(Bloomberg)– US sanctions on Russia’s energy giants are sending shock waves deep into the heart of China’s oil industry, where both state-owned and private refiners face increased pressure to maintain supply and avoid sanctions.
Up to 20% of China’s crude oil imports – about 2 million barrels a day in the first nine months of this year – come from Russia, making it one of the country’s main sources of oil for processing products such as diesel, gasoline and plastics.
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The Trump administration’s listing of Rosneft PJSC and Lukoil PJSC is the latest in a series of measures implemented by the United States, the European Union and the United Kingdom targeting buyers of Russian crude oil and the contribution they make to Moscow’s coffers and its war efforts in Ukraine. Transactions involving the two companies must be completed by November 21, according to the US government.
The risk for China and India, Russia’s biggest customers, lies in their dealings with sanctioned entities, which can leave companies exposed to devastating secondary sanctions. These include being cut off from Western banking systems and access to dollars, or frozen by Western producers, traders, shippers and insurers who form the backbone of global commodity markets.
Of particular concern is the role Western companies play as investors and operators in major oil-producing regions such as the Middle East and Africa, traders say. Chinese and Indian companies that choose to continue working with sanctioned companies risk being sidelined or excluded from a large number of projects.
If they decide to comply with the sanctions, they will lose access to deeply discounted oil supplies that have helped keep energy costs down for industry and consumers. Additionally, buyers outside China and India are grappling with the impact on Lukoil, which is involved in the Basra project in Iraq and the Caspian Pipeline Consortium in Central Asia.
Moves by the United Kingdom last week to blacklist Rosneft and Lukoil, as well as China’s Shandong Yulong Petrochemical Co. for their Russian imports, had already made traders nervous. Western companies have since become cautious about supplying the privately owned refinery. Other recent US sanctions have targeted major Chinese ports, including Rizhao and Dongjiakou, key conduits for Russian and Iranian oil.
Central to the mammoth trade between Russia and China is the long-term contract between Rosneft and state-owned China National Petroleum Corp., which involves purchases of ESPO crude via pipelines to landlocked refineries in the northern Daqing region. According to traders, plants there rely predominantly on Russian raw materials, making them particularly vulnerable to any disruption.