Downstream Production Capacity of China’s Teapot Refineries
China’s independent “teapot” refineries, primarily located in Shandong province, are small-to-medium-sized, privately-owned facilities that account for a significant portion of the country’s refining capacity. Estimates suggest they represent about 20–25% of China’s total refining capacity, with the following details on their downstream production:
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Total Capacity: Teapot refineries collectively have a refining capacity of approximately 4.2 to 5 million barrels per day (bpd), based on various industry estimates. This equates to roughly 1.8 million bpd of processed crude oil, though actual throughput varies due to low utilization rates.
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Utilization Rates: In 2024, teapot refineries operated at around 54% of their capacity, the lowest since 2017 outside of COVID-affected years, translating to an effective throughput of about 2.3–2.7 million bpd. Historically, utilization rates have been as low as 35–40%, with an average of 47–58% in recent years, depending on market conditions.
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Output Products: Teapots primarily produce diesel (their main product), gasoline, bitumen (accounting for ~60% of national production), and smaller amounts of jet fuel and petrochemical feedstocks like naphtha. Some have shifted toward integrated petrochemical production to improve margins, especially larger teapots with modern facilities.
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Challenges and Closures: Due to overcapacity, stricter regulations, and reduced access to cheap feedstock, industry predictions suggest 6–15 million tons (approximately 120,000–300,000 bpd) of teapot refining capacity could close by 2025. In 2024, at least four plants with a combined capacity of 320,000 bpd halted operations due to new tax policies and low margins.
Countries from Which Teapot Refineries Import Oil
Teapot refineries rely heavily on imported crude oil and fuel oil, often from sanctioned countries due to their cost-sensitive operations and ability to exploit discounted feedstocks. The primary importing countries include:
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Iran:
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Volume: Iran supplies a significant portion of teapot feedstock, with estimates suggesting 80–90% of Iran’s crude oil exports (up to 1.5–1.8 million bpd) go to China, primarily to teapots.
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Details: Iranian Light and Heavy grades are purchased at steep discounts (e.g., $13–$20 per barrel below ICE Brent). Imports are often rebranded as originating from Malaysia or Oman to evade sanctions, with shipments frequently passing through intermediaries.
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Significance: Teapots handle ~90% of Iran’s oil exports, leveraging their agility and alternative financial systems (e.g., renminbi transactions, cryptocurrency, or barter trade) to bypass sanctions.
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Russia:
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Volume: Russia is a major supplier, with China importing 2.2 million bpd in 2024, a portion of which feeds teapots.
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Details: Russian ESPO and Urals crude are popular, though rising costs (e.g., ESPO at a $0.50 premium to Brent in 2023) have made Iranian oil more attractive. Teapots increased Russian imports post-2022 due to G7 sanctions and price caps, which led to discounted Russian crude.
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Sanctions Impact: Tighter U.S. sanctions enforcement could raise costs, pushing teapots to rely more on Iranian or Venezuelan oil.
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Venezuela:
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Volume: Teapots import around 400,000 bpd of Venezuelan crude, notably Merey and Boscan grades, which are heavy and high-sulfur, suitable for bitumen production.
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Details: Venezuelan oil is often trans-shipped via Malaysia and rebranded as “bitumen blend” or “other heavy oil” to avoid sanctions. Prices have risen post-2023 U.S. sanctions relief, with Merey at a $22–$31 discount to Brent.
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Trends: Supply may decrease as Venezuela prioritizes exports to Europe and the U.S. following sanctions easing.
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Malaysia:
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Volume: Official data shows 1.4 million bpd imported from Malaysia in 2024, exceeding Malaysia’s domestic production of ~0.6 million bpd.
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Details: Much of this is Iranian or Venezuelan crude rebranded or trans-shipped via Malaysia to obscure origins. “Other heavy oil” imports hit a record 1 million metric tons (249,244 bpd) in September 2023.
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Other Middle Eastern Countries:
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Countries: Saudi Arabia, Iraq, Oman, UAE, and Kuwait supply crude to China, with some volumes reaching teapots.
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Details: Saudi Aramco and other Middle Eastern suppliers target teapots to lock in Chinese demand, though their higher-priced crude is less competitive compared to sanctioned oil. Iraq’s imports increased in 2024, while UAE and Kuwait saw declines.
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Investment Ties: Middle Eastern producers like Saudi Aramco are investing in teapot-led downstream projects, enhancing their role as suppliers.
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Canada:
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Volume: Imports from Canada reached 0.3 million bpd in September 2024, an all-time high, driven by the Trans Mountain Expansion (TMX) pipeline.
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Details: While primarily serving larger refiners, some Canadian crude may reach teapots, particularly those with import quotas. This is a smaller but growing source.
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Additional Notes
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Sanctions Evasion: Teapots’ reliance on sanctioned oil (Iran, Russia, Venezuela) involves covert tactics like falsifying shipping documents, using “dark fleet” tankers with disabled transponders, and trans-shipping via Malaysia. This exposes them to risks from tighter U.S. sanctions, especially under potential policy shifts in 2025.
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Tax and Policy Pressures: New Chinese policies in 2025, including reduced tax rebates (50–80% of the 1,218 yuan/ton consumption tax) and higher import tariffs, have increased feedstock costs by $5–$12.8 per barrel, forcing some teapots to halt operations.
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Regional Concentration: Shandong hosts ~50% of teapot capacity, with other clusters in Guangdong and along the eastern coast.
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Data Uncertainty: Chinese refinery data, especially from teapots, is often underreported or misclassified to evade taxes or sanctions, so estimates should be treated cautiously.
Summary
China’s teapot refineries have a nominal capacity of 4.2–5 million bpd, but low utilization rates result in actual production of 2.3–2.7 million bpd, focusing on diesel, gasoline, bitumen, and petrochemicals. They import primarily from Iran (1.5–1.8 million bpd), Russia (part of 2.2 million bpd), **Venezuela (400,000 bpd)**, Malaysia (1.4 million bpd, often rebranded sanctioned oil), and smaller amounts from Saudi Arabia, Iraq, Oman, UAE, Kuwait, and Canada. Their reliance on discounted, sanctioned oil and vulnerability to policy changes pose significant operational risks.
The US Department of the Treasury’s Office of Foreign Assets Control (OFAC) has designated the teapot refinery Hebei Xinhai Chemical Group and three port terminal operators in Shandong Province for their role in purchasing or facilitating the delivery of hundreds of millions of dollars’ worth of Iranian oil. OFAC has also imposed sanctions on several companies, vessels, and captains responsible for facilitating Iranian oil shipments as part of Iran’s shadow fleet. This is OFAC’s third action against a teapot refinery and its first targeting terminal operators at Dongying Port in Shandong Province.
The Panama-flagged Star Twinkle 6, Skadi, and Big Mag, Sao Tome and Principe-flagged Impalas, and San Marino-flagged Thane were all added to the US’s extensive ship sanctions list as were the companies operating the vessels.
Two Indian vessel captains who have served for several years onboard sanctioned shadow fleet vessels were also hit by sanctions.
“As part of President Trump’s broad and aggressive maximum pressure campaign, Treasury today is targeting another teapot refinery that imported Iranian oil,” said secretary of the treasury Scott Bessent. “The United States remains resolved to intensify pressure on all elements of Iran’s oil supply chain to prevent the regime from generating revenue to further its destabilising agenda.”
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