In April, oil exporter Saudi Aramco agreed to sell 730,000 barrels of crude oil to a privately owned refinery in East China's Shandong Province. It was the first time that the Saudi Arabian oil behemoth had ever sold spot oil to one of China's independent refineries, also known as "teapots." These refineries, which were once relegated to the edges of the State-dominated oil industry, have become a major driver for China's oil imports since the central government started authorizing them a year ago to import crude. Saudi Arabia, which had long been China's largest oil supplier, is now playing catch up in this newly open corner of market, where Russia has already staked a claim. The competition illustrates the growing importance of China's "teapot" refineries to the big oil exporters, who are desperate for new market share at a time of sluggish global oil demand.

An oil tanker waits to unload at a port in Ningbo, East China's Zhejiang Province on Saturday. China's crude oil imports jumped 13.4 percent year-on-year in the first quarter of 2016, customs data showed. The surge is in large part due to growing demand from China's independent "teapot refineries." Photo: CFP

Over the past year, Russia and Saudi Arabia have been wrestling for the title of China's largest crude oil supplier.

In March, Russia again came in ahead of Saudi Arabia as China's top oil supplier, customs data showed.

Crude imports from Russia surged 58 percent year-on-year to 4.65 million tons during the month.

Although Saudi Arabia has historically been China's largest oil supplier, Russia took the No.1 spot in four months in 2015.

China's independent refineries, mostly privately owned and known as  "teapot refineries," are one of the driving forces behind the influx of Russian oil, and the surge in oil imports in general, analysts said.

However, Saudi Arabia has since struck back. Although the gulf country has recently announced a national plan to reduce its dependence on crude oil, it has continued to fight aggressively for its share of the China market.

In April, state-owned Saudi Aramco agreed to sell 730,000 barrels of crude oil to the independent refinery Shandong Chambroad Holding - the first time that the company has reached a spot deal to sell to a "teapot" refinery, according to a Reuters report on April 27.

It was an unusual deal for Saudi Aramco, which usually sells its crude oil under contracts with terms of a year or longer. The fact that it agreed to a spot sale to Shandong Chambroad has been seen as a concession to grab a share of the rapidly growing "teapot" market, according to analysts from commodity information provider Zibo Zhongyu Information Technology, which is based in Zibo, East China's Shandong Province.

The "teapot" market has grown in importance for big oil exporters like Saudi Arabia and Russia at a time when they are desperate for new market share in light of sluggish global oil demand, said Sang Xiao, an industry analyst from Zibo Zhongyu.

"Demand from independent refineries is now a major driver for China's oil imports, which is of interest to major oil producers," Sang told the Global Times on Wednesday.

A new market

Until recently, China's State-owned oil giants were the only companies allowed to import crude oil into the country. In May 2015, Shandong Dongming Petrochemical Group became the first independent refinery in China to receive authorization to import crude. It won approval to import 7.5 million tons each year.

Since then, Chinese authorities have given 11 independent refineries the right to import crude oil, though only up to set amounts.

Under official quotas, independent refineries are allowed to import 44.59 million tons of crude oil in total each year, according to data from Zibo Zhongyu Information Technology.

Shandong's independent refineries are allowed to import 31.43 million tons annually.

Fourteen other refineries are still waiting for government approval to start importing crude, the consultancy said. If they all received approval, China's "teapots" would have the right to import 91.5 million tons of crude oil, or 27 percent of China's total oil imports in 2015.

"Independent refineries have become the major driver for China's oil imports because they need spot crude oil for production," said Li Li, director of research at Shanghai-based industry consultancy ICIS.

Specifically, the independent refineries in Shandong account for about 70 percent of the China's total independent refining capacity, analysts said.

Saudi Aramco's deal with Shandong Chambroad is significant because it indicates China's independent refineries will have more options in the future for importing crude oil, said Zhang Yonghao, an analyst at Zibo Zhongyu.

"Plus, crude oil from Saudi Arabia is generally of better quality than oil from South America and West Africa," he told the Global Times on Tuesday.

Under government rules, Shandong Chambroad is allowed to import 3.31 million tons of crude oil each year, according to the National Development and Reform Commission, which in December 2015 authorized the refinery to directly import crude oil.

Bigger buying power

The competition from Saudi Arabia has brought tangible benefits to independent refineries. Saudi Aramco has been selling crude to Shandong Chambroad at a discount to the Oman/Dubai benchmark price, according to the Reuters report.

Neither Saudi Aramco nor Shandong Chambroad responded to requests for comment as of press time.

China's independent refineries have been working to leverage their combined purchasing power to get a better price from suppliers. In February, 16 independent oil refineries banded together to establish an oil purchase federation to help them get a better deal on imported oil.

The operating status and effects of the federation have not yet been revealed by the media.

China's goal of building up its strategic oil reserves will also drive oil imports this year, analysts said.

As of the end of 2015, China had eight oil reserve bases with the capacity to store 26.1 million tons of crude oil - double the capacity it had in 2014, according to data from the National Bureau of Statistics.

Driven by low prices, China's crude oil imports rose 8.8 percent in 2015 to 334 million tons, customs data showed. In the first quarter of 2016, China imported 91.1 million tons of crude oil, up 13.4 percent year-on-year.

Sang, the analyst, forecast international oil prices will range between $40 and $50 per barrel in 2016 and China's oil imports will grow by about 8 percent.

Li from the ICIS predicted China's oil imports may grow around 10 percent this year.

Analysts believe Russia will stay neck-and-neck with Saudi Arabia in the competition to be China's largest crude oil supplier, especially considering the deepening economic ties between China and Russia.

 "I don't think the Saudi's trade volume with independent refineries will pick up very soon," Li said, because the Saudis are still just testing the water with their deal with Shandong Chambroad.