EU sanctions on CNPC units may not hit flows, but warn China on Russian crude

The EU's latest sanctions on a trading subsidiary and a refinery of China National Petroleum Corp. are not expected to significantly impact the state-run oil company's operations; however, they send a strong warning to Chinese buyers of Russian crude, traders and analysts told Platts on Oct. 24.

On Oct. 23, the European Commission unveiled sweeping measures targeting major Russian oil traders, including Chinaoil (Hong Kong) Corp., as well as consumers of Russian oil, such as the Liaoyang Petrochemical refinery.

Chinaoil is jointly owned by CNPC, China's biggest oil and gas company, and the state-owned Sinochem. Its Hong Kong desk, now targeted by EU sanctions, was established to provide financial and logistical support for CNPC's international oil trading activity.

The Liaoning-based 180,000 b/d Liaoyang Petrochemical is owned and operated by CNPC's listed subsidiary PetroChina.

These sanctions represent the first time a major state-backed Chinese entity has been targeted by the EU.

CNPC and PetroChina did not respond to Platts' requests for comment. Platts is part of S&P Global Energy.

"The targets were well chosen, as they will not significantly hurt the oil major, but they send a message of 'Be careful, I know everything'," said a senior analyst based in Shanghai.

A source familiar with Liaoyang's operations said the landlocked refinery will continue processing ESPO crude via the pipeline and marketing its products domestically, with financial support from CNPC's Bank of Kunlun, which is included on the US Specially Designated Nationals list.

Liaoyang Petrochemical is one of the few PetroChina refineries that fully relies on Russian ESPO crude, following a series of infrastructure reconfigurations at plants in northeast China allocated Russian crude amid the expansion of the Russia-China pipeline.

This marks the first instance of a Chinese refinery supplied via pipeline being sanctioned by the West, despite the fact that these supplies are under a government-to-government arrangement. In the past, EU, UK and US sanctions typically targeted refineries receiving seaborne supplies.

CNPC has term deals with Rosneft to import about 800,000 b/d of crude via pipelines under an arrangement between Beijing and Moscow. This comprises 200,000 b/d via Kazakhstan through the Atasu-Alashankou pipeline and 600,000 b/d of ESPO Blend via the Skovorodino-Mohe pipeline.

Pipeline imports are allocated to PetroChina's refineries in northeast and northwest China, including the Liaoyang Petrochemical refinery, which has been processing Russian crude since 2007.

Liaoyang's move

A Beijing-based energy expert specializing in China-Russia relations said that sanctions are unlikely to disrupt pipeline supplies delivered under government-to-government arrangements, despite new restrictions on both Rosneft and its buyers, as pipeline flows could be difficult for EU officials to monitor.

On Sep. 20, Liaoyang Petrochemical announced via its official WeChat account that it aims to process 2.33 million metric tons (186,000 b/d) of crude in the fourth quarter, in order to achieve its 2025 throughput target of 8.8 million mt.

Liaoyang Petrochemical typically exports about 40,000 mt of jet fuel each month, including volumes supplied to the neighboring international airport in Shenyang for bonded refueling, as well as cargoes shipped directly overseas.

Market sources anticipate that the jet fuel exports will likely be allocated to other PetroChina refineries in the region, while Liaoyang Petrochemical focuses on domestic supply.

Meanwhile, traders with state-run firms in Hong Kong said CNPC could divert regular business from Chinaoil (Hong Kong) to its other trading subsidiaries. "The oil giant has many entities to back up the operation, although it needs time and incurs costs to transfer the business," a trader said.

Chinaoil (Hong Kong) provides oil and natural gas products and services in Hong Kong, Macau and Taiwan, according to the company website.

The EU also sanctioned the independent 400,000 b/d Shandong Yulong Petrochemical refinery for purchasing Russian crude.

According to market sources in China and Singapore, the refinery has faced difficulties in securing regular crude supplies and has been compelled to use more Russian crude as feedstock.

"The European side has repeatedly initiated illegal unilateral sanctions against Chinese enterprises under the pretext of being involved with Russia," a Chinese Ministry of Foreign Affairs spokesperson said Oct. 23.

"China expresses strong dissatisfaction with this and firmly opposes it, having already made stern representations to the European side."