Chinese refining giant resisting cut-price Iran crude offer due to US sanctions

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A worker walks past a Sinopec International Petroleum Exploration and Production Corporation (SIPC) a wholly-owned subsidiary of Sinopec Group of China facility. Photo - Reuters

A senior oil executive said Chinese refining giant Sinopec Corp, the biggest buyer of Iranian oil, has no intentions to raise its Iranian crude imports for the rest of this year as it is keen on avoiding tough US sanctions on Tehran’s oil trade.

Washington has not put China on the last of countries that are already exempt from sanctions. Obama administration on Monday excluded India and South Korea from the economic embargo. Iranian oil buyers could face penalties from the United States once sanctions kick in on 28 June.

Sinopec is already resisting cut-price offers from Tehran, the Beijing-based official who has knowledge of the refiner’s trading operations told Reuters on condition of anonymity. “The Iranians have made some offers, but we have turned them down,” the official said, declining to elaborate.

“The economic benefits of filling some discounted Iranian oil into the national oil reserves would be too small a consideration for the state. The key concern for the Chinese government would be China-US relations.”

Strategic Decisions

China, Iran’s top trade partner, has publicly criticised sanctions against Tehran which operate outside the United Nations framework. However, it is forced to be mindful of sanctions as its state-owned energy giants have made big investments in the United States.

China is the world’s second-largest oil consumer and is building up strategic storage across the country to deal with any surprise supply outages. Many oil industry analysts expect that sooner or later, Beijing would become Iran’s buyer of last resort and take the crude into its tanks.

But Sinopec has set its 2012 import target for Iranian crude at 400,000-420,000 barrels per day (bpd), 16-20% below last year’s 500,000 bpd, the official said asking not to be named.

“One thing is for sure: within this year, there will be no increase (over the target) in Iranian oil,” he said. “The nearly 20% cut shows China places the relationship with the United States at the very top level. The US should really appreciate what China has done and not push for more in a condescending manner.”

Sinopec more than halved its Iranian crude imports in the first quarter as it tussled with Tehran over the terms of its annual oil purchasing contract, industry sources have told Reuters. The 16-20% cut detailed by the official for the full year was a little more than the 14% annualised cut Reuters estimated after those contract disputes ended and Sinopec imports started to recover in April.

“If you compare actual loadings from April onward, you’re going to see almost the same amount of oil being lifted from Iran versus a year ago,” the official said.

A bigger potential threat to Iran’s crude flow to Asia has been posed by European Union sanctions, which ban EU firms from insuring tankers carrying Iranian crude from July 1. European insurers cover most of the world’s tankers, and Asian importers have struggled to find ways to put alternative insurance in place to keep imports flowing.

The Chinese official said the insurance ban would not pose a problem to China, although he did not detail how importers would continue importing. “So long as China wants to solve this problem, there must be a way. It won’t be a difficult issue for China. We are fully capable of sorting it out,” he said.

Among the options, Iran could deliver the crude on its own tankers, he said.

Indian state-owned refiners will halt planned imports of 173,000 bpd from Iran when EU sanctions take effect next month, unless the government allows them to use insurance and freight arranged by Tehran, industry sources said on Monday.

And Japan this week became the first country to attempt to initiate sovereign insurance once the EU sanctions start, with the government submitting a special bill to parliament to allow it to insure Iranian crude imports. South Korean government sources have told Reuters Seoul will halt Iranian imports after July, and is not yet considering state guarantees on imports.

China bought a total of 27.76 million tonnes, or 555,000 bpd of Iranian oil last year, according to Chinese customs data. The 500,000 bpd bought by Sinopec is covered by two separate contracts with the National Iranian Oil Co (NIOC) – one through Unipec, Sinopec’s trading arm, and a second via Zhuhai Zhenrong Corp, a state oil trader now on Washington’s sanction list.

The supplies include crude oil and South Pars condensate, a light oil used in petrochemicals.

PetroChina, China’s top oil and gas firm, but a smaller refiner than Sinopec, bought around 55,000 bpd last year.

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