China has been hoarding Iranian Crude Oil ignoring US Sanctions

China is continuing to import many millions of barrels of crude oil from Iran every single month but also it will continue to do so in line with the now firmly in-play 25-year deal between the two countries.

Specifically, from 1 June to 21 July (51 days), China imported at least 8.1 million barrels of crude oil, which is 158,823 barrels per day (bpd). The vast majority of these 8.1 million barrels were delivered by crude oil container ship.

Beginning with the cargo of the ‘Giessel’, which likely loaded Iranian crude oil via ship-to-ship transfer just off the Strait of Hormuz at the Gulf of Oman and this likely occurred between the 26 April and 5 May,”.

The Giessel then discharged about 2.1 million barrels of Iranian crude oil to [China’s state-owned] Sinopec at the Qingdao Huangdao port on 13 June, 2020.

Shortly thereafter, according to the Iran source, the crude oil tankers ‘Stream’ and ‘Snow’ left Iranian ports for China and later offloaded their respective 1.6 million barrels and 2.1 million barrels of Iranian crude oil at Chinese ports.

This process involves shipping Iranian oil to somewhere within Malaysian or Indonesian maritime boundaries, changing the vessel registration documents relating to its origin and ownership, and to the provenance of the crude oil cargo, and then continuing the voyage on to China.

Another method of Iran delivering its oil to China is now being worked on by Tehran, together with Russia and China itself.

This is to build-out the oil collection, storage, and delivery elements from Iran’s Caspian Sea allocation into the Russian feed-in structures used in the ESPO [Eastern Siberia–Pacific Ocean] pipeline, and then to move the Iranian crude through Kazakhstan and then into China.

Iran now has an 12% in the Caspian resource, with the onshore and offshore Caspian fields conservatively estimated to have around 48 billion barrels of oil in proved and probable reserves.

Russia already has experience of using Iranian oil in the ESPO crude oil blend. In 2018 it was facing numerous complaints from European buyers of its oil when its efforts to meet increased oil demand from China simply by boosting crude oil output in East Siberia failed.

In order to redress the quality issue for Europe, Russia utilized the relevant light, sweet, Iran crude grade into its own ESPO deliveries, juggling it between Europe and China.

For China there are distinct advantages to holding millions of Iranian crude in storage, aside from the sanctions-busting element. To start with, it means that it can secure the oil at extremely discounted prices, in keeping with the secret element of the 25-year deal agreed between the two countries.

In the case of the crude oil delivered by the Giessel, Stream, and Snow tankers – 5.8 million barrels in total – each barrel was discounted by US$10.95 to the headline Iranian grade price, according to the Iran source.

In addition to this discount, Iran offered China CIF [cost, insurance, and freight] cargoes at FOB [free-on-board] pricing, and Iran continues to offer Chinese buyers protection and indemnity [P&I] insurance, through the ‘Kish P&I Club’, among other such entities.

Additionally positive for China is that this stored oil can be sold at any time should the need arise or at a time when oil prices rise significantly (effectively also functioning as a hedge).

It can also be used for geopolitical advantage, as it allows China to trade the oil in deals with energy-poor countries that nonetheless have things (port facilities, for example) that China wants, especially in pursuit of its ‘One Belt, One Road’ program.

Finally, stored Iranian crude oil gives China a wider energy security safety net in the event that the USA imposes further sanctions against more of China’s traditional oil suppliers.

On the other side of the equation, Iran benefits in part from the fact that it does not have to halt production at its core fields because it is running out of storage space, which could damage the wells.

Nor does it have to commit all of its tanker fleet to storage, which is costly and would prohibit revenue-raising crude oil exports to other countries. The major benefit for Iran, though, is funding.

Before Iran signed the secret part of the 25-year deal with China it was short of the approximately US$150 billion that it needed to complete all of its major oil and gas developments, plus another US$250 billion that it needed to build out the rest of its key business sectors to internationally functioning levels.

Whilst China has vouched for this US$400 billion, Iran is still relatively cash poor, so the discounted oil exports are a means of allowing it to pay China for its part of the infrastructure development costs.

According to various sources, the discounted price of oil on the Giessel, Stream, and Snow oil tankers, was part of the payment for Sinopec’s ongoing work on Phase 2 of Iran’s super giant Yadavaran oil field.

Sinopec is apparently working on this field on multiple contract-only operations through seven front companies that have been registered variously in Myanmar, Malaysia, Singapore, and Pakistan.

China imported at least 338,000 bpd of Iranian crude oil. This equates to just over 67% of Iran’s total 500,000 bpd of exports at the moment. This leaves around 162,000 bpd being exported to Iran’s other major traditional buyers right now, including Syria and various former Eastern Bloc states, among others.

Oil Price.com / ABC Flash Point News 2020.