful.
"In an oversupplied market, if someone is interested in spot cargoes, sellers would still consider, but with more caution," said Shum.
In 2015, Beijing allowed in 20 little known companies into the oil market to break the crude purchasing monopoly held by state firms and more are expected to get approval. An official at the Chinese industry body, responsible for technical assessments before government oil import quotas are given, said problems could lead to the tightening of rules for new entrants and even a review of existing quota holders.
"This may help us tighten up the supervision in this year's assessments and further improve the rules to maybe include the credit standings of the applicants," said Zhu Fang, an official at the China Petroleum and Chemical Industry Federation.
Beijing has granted the independent refiners a total of 1.45mn barrels per day (bpd) of crude quotas, a fifth of China's total crude imports € marking a faster than expected market opening than many had anticipated.
Founded by a law professor, Baota was allocated the third-largest quota by volume of 6.16mn tonnes a year, or 124,000 barrels per day, last October.
While most private refineries in China are near the coast, Baota's main facilities are in the landlocked province of Ningxia, and it has to rely on rail to bring in crude.
Traders have been quick to supply the new buyers, offering crude from as far as Colombia to the Middle East and Russia.
The private refineries are expected to boost China's crude purchases to new highs this year, after imports rose nearly 9% in 2015.
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