Come January 28 and with the Lunar New Year, the Year of the Rooster begins. Chinese geomancers are already making predictions based on the incredibly multi-faceted image of a red fire rooster, which is characterized by not only irascibility, impulsiveness and emotional instability, but also pedantry, accuracy, generosity and courage.
Surging crude oil imports, falling output, rising oil product exports and the emergence of independent refiners were some of the key themes that dominated China's oil industry in 2016 -- the Year of the Monkey.
In 2017, China is expected to take a wait-and-watch approach.
Signs of this emerged towards the end of 2016 when the government tightened the noose around independent refiners and refrained from allowing them to export products next year.
The Communist Party is also set to undergo a change in top leadership in 2017, and this is likely to slow down any major policy announcements. But China is expected to continue its focus on growth, the environment and reform of state-owned enterprises.
So, oil price recovery, uncertainty around independent refiners, environmental concerns, and a new leadership of the Communist Party are some of the key themes to watch out for in 2017.
IMPACT OF HIGHER OIL PRICES
China dealt with falling oil prices by stockpiling its strategic reserves and putting a floor under retail prices to support upstream development. Now that prices seem to be rising, what impact will that have on China's oil sector?
For one, rising prices may arrest the decline China's crude oil production.
Over January-November, China's domestic crude oil output fell 7.2% year on year to 4 million b/d.
"If oil prices average $55/b in 2017, China's production will continue to go down, by about 5% from 2016," said Gordon Kwan, head of regional oil/gas research at Nomura. Output will stay flat if oil prices average $60/b in 2017, but China's oil production has consistently disappointed despite massive capex increase since 2000, he added.
Falling output will likely increase China's crude oil imports in 2017 compared with 2016, according to Wu Kang, vice president at Facts Global Energy.
Rising prices are likely to have a limited impact on China building its strategic reserves.
Strategic reserves are planned and paid for by the government, which makes them less sensitive to price changes than commercial reserves, a Shanghai-based analyst said.
The National Bureau of Statistics announced in September that the country's SPR had reached 234.34 million barrels by early 2016, implying that the volume had increased by around 22% from 191.31 million barrels in mid-2015.
But stockpiling interest for commercial storage is expected to shrink from 2016 as companies are hit by high prices and a depreciating yuan against the dollar.
Over January-November, the country added 31.84 million barrels of crude oil stocks, including SPR and commercial stocks, nearly double the 16.03 million barrels added over the same period in 2015, according to S&P Global Platts calculations based on official data.
INDEPENDENT REFINERIES
China's independent refiners face uncertain times in 2017 as the government comes down hard on them for compliance and tax evasion, and has retracted from allowing them to export refined products.
Beijing allowed independent refiners access to imported crude oil in early 2015 and export oil products in late 2015. Their emergence, which came at a time of excessive oil supply, made them the darlings of oil suppliers.
And they thrived.
Independent refiners imported around 49 million mt (984,000 b/d) of crude oil in 2016, according to Platts estimates.
In the first 11 months of the year, they produced 54 million mt of gasoil and gasoline, up 81% year on year, based on data from information provider JYD. And they exported around 900,000 mt of refined products in the year.
But 2017 is going to be fraught with challenges, which may undermine their profitability and slow down their crude import growth.
Since Q3 2016, the National Development and Reform Commission has announced stricter tax norms, tighter crude import quota application procedures and carried out inspections to ensure that independent refiners adhered to rules and regulations.
Beijing has also withdrawn permission to independent refiners to export refined products, which could throw into disarray their infrastructure investment plans and also any plans to set up trading outfits domestically and overseas.
GROWTH VS ENVIRONMENT
The worsening pollution in Beijing and neighboring provinces has highlighted the need to balance economic growth with sustainable environmental policies.
Curbing energy consumption and improving energy efficiency have become key considerations for the government when approving new projects.
China is adopting a policy of slower but stable GDP growth. Economists have estimated that China's growth rate could fall to below 6.5% in 2017, and this will have an impact on oil demand.
The refining sector will be one of many to bear the brunt of tighter environmental norms and will be asked to cut run rates in times of extreme pollution. And, unlike previously, the government has tightened monitoring of the environment and companies.
"The inspectors can go into our refinery without any prior notice. They are the men with highest authority here," said a refinery source based in Shandong.
SLOW POLICY CHANGES
A significant theme for 2017 is the 19th National Congress of the Communist Party of China in autumn. This is closely watched as it brings far-reaching changes in the top leadership of the party.
Policy changes or reforms are expected to slow down, including those related to oil sector, until there is clear direction from the new leaders.
This may further delay the country's first crude oil futures contact, which has been in the works for several years.
It could also delay deregulation of the oil products market even though the State Council in late 2015 said it wanted to fully deregulate oil products pricing in 2017. The State Council's second targeted timeline of 2020 is now looking more realistic.
But the National Energy Administration and National Development and Reform Commission are expected to release the oil and gas industry reform plan, which could open the upstream sector to independent companies and remove pipeline infrastructure from under state oil companies.
In addition, diversifying ownership of state-owned companies is one of Beijing's key targets in 2017. The big state-owned oil companies CNPC, Sinopec and CNOOC could see more re-organization as private investment comes in.
