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Analysis: China puts Iranian crude into strategic petroleum reserves in June

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Analysis: China puts Iranian crude into strategic petroleum reserves in June

Highlights

Iranian barrels imported by China in June sent to SPR

Iranian heavy and light grades sent to Tianjin, Huizhou and Jinzhou

China's Iranian crude imports include equity oil

Singapore — Iranian crude oil imported by China in June was injected into storage tanks used for maintaining strategic petroleum reserves, according to several sources with knowledge of the matter.

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The barrels of predominantly Iranian Heavy and Iranian Light grades were sent to bonded storage at the coastal sites of Tianjin, Huizhou and Jinzhou, highlighting how discounted and refinery-compatible Iranian grades continue to find favor in China.

China imported 855,638 mt or 209,060 b/d of crude from Iran in June, latest data from the General Administration of Customs showed. This amounts to roughly three VLCCs, all of which were sent to SPR sites through state-run companies or storage operators, the sources said.

The June imports from Iran were 59.1% lower year on year and have fallen from a five-year high of 792,380 b/d in April, hit by the withdrawal of sanction waivers by the US on May 2, and Washington's efforts to bring Iranian oil exports down to zero.

The sources said Iranian barrels have been moving into SPR since at least November 2018, when the US re-imposed sanctions but gave waivers to Iran's biggest crude and condensate buyers, including China.

The storage sites at Tianjin, Huizhou and Jinzhou are some of the newest built under China's second phase of expansion for its SPR. These include 20.1-million-barrel above ground storage in Tianjin commissioned in 2014, 18.9-million-barrel underground storage at Jinzhou in northern Liaoning province commissioned in 2017 and a 31.4-million-barrel facility at Huizhou in southern Guangdong province that started in 2018.

In June, VLCCs that discharged Iranian crude cargoes in China included the 317,367 dwt Horse, and the 317,534 dwt Stream, both owned by the National Iranian Tanker Company, and they arrived at Tianjin's Xingang port, cFlow, Platts trade flow software, showed.

The total volume of Iranian crude sent to China's SPR was not available, but data showed deliveries were more concentrated between November-December 2018 and June-July 2019, and some in between.

STRATEGIC PETROLEUM RESERVES

China has shown a preference for medium sour Middle Eastern grades for building its SPR because they are more compatible with the country's refinery configurations.

It has a long-term plan to build national petroleum reserves equivalent to 90 days of net import cover, in line with the International Energy Agency's guidelines for oil importing countries.

China's net crude imports were at 9.91 million b/d in H1 2019, up 8.8% year on year, official data showed.

The last time China announced official SPR data was in December 2017, when the National Bureau of Statistics said volumes had reached 37.73 million mt of crude as of mid-2017, or 276.56 million barrels, up from 33.25 million mt recorded in mid-2016.

As of mid-2017, nine SPR storage sites were in use with the second phase still in progress, and the third-phase of China's SPR sites will start commissioning in 2021. Due to limited storage availability at the SPR sites, the government can lease commercial tanks for SPR as well.

China posted a 25% year-on-year increase in crude imports at the end of 2018, implying an unprecedented rate of SPR filling due to geopolitically driven purchases of crude and gold, Bernstein Research senior analyst Neil Beveridge said earlier this year. He had estimated China's SPR to be close to the 2020 target of around 550 million barrels, and expected import growth to remain in the high single digits to meet the 90-day target.

EQUITY OIL

China's Iranian imports in June made Iran the country's 11th largest crude supplier.

Earlier this month, the US imposed sanctions on state-owned Zhuhai Zhenrong Company Limited for allegedly violating US restrictions on Iran's oil sector, but it wasn't clear how much crude Zhuhai Zhenrong imported and when.

A portion of the Iranian barrels imported by China was equity oil for its previous investments in Iran's upstream sector.

China National Petroleum Corp., or CNPC, had suspended its operations at the South Pars gas field project in Iran, and minimized support and services to two Iranian oilfields where it had interests, after the US re-imposed sanctions on Tehran in 2018, according to regulatory filings by its subsidiary PetroChina on April 29.

CNPC has indirect interests in three oil and gas projects in Iran -- the South Pars gas field project, the Masjid-i-Sulaiman (MIS) oil fields in which CNPC obtained a 75% interest in 2005, and the North Azadegan oilfield in which CNPC obtained 100% interest in 2009, according to the filings. CNPC had shipped about 2.3 million mt of crude from those fields in 2018.

-- Oceana Zhou, oceana.zhou@spglobal.com

-- Eric Yep, eric.yep@spglobal.com

-- Edited by Geetha Narayanasamy, geetha.narayanasamy@spglobal.com