In the global refining industry, COVID-19 has exposed a seismic shift. While China’s oil refineries forge ahead with capacity expansion, many western-based refiners have retrenched. As China again hits the stimulus pedal, this year it is expected to officially surpass the U.S. as the world’s largest oil refiner according to the International Energy Agency (EIA).

This can be partly explained by China’s head start in recovering from the pandemic. While much of the world remains under varying states of lockdown, China’s economic growth hit 6.5% in the fourth quarter of 2020, meaning that it grew 2.3% for the full year. It is the only major economy to have expanded in 2020.

There are four other structural factors driving the global refining industry amid China’s new capacity boom. Let’s take a look at each.

COVID Fallout for Refineries

According to the EIA, as economies locked down and airlines were grounded, global oil demand slumped 9.2% to 92.2 million barrels a day. Refineries were quick to feel the impact with about 1.7 million barrels a day of refining capacity being halted in 2020, with more than half of that decrease in the U.S.

And while Europe’s pandemic-induced lockdowns may be temporary, at the end of 2020 they were taking out some 900,000 barrels a day of road fuel demand according to Rystad Energy.

Added to the deep recessions in many western countries, the growing pressure to phase out fossil fuels is another headwind. One example is the move by President Biden to pause new domestic oil exploration on federal land.

Consumers Driving Demand

While Asia has not escaped pandemic travel disruptions, the refining industry outlook is on much firmer footing because the main demand driver for refined oil products is the region’s vast consumer markets – namely the billion-plus populations of China and India.

Capacity expansion there is being driven by plastics and other petrochemicals where refined crude oil is the essential building block for everything from food packaging, clothing, cosmetics and fertilizer, even car interiors.

According to industry consultant Wood Mackenzie, approximately 70% to 80% of new refining capacity coming on stream in Asia up to 2027 will be plastics-focused. As well as China, this includes several new plants in India and the Middle East.

Consumer demand, however, is only part of the story behind China’s refinery building. The other factor is supply and the role of the country’s resurgent independent refineries.

China’s Upgraded “Teapots”

The explosive growth today in China’s refining capacity has its roots in a major regulatory shift in 2015 when independent refiners (known as “teapots”) were first allowed to import crude oil. The rationale was that in return for import quotas, they would upgrade, modernize and instill wider competition and efficiency in the state-dominated oil industry.

As refining capacity has surged with China’s crude oil imports, this helps China surpass the U.S. to become the world’s largest importer.

These teapots are now leading the charge with bigger, integrated refineries. At least four projects with about 1.4 million barrels a day of crude-processing capacity – more than all the refineries in the UK combined – are under construction.

By 2025, China’s crude processing capacity is expected to reach 1 billion metric tons a year, or 20 million barrels per day, up from 17.5 million barrels at the end of 2020, according to China National Petroleum Corp’s Economics & Technology Research Institute.

China’s state-owned oil behemoths are also not sitting on their hands either. Last year Russian petrochemicals producer Sibur and China Petrochemical Corp (Sinopec Group) began to work on what is set to become the world’s largest polymer plant, the Amur Gas Chemical Complex in Russia. This $11 billion venture will produce 2.3 million metric tons of polythene and 400,000 metric tons of polypropylene per year. Sinopec is set to take a 40% stake in the complex, which is due for completion from 2024.

New Capacity?

The surge in China’s refining capacity is already having an impact across the global refining industry.

More crude oil is finding its way to China and Asia and less is routed to traditional western customers. The demand from Chinese refiners has coincided with Oman crude oil trading at a sustained premium to Brent for the first time in four years.

Although increased production by China’s independents is largely trapped inside the domestic market due to export quotas, it has allowed the giant state operators to export more. This has led to China’s surplus refining capacity finding its way to international markets as it takes global market share. Exports of refined products have increased to Hong Kong, Singapore, the Philippines, Australia, and South Korea. This has already been felt by older plants with Shell in Singapore announcing cuts to its capacity in Singapore in 2020.

As more supply comes on stream, it will come sharply into focus whether demand for plastics and petrochemicals will really be able to take up the slack, particularly as demand for refined fuel abates. China National Petroleum sees fuel demand peaking in China by 2025 as electric vehicles sap consumption.

Another wild card to consider is China’s clean energy push with President Xi Jinping pledging China would be carbon neutral by 2060.

Ultimately, what is easier to predict is that, with China’s refinery capacity leading the world, it will also increasingly play a bigger role in regional and perhaps global markets for oil and refined products.