Chinese Officials Take Control of Private Oil Refiner Amid Probe

(Bloomberg) -- The management of troubled private oil refiner Liaoning Bora Enterprise Group has been taken over by government officials from China’s Panjin city amid a tax probe that could lead to heavy fines and possible insolvency, said people familiar with the situation.

A team led by officials from the north-eastern city, where the conglomerate is based, has been appointed to run the company from this month, said the people, who asked not to be identified as the matter is sensitive. Bora is seeking to restructure and avoid collapse due to mounting financial woes brought on by large amounts of unpaid taxes.

Panjin has become a focal point of a government crackdown on private refiners as several processors located in the city face allegations of tax violations and non-compliance with environmental rules. China’s central government has reduced crude import quotas to private refiners -- also known as teapots -- this year to rein in the sector that’s rivaled state-owned oil giants since its liberalization in 2015.

Bora is one of China’s largest teapot refiners, with a crude processing capacity of more than 20 million tons a year. If it were to collapse, the fallout could pose a large financial risk to the city and lead to widespread layoffs, said the people. Assets held by the conglomerate totaled 92 billion yuan ($14 billion) in late-June with liabilities of 66 billion yuan.

The interim management will help the company seek investors and ensure continued operations and employment of its workforce, the people said. Its role will cease upon the finalization of Bora’s restructuring, or if the company enters judicial proceedings including bankruptcy, they added.

Bora agreed to sell a stake in a chemical-making unit to another firm last month after informing banks and counterparties that it was operating as usual. An official at the Panjin government declined to comment and referred the inquiry to the Liaoning provincial government. Calls to Bora and Liaoning government’s press office went unanswered.

Teapots processors can be found in provinces including Liaoning and Shandong, as well as along the country’s eastern coast. These refineries account for a quarter of China’s overall oil-processing capacity, with many complexes operated by private companies that have expanded from the plastics and textile industries.

In recent years, the loosely-regulated sector has come under the spotlight for unlawful practices involving the use of taxation loopholes to boost profits, prompting harsh government clampdowns and the roll-out of new rules to curb such activities. Shandong teapots were required earlier this month to agree to strictly follow regulations.

International traders and suppliers of oil are closely watching for developments in the sector to assess the impact of government measures on its appetite for imported crude. Beijing released crude oil import quotas to a few teapots last week, its smallest issuance since the sector was allowed to directly procure feedstock in 2015.

Some private refiners haven’t been awarded any quotas in recent releases, which throws into question their ability to buy feedstock needed for operations, while newer and larger processors known as teapot 2.0 are still getting new quotas, or still have substantial room to import crude.

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