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Yulong refinery ramps up Russia oil buying after sanctions

hit

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Refiner is top Chinese buyer by site of seaborne Russian

crude

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Widening Western sanctions drive bifurcation of global oil

trade

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Yulong overseas customers, banks, service providers cut

access

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Global oil firms cut sales to Yulong after sanctions

By Chen Aizhu, Trixie Yap and Florence Tan

SINGAPORE, Nov 26 (Reuters) - When Shandong Yulong

Petrochemical opened its Singapore office a year ago, the

company staged a lion dance to herald prosperity for the new $20

billion oil refiner at the centre of modernisation efforts in

its home province in China.

But Yulong's ambition to rub shoulders with global

heavyweights, backed by Beijing's push to modernise its

refiners, was upended on October 15, when the UK sanctioned it

for dealing in Russian oil. The European Union followed suit a

week later. Neither the EU nor the UK said Yulong violated

sanction-related price caps.

The effect was immediate: Yulong's non-Russian suppliers,

foreign customers, banks and vendors ran for the exits, Reuters

reporting shows, leaving it with little option but to buy even

more Russian oil, a consequence of widening Western measures to

curb Moscow's oil revenue as its Ukraine war continues.

Going after Yulong marked an escalation in Western efforts

to disrupt Russia's oil flows. Previously, Western blacklistings

of Chinese firms focused mainly on smaller operators, often for

violating U.S. prohibitions against importing Iranian oil.

Reuters is reporting for the first time the extent of the

disruption to Yulong's operations caused by sanctions, which

have taken some of the shine off China's newest refinery

project, limited its crude sourcing and forced it to turn

inward.

Yulong did not respond to requests for comment.

"These designations are part of a developing trend in the UK

and EU's approach to sanctions; namely to target third-country

actors that are perceived to be acting contrary to EU and UK

foreign policy objectives," said Alexander Brandt, sanctions

partner at law firm Reed Smith.

"Such measures are increasingly akin to aspects of U.S.

secondary sanctions," he said.

The growing ranks of sanctioned participants in China

and around the world have been forced to deal with an expanding

network of producers, refiners, middlemen and the "shadow fleet"

ships on the blacklisted side of a bifurcated global oil

industry.

Within days of the UK censure, Yulong's mainstream crude

suppliers - including BP, TotalEnergies, Saudi

Aramco, PetroChina and Trafigura - cancelled

shipments, Reuters reported last month, afraid of incurring

secondary sanctions.

In Yulong's Singapore office, where a team of around 10 is

led by an ex-Chinese state oil executive, staffers lost access

to service providers including trading platform Intercontinental

Exchange ( ICE ), information provider LSEG and at least one

European brokerage, people familiar with the matter said.

ICE and LSEG declined to comment.

"Nobody seemed to have a contingency plan in place," one of

the trading sources said, declining to be identified given the

sensitivity of the matter.

Yulong's Singapore office, the main contractual party for

its global supplies, lost services from banks in the city-state,

two sources said. Yulong's banks in Singapore included local

branches of Agricultural Bank of China and Bank of

China as well as UOB and OCBC,

according to the Accounting and Corporate Regulatory Authority.

"OCBC Group has always complied strictly with our robust

sanctions policy as well as the laws and regulations in all the

jurisdictions the group operates in," an OCBC spokesperson said.

None of the other banks responded to requests for comment.

Yulong's export customers also got cold feet: regular buyers

including global traders Vitol and Gunvor suspended purchases of

petrochemicals like methyl tert-butyl ether and toluene beyond a

November 13 grace period, two people familiar with the matter

said.

China's Wanhua Chemicals, which has several

Western clients, also halted benzene purchases, three sources

said.

Vitol declined to comment; Wanhua and Gunvor did not respond

to requests for comment.

India-based refiner Nayara, which is Russian-owned, was also

cut off by many of its counterparties when the EU sanctioned it

over Russian oil purchases in July. Since then, it has been

importing crude from Russia exclusively.

Rajesh Chopra, an analyst with energy consultancy XAnalysts,

said stepped-up Russian crude buying by sanctioned refiners is

an unintended consequence.

"These sanctions are proving ... kind of counterproductive

because instead of stopping the Russian crude processing in

those complexes, it's not giving the sanctioned refiners any

other option but to process more Russian crude," he said.

The UK declined to comment and the EU did not respond to

a request for comment.

On the day that the UK sanctions were unveiled, one panicked

supplier told Yulong it wanted to cancel a fully paid

2-million-barrel Middle Eastern oil shipment worth around $130

million that was about to discharge at Shandong's Yantai port, a

person briefed by Yulong said. The cargo was later delivered

within a grace period.

Over several days, Yulong's suppliers cancelled at least

half a dozen shipments.

TOP RUSSIAN BUYER

To plug the gap left by mainstream suppliers, Yulong snapped

up 15 cargoes of Russian oil for November, roughly doubling its

typical monthly intake, traders said. Yulong added more than 10

Russian cargoes for December delivery, traders said.

Yulong opened its 400,000 barrel-per-day refinery last year

and lined up supplies from Oman, the United Arab Emirates,

Canada and Russia.

Yulong's Russian shipments accounted for 40% to 50% of its

crude purchases before the sanctions hit, according to three

traders and two analysts, making the refinery Moscow's

single-largest Chinese client. At present, Russian oil accounts

for most if not all of its imports, multiple traders said.

Russian oil seemed like a safe bet given that Moscow is a

longtime supplier to China, including its state-run oil giants,

and its trade is not prohibited if it complies with a

Western-imposed price cap.

In sanctioning Yulong, the UK and EU cited its dealing in

Russian oil, benefiting Moscow, but did not mention the price

cap.

Beijing, which has close ties with Moscow, has rejected

unilateral sanctions and criticised Yulong's blacklisting.

Russian oil - mainly the ESPO blend, Russia's flagship grade

for Asian markets, which is typically cheaper than Middle

Eastern equivalents and takes less than a week to ship from

Russia's Far East - is a favourite of refiners in China's

Shandong province.

With few alternatives, traders said they expect Yulong to

rely even more on Russian oil, which at a current discount of

over $5 versus the Middle Eastern benchmark, will bolster the

loss-making firm's margins.

"Overall, it's a blessing in disguise," said a Chinese

executive who deals in Russian oil. "With cheaper, abundant

Russian oil, Yulong could fly high and fly free."

YULONG: PAST, PRESENT AND FUTURE

The Yulong project was greenlit by Beijing as part of a push

to create stronger industrial firms with international standing

while consolidating and modernising Shandong's crowded refining

sector, where some smaller independent operators dubbed

"teapots" have been known to evade taxes and flout government

limits on crude imports.

In 2023, talks began with Saudi Aramco to take a 10% stake

in Yulong, along with a long-term supply deal. Reuters could not

determine the status of those talks. Aramco did not respond to a

request for comment.

Yulong was founded by private aluminium smelter Nanshan

Group, but state-controlled Shandong Energy Group is its

second-biggest shareholder.

That has allowed Yulong to operate in some ways like a state

company, according to five sources familiar with Yulong, which

has meant avoiding cheap Iranian and Venezuelan oil favoured by

teapots for fear of exposure to secondary U.S. penalties.

Market participants expect Yulong to find workarounds to

Western restrictions.

It is already diverting more petrochemical output to the

domestic market after export clients stopped buying, enabling it

to limit declines in refinery runs, over 10 traders said. A

downstream unit that Yulong is set to bring online next year

could absorb even more production.

Yulong could segregate some of its business in a separate

corporate entity, industry sources said, a structure adopted by

U.S.-sanctioned refiners Shouguang Luqing and Shengxing

Chemical, with the intention of allowing counterparties to deal

with non-sanctioned entities.

Yulong, whose November purchases of Russian oil will cost it

roughly $660 million based on market prices, must also find new

financing channels and may rely more on Chinese non-bank credit

providers, three traders said.

Xiamen Xiangyu Group, a government-backed trader, is

expected to continue financing Yulong's purchases, two sources

close to Xiangyu said. As a middleman, Xiangyu typically pays on

behalf of Yulong for Russian cargoes, becomes the owner of the

oil on paper and allows the refiner 30 days to repay with

interest. Xiangyu did not respond to a request for comment.

Yulong could also seek credit from its suppliers of Russian

oil now that it is an even bigger client, said the Chinese

executive who deals in Russian oil.

($1 = 7.1230 Chinese yuan renminbi)