US sanctions on China oil giant turn up heat on ‘teapot’ refiners

BEIJING - A US move to sanction one of China’s largest private refiners over its ties to Iran will hurt a vast and already embattled petrochemicals sector – but the collateral damage will extend far beyond oil.

The US Treasury Department announced on April 24 that it had blacklisted Hengli Petrochemical (Dalian) Refinery Co.

The target is the most ambitious to date in China’s refining sector, and underscores US eagerness to push Iran to the negotiating table at all costs, even just weeks before an expected and long-awaited meeting between US President Donald Trump and his Chinese counterpart Xi Jinping. 

“With Trump set to visit Beijing in May, this move looks more like a bargaining chip deployed by Washington, given the lack of progress on the Iran War and the Strait of Hormuz,” said founder Liao Na of GL Consulting, which analyses China’s energy and industrial sectors.

Widening sanctions on Iran’s trader partners is a tactic that will now ripple Asian and global supply chains.

At least two of Hengli’s petrochemical clients in Asia have already rushed to cancel their orders, according to people with knowledge of the situation. They asked not to be named as the deals are not public.

Until now, wary of the economic and diplomatic fallout, Washington’s efforts to cut off Tehran’s oil revenue have targeted smaller Chinese companies and facilities. 

Hengli, by contrast, is representative of the most modern of China’s private refiners, with a sprawling oil-processing and chemicals complex in the north-eastern province of Liaoning.

While the country does still have an army of small independent players – the original so-called teapots – larger entities like this one are now giant operations. 

Altogether, the private sector accounts for as much as a third of refining capacity, in a country where energy security is an unchallenged priority.

“The sanctions on Hengli are an escalation,” said Dr Erica Downs, senior research scholar at Columbia University’s Center on Global Energy Policy, who has spent years studying the sector.

Hengli “is also the very type of integrated refining-petrochemical facility in which Beijing wants to concentrate on – and is an Aramco customer”.

China has long been the single largest buyer of Tehran’s oil shipments, many of them arriving indirectly and through private refiners, and then turned into gasoline, diesel and other oil products.

Chinese customs data do not reflect that trade, with the last official shipment recorded several years ago.

Hengli said in an exchange filing on April 26 that the US’ accusations were “baseless”, as it had never engaged in any trade with Iran and that all crude suppliers have committed to ensuring their cargoes are not sourced from jurisdictions under US sanctions.

It holds sufficient crude inventories to cover more than three months of processing needs and procurement operations have not been affected, it said, though in future, it will settle purchases in Chinese yuan.

The company has not immediately responded to further queries. 

China on April 27 reiterated its opposition to unilateral sanctions and said it would “firmly safeguard the lawful rights and interests of Chinese companies”.

“China urges the US to abandon the wrongful practice of sanctions abuse and long-arm jurisdiction,” Foreign Ministry spokesman Lin Jian told reporters during a regular press briefing in Beijing.

The US has vacillated on its stance on Iranian oil since the start of the war in the Persian Gulf, initially offering waivers on Tehran’s seaborne crude to cool prices. That has since expired and has not been renewed.

Hengli is among China’s top producers of purified terephthalic acid and one of world’s biggest petrochemical suppliers.

Beijing’s ever-growing consumption of plastics products from textiles to toys has attracted investment interest worth billions of dollars from conglomerates from Saudi Arabian Oil Co to Germany’s BASF. 

Aramco, which has a term crude deal with Hengli, has sought to take a minority stake, though talks have stalled. The Saudi oil major declined to comment.

With Hengli out of the dollar-based payment system, hundreds of chemical, synthetic fibre and textile producers across East Asia face near-immediate disruption to vital supplies – potentially good news for competitors in China, Japan and South Korea, but a change that will lead to further inflationary pressures from an eight-week war in the Middle East.

Hengli has a nameplate crude refining capacity of 400,000 barrels a day and ranks second in the private sector alongside Shandong’s Yulong Petrochemical Co, sanctioned by the European Union last year for the Russian oil trade.

Together with Zhejiang Petrochemical Co and Shenghong Group, the four are known as Chinese “mega” private refiners and account for about 10 per cent of capacity. 

Shares in Hengli Petrochemical Co, which includes the Dalian operation, plunged by 10 per cent on April 27, the daily limit. BLOOMBERG