How Venezuela’s crisis threatens Shandong’s teapot refiners

Venezuela has the world’s largest proven oil reserves. The crude is predominantly heavy to extra-heavy and sour – a technical term indicating the sulfur content often exceeding 2.5–4 wt%, making it highly viscous and rich in asphaltenes, heavy metals like vanadium and nickel, and nitrogen compounds.

From chemical engineering point of view, these crude properties results in complicated refining requirements, for example multiple stages of sulphur removal to prevent poisoning of expensive catalyst and delayed coking. In addition, removing heavy metals like vanadium and nickel through hydrodemetalization is an extra cost as the process is energy-intensive.

Since sanction by U.S. in 2005, Venezuela has seen its crude output collapse from 2.5 million barrels per day in 2014 to under 0.9 million barrels per day in 2024 following years of sanctions from the U.S. Despite sanctions, China emerged as the top buyer, importing roughly 470,000 barrels per day in 2025, accounting for 4–5% of China’s total crude imports. However, this amount is equivalent to more than 70% of Venezuelan crude export.

While large and national refineries in China have refrained from buying Venezuelan crude, it is one of the most common crudes used in teapot refiners along the coast of China, primarily in Shandong and Zhejiang areas.

Although this crude is technically challenging in processing, deep discount offered by Venezuela, often around USD$10 – 15 per barrel below premium Brent level, and high resid yield, make it attractive for the teapot refiners focusing on asphalt, petroleum coke, and low-sulfur fuel oil, alongside lighter fractions like diesel and naphtha after upgrading.

However, processing this crude carries heavy environmental costs. The high sulfur and metal content requires intensive hydrotreating and coking, generating significant amount of carbon dioxide emissions and sulfur recovery loads.

Heavy metal-based Catalysts, such as Cobalt-Molybdenum (Co-Mo) on alumina for hydrodesulfurization and zeolite-based catalysts in hydrocracking, which suffer rapid deactivation from vanadium and nickel poisoning.

From an economic point of view, processing the heavy crude from Venezuela is inherently costly: it demands complex upgrading units, high hydrogen consumption, and frequent catalyst replacement.

However, Shandong’s teapot refiners that thriving on the deep discounts offered by Venezuelza, leveraging simple coking configurations and target niche markets for asphalt and marine fuel, turning geopolitical risk into a competitive edge.

Over the past decade, Shandong’s teapot refiners has evolved from small, fuel-focused refineries into a dynamic petrochemical hub, driven by provincial policy and massive private investment. Initially reliant on simple distillation and coking units, these independents faced pressure from Beijing on ‘reducing fuel output and increasing chemical production’.

In response, Shandong launched integrated mega-projects like Yulong Island, a CNY116.8 billion complex with 20 million tons/year refining and 3 million tons/year ethylene capacity. Private players such as Dongming Petrochemical and Lihuayi Group have invested billions in high-value chemical units to shift their product slate toward plastics and specialty chemicals. These expansions represent a strategic pivot to capture higher margins and insulate against volatility in fuel markets.

Today, Shandong’s independent refiners contribute roughly one-quarter of China’s refining throughput, and their petrochemical diversification strengthens provincial GDP, which reached CNY9.86 trillion in 2024. This transformation underscores a critical reality: while teapots refiners were once synonymous with low-cost asphalt and fuel oil, they are now emerging as integrated chemical producers.

The question now: President Trump has made it clear that the U.S. will control the Venezuelan crude export. If the new Venezuelan government walk in that direction, or exporting the sour crude without discount, can these teapot refiners sustain?

These independents rely heavily on discounted heavy sour crudes like Venezuelan Merey to sustain profitability. Without such feedstock, they would be forced to acquire alternatives elsewhere from the world, including Russian Urals, Iran, Canadian Access Western Blend (AWB), where deep discount is almost impossible.

In early 2025, the teapots were already hit hard: utilization dropped to 45–55% from around 70% in 2021, with many shuttering units as costs rose from tax reformation, increased tariffs and weaker fuel demand. A sharp reduction in Venezuelan crude exports would compounding tighter margins, delaying recovery of installed petrochemical capacity like Yulong Island, and pulling the financial strain on private investors. The ultimate impact is a double blow: profit reduction and underutilization rip through Shandong’s refining ecosystem.

Worst still, the economic ripple extends beyond margins. Imagine what will happen to the rate of employment as teapot refiners in Shandong supporting hundreds of thousands of jobs, from planners and plant operators to logistics and ancillary services.

It is more than just an industry challenge; it is a provincial economic vulnerability. For Shandong, the path forward lies in diversification, crude flexibility, and accelerating integration, but addressing the current challenging is critical.

In the financial level, the crude trade between Beijing and Caracas has been structured through oil-for-loan arrangements and non-USD settlements. With Venezuela’s outstanding oil-backed debt to China can be up to US$12 billion and total China lending exceeding US$60 billion, halting of Venezuelan crude export to China will undercut China’s de-dollarization efforts and risk write-downs on those credit-based exposures.

In 2024, Shandong Province was ranked third-largest GDP among provinces in China, worth up to CNY9.86 trillion and 7.3% of the China total economic output. In Shandong, chemical industries contributed to approximately 28% of provincial GDP, and 25% of the nationwide overall refining capacity.

U.S. capture of President Nicolás Maduro not only a political blow to China, but more significantly, economic development in Shandong.

---