(Bloomberg) — The US sanctions on Russia's energy giants are sending shockwaves deep into the heart of China's oil industry, where both state and private refiners are under increased pressure to maintain supplies while avoiding fines.
As much as 20% of China's crude oil imports – about 2 million barrels per day in the first nine months of this year – come from Russia, making it one of the country's top oil sources for processing into products such as diesel, gasoline and plastic.
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The Trump administration's blacklisting of Rosneft PJSC and Lukoil PJSC is the latest in a series of measures introduced by the US, European Union and United Kingdom targeting buyers of Russian crude and the contribution they make to Moscow's coffers and its war effort in Ukraine. According to the US government, the transactions involving the two companies must be wound down by November 21.
The risk for both China and India, Russia's largest customers, lies in their dealings with sanctioned entities, which could expose companies to crippling secondary penalties. These include being cut off from Western banking systems and access to dollars, or frozen by the Western producers, traders, shippers and insurers that form the backbone of global commodity markets.
Of particular importance 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 cut off from many projects.
If they choose to comply with the sanctions, they will lose access to deeply discounted oil supplies that have helped keep energy costs low for industry and consumers. In addition, buyers outside China and India are grappling with the impact on Lukoil, which is involved in Iraq's Basrah project and the Caspian Pipeline Consortium in Central Asia.
The British moved last week to take over Rosneft and Lukoil, as well as China's Shandong Yulong Petrochemical Co. blacklisted for its Russian imports had already put traders on edge. Western companies have since become wary of supplying the private refinery. Other recent US sanctions have targeted major Chinese ports, including Rizhao and Dongjiakou, key conduits for both Russian and Iranian oil.
At the center of the massive trade between Russia and China is the long-term contract between Rosneft and state-owned China National Petroleum Corp., which includes the purchase of ESPO oil through pipelines to landlocked refineries in the northern Daqing region. According to traders, the factories there rely mainly on Russian raw materials, making them particularly vulnerable to any disruptions.
