The source of this arrangement is in the crude oil supply plan drawn up in 1998. In the beginning of oil price reform, domestic oil prices, as set by the SDPC, were still lower than international ones. But while Sinopec sold crude oil at international prices ranging from 1,200 to 1,700 yuan a ton to other local refineries, its subsidiary ones only paid the domestic rate of 905 yuan per ton.

As a result, local refineries became non-cooperative: they didn’t offer sufficient processed oil to Sinopec as per the plan's stipulations. In response, Sinopec cut down its oil supply to local refineries. On August 14th, 2002, Sinopec issued a memo saying that, due to local refineries' low supply levels to Sinopec in July, and their uncooperative attitudes in August, Sinopec would cut down crude oil supply to six local refineries’ in September, including Shandong Befar Group, Shandong Guangrao Petroleum and Chemical Group, Shandong Kenli Petrochemical Company, and Great Wall Refinery.

On October 15th 2004, Sinopec issued another memo claimed that local refineries in the Dongying area of Shandong didn’t make their processed oil requirements-- they only processed 9,600 tons, much lower than the 21,200 tons expected of it. The memo also mentions Kenli Petrochemical Company's use of the 50 yuan sale charges as grounds to refuse to deliver oil to Sinopec, and also encouraged other refineries to boycott the current repurchasing policy. Sinopec thus suggested cutting down Kenli's September crude oil supply 11,700 tons.

A Broken System

Says one Dongying refinery manager, “The local refineries have many complaints about the current oil monopoly. Whenever there's an oil shortage, the refineries bear higher cost and suffer greater profit risk. They regularly operate under undue pressure and shut down their refinery equipment. In turn, the shortage becomes much worse.”

But the relief offered by this oil bailout will not be permanent, say industry insiders. They say that the root cause is the monopoly, and the lack of access by local refineries to crude oil imports. This, they say, combined with the fact that the two oil giant’s productivity can’t meet the market demands guarantees that another shortage will come again.

It seems that Shandong's struggling local oil refineries have already seen a glimmer of hope. This year, in October and November, the NDRC initiated two investigations in Shandong, opening dialog with local refineries to research their plight from their angle, and actively explore solutions to challenges facing the industry.

It is said that NDRC is preparing a plan to distribute crude oil directly to local refineries, not via the two oil giants. Details on the distribution amount, price, and related issues is under consideration now.