Due to sanctions imposed by the United Kingdom, there are reports that China’s Yulong Petrochemical has faced a collective “oil cut-off” by international suppliers, potentially leaving the refinery isolated and facing supply disruptions in the international crude oil market.
Several sources familiar with the trading industry have informed Reuters that after the UK imposed sanctions on Yulong Petrochemical, several suppliers have canceled agreements to sell Middle Eastern and Canadian oil to the company.
Yulong Petrochemical is one of China’s newest refineries with a capacity of 400,000 barrels per day. It was added to the sanctions list by the UK last week, with the reason pointing directly to Russia’s aggression in Ukraine.
Yulong Petrochemical is one of the largest single customers of Russian oil in China. The purpose of the sanctions imposed on them is part of the UK government’s actions to curb Russian revenues. A statement from the UK Foreign Office indicates that the measure aims to cut off Moscow’s oil income used to fund the war in Ukraine, targeting entities that support Russia’s war machine and circumvent existing sanctions.
The sanctions have led to international suppliers collectively terminating supply agreements, including European oil giants TotalEnergies, BP, as well as Saudi state-owned oil giant Saudi Aramco, Kuwait Petroleum Corporation (KPC), trading company Trafigura, and China’s state-owned trading company China National Petroleum Corporation International.
Sources cited that the decision to cancel contracts was due to Western banks ceasing services to comply with sanctions, which has posed significant risks to the payment ability for transactions with sanctioned entities.
With the reduced access to non-sanctioned crude oil supplies, Yulong will be forced to significantly increase procurement from Russian suppliers with ties to the conflict.
Analyst Sun Jianan stated, “We have heard that Yulong is shifting towards mainly processing sanctioned oil products, which may lead to a reduction in refining capacity.” This move brings about a chain of consequences:
Intensified financial isolation:
Turning to Russian oil will further isolate Yulong from major global banks and traders, increasing transaction costs and uncertainties.
Secondary sanction risks:
While UK sanctions do not directly equate to US or EU sanctions, continued extensive transactions with sanctioned entities may trigger US secondary sanctions, thereby cutting off the majority of Yulong’s channels in the international financial system.
Challenges in emulating the Indian model:
Reports suggest that Nayara Energy in India solely imports oil from Russia post-sanctions, however, this model comes at the cost of sacrificing global trade relations. As an emerging refinery in China, Yulong’s room for long-term development in international trade will be significantly constrained.