How Will China's Clampdown on Mislabelled Cargoes Affect Sanctioned Oil?

Chinese customs authorities are stepping up inspection checks on cargoes of heavy crude oil after uncovering several Iranian shipments that were mislabelled as diluted bitumen in an effort to bypass import quotas.

The checks, begun a month ago, are delaying oil discharges into the eastern refining hub of Shandong province.

They are also adding to uncertainty over the risk of disruption to shipments from Iran and Venezuela, while cutting into refining operations just as fuel demand recovers.   

China's independent refiners known as teapots, which account for more than a fifth of its crude imports, have become top customers of Iranian and Venezuelan oil since late 2019.

That has followed tough U.S. sanctions on the two exporters, which have supplied China for more than two decades.

The Chinese refiners have increasingly decoupled from the mainstream global oil market to focus almost solely on  discounted oil from Iran and Venezuela, and more recently Russian oil in the aftermath of Moscow's invasion of Ukraine.

China has repeatedly condemned Washington's unilateral sanctions and defended trade with Iran and Venezuela as normal business practice in line with international law.   

WILL THE CHECKS WIDEN TO ALL IRANIAN CARGOES?

This is unlikely. Traders said they believed the checks were technical rather than political, and aimed to regulate the domestic market and toughen scrutiny of the use of crude oil quotas.

Beijing sets no quotas for state-run refiners, but allots them for independent plants, recently giving greater volumes to "mega" private refiners while cutting back on quotas for smaller plants. 

The inspections have primarily targeted shipments of oil with density of less than 950 kg a cubic meter (kg/m3) - mostly Iranian heavy crudes Pars Oil and Soroosh - that account for about 10% to 20% of the Middle East nation's oil into China, compared with dominant Iranian Light and Iranian Heavy. 

China's Iranian oil imports, often branded as originating from Malaysia, Oman or the United Arab Emirates, were estimated at 640,000 barrels per day (bpd) in the first quarter of 2023, according to tanker tracker Vortexa Analytics.

That is up from 490,000 bpd a year earlier and down from 960,000 bpd in the fourth quarter of 2022, Vortexa estimated. 

VENEZUELAN FUEL

Traders expressed worry that inspections might extend to Venezuelan crude, long used as a feedstock for road-paving bitumen with a density of 950 kg/m3, or higher, and which has been marketed into China in recent years labelled as Malaysian crude or bitumen mix with little hassle.

Vortexa estimated China's first-quarter imports of Venezuelan crude, mostly its main grade Merey, at 430,000 bpd, steady with the previous quarter but up from 300,000 bpd a year earlier.  

China has not officially reported any crude imports from Venezuela since October 2019. Only a handful of Iranian oil shipments were officially recorded, often destined for state reserves, after independents took over the business in late 2019.   

WHY THE MISLABELLING?

Some independent refiners do not have, or are short of, crude oil import quotas. 

Cargoes labelled as diluted bitumen do not require quotas, but are subject to consumption tax of 1,218 yuan ($176) a tonne, and an import tariff of 8%. Refiners can receive partial rebates of the consumption tax after processing.  

Traders said the mislabelling was encouraged by steep discounts for Iranian oil, last heard at benchmark Brent futures minus $12.5 a barrel, and recovering demand in China for gasoline, aviation fuel and bitumen.     

($1=6.9110 Chinese yuan renminbi)

China's Iranian oil imports since 2022https://tmsnrt.rs/3LAavqw

(Reuters - Reporting by Chen Aizhu and Muyu Xu; Editing by Clarence Fernandez)