US Sanctions on China Oil Giant Turn Up Heat for Teapot Refiners

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

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The Treasury Department announced on Friday 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 President Donald Trump and his counterpart Xi Jinping. 

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

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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. 

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

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

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“The sanctions on Hengli are an escalation,” said 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 that which Beijing wants to concentrate on — and is an Aramco customer.”

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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.

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Hengli said in an exchange filing on Sunday that 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.

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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.

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The company has not immediately responded to further queries.

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The US has vaccilated on its stance on Iranina 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.

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Widening sanctions on 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.