China Shifting Cargoes to Iranian Tankers to Keep Oil Flowing as US Sanctions Resume

August 20, 2018 Updated: August 26, 2018

BEIJING/SINGAPORE—Chinese buyers of Iranian oil are starting to shift their cargoes to vessels owned by the National Iranian Tanker Company (NITC) for almost all of their imports to keep the supply flowing amid the reimposition of economic sanctions by the United States.

The shift demonstrates that China, Iran’s biggest oil customer, wants to keep buying Iranian crude despite the sanctions, which were brought back after the United States withdrew in May from a 2015 agreement designed to halt Iran’s nuclear program.

The United States is trying to halt Iranian oil exports to force the country to negotiate a new nuclear agreement and to curb its influence in the Middle East. China has said it’s opposed to any unilateral sanctions and has defended its commercial ties with Iran.

The first round of sanctions, which included cutting off Iran and any businesses that trade with the country from the U.S. financial system, went into effect Aug. 7. A ban on Iranian oil purchases will start in November. Insurers, which are mainly U.S. or European-based, already have begun winding down their Iranian business to comply with the sanctions.

To safeguard their supplies, China’s oil traders Zhuhai Zhenrong and Sinopec Group, Asia’s biggest refiner, have activated a clause in its long-term supply agreements with National Iranian Oil (NIOC) that allows them to use NITC-operated tankers, according to four people with direct knowledge of the matter. They spoke on condition of anonymity, as they were not allowed to speak publicly about commercial deals.

Iran will cover all the costs and risks of delivering the crude as well as handling the insurance, the people said.

“The shift started very recently, and it was almost a simultaneous call from both sides,” according to one of the people, a senior Beijing-based oil executive.

In July, all 17 tankers chartered to carry oil from Iran to China were operated by NITC, according to shipping data on Thomson Reuters Eikon. In June, eight of the 19 vessels chartered were Chinese-operated.

Last month, those tankers loaded about 23.8 million barrels of crude oil and condensate destined for China, or about 767,000 barrels per day (bpd). In June, the loadings were 19.8 million barrels, or 660,000 bpd.

In 2017, China imported an average of 623,000 bpd, according to customs data.

Not the First Time

Iran used a similar system between 2012 and 2016 to circumvent Western-led sanctions, which were effective in curtailing exports because of a lack of insurance for the shipments.

It wasn’t immediately clear how Iran would provide insurance for the Chinese oil purchases, worth some $1.5 billion a month. Insurance usually includes coverage for the oil cargoes, third-party liability, and pollution.

“This is not the first time companies exercised the option. …Whenever there is a need, the buyers can use that,” said another of the unidentified people, also a senior Beijing-based oil executive.

It typically takes about a month for Iranian crude to reach China.

With the new shipping arrangement, Iranian oil cargoes to China are expected to stay at recent levels through October, said the four people with knowledge of the tanker changes.

By Chen Aizhu, Florence Tan, & Parisa Hafezi.