There is an oil market that operates outside of sanctions, international organizations such as OPEC and that is not even connected to the global banking system. They are the “teapot refineries” of China, which proliferate in the province of Shandong and act as opportunistic buyers of the sanctioned crude oil that they obtain at a reduced price.
Without them, it would be very difficult to put discounted barrels from Russia, Iran and Venezuela on the international market.
These small rudimentary plants, independent of the Chinese state oil companies known as “The Big Three” – PetroChina, Sinopec, and CNOOC – have more profit margins and less bureaucracy than them.
In fact, the term “teapot” (teapot) was born in the 90s to describe private refineries, which operated with obsolete technology and very limited processing capacity. They were, in essence, small “pressure cookers” compared to large government refineries.
For decades, they survived by processing fuel waste and operating in the shadows of legality. Everything changed in 2015, when the Chinese Government, in a strategic decision, granted them licenses to import crude oil directly.
Overnight, the “teapots” were modernized and grouped, today representing close to 20% of the Asian giant’s refining capacity. That is, from the largest oil importer in the world.
“By the end of 2016, 19 independent refiners had received quotas totaling 1.4 million barrels per day, a figure greater than the net oil imports of a country like Spain,” explains Erica Downs, a researcher at the World Energy Policy Center at Columbia University and author of the report “The Rise of China’s Independent Refineries.”
The Chinese government went from trying to close these plants for two decades to formally integrating them for several strategic reasons. The essential factor, the report says, is that President Xi Jinping sought to make the state oil majors more efficient and that is why competition in the domestic market increased.
These small independent refineries have refining capacities ranging from 40,000 to 214,000 barrels per day, according to data from S&P World.
The sanctioned crude oil business
For Venezuela or Iran, selling oil under sanctions is extremely difficult. Since few dare to buy it, they have to offer massive discounts that can reach up to US$30 per barrel compared to the price of Brent, the reference price in Europe.
In 2023, 98% of raw material imports from small independent refiners came from Russia, Venezuela and Iran, according to data from S&P World Commodity Insights. The use of sanctioned crude oil allowed these refineries to obtain profits of up to 1,500 yuan/tonne ($28/barrel) in March of that year.
“The discounts that the refineries teapot they obtain were what propelled them to become the main buyers of sanctioned crude oil. This allows them to increase their profits,” Downs explains to BBC Mundo.
Many of these refineries are connected by private pipelines and share logistics, which also saves them costs.
“In addition, they are more risk tolerant than Chinese state oil companies, since they have much less, or no, exposure to the US dollar financial system,” he adds.
A report from the US-China Economic and Security Review Commission of the US Congress last March states that tea refiners are deliberately isolated from the international financial system to minimize their exposure to the sanctions that Washington has imposed on Iran, Venezuela or Russia, allowing them to process “banned” crude oil without risk for large Chinese banks.
Expelled from the banking system in dollars
“The Chinese oil majors stopped importing Iranian crude because they didn’t want to risk sanctions,” Downs recalls. However, the small companies had no qualms about buying that oil, acting as a “win away valve” that allows the crude oil that no one else dares to touch to continue flowing.
PetroChina, Sinopec, and CNOOC have businesses around the world, are publicly traded, and use the international financial system. For this reason, they are terrified of US sanctions: if they buy that oil, they risk being expelled from the banking system in dollars.
Instead, the teapots They are local, private companies with minimal or no international exposure. They have no assets in the United States nor do they need to use Western banks. This makes them the perfect partner for Caracas or Tehran: they are immune to financial retaliation from Washington because they operate in a strictly Chinese ecosystem and in a currency other than the dollar.
The report notes that Chinese customs authorities do not officially report these imports as Iranian, but instead falsely attribute them to countries such as Malaysia, Oman or the United Arab Emirates.
And something similar happens with ships that leave Venezuela or Russia. “Transportation depends on aging oil tankers that operate in the shadows, turning off their identification systems (AIS), transshipping at sea and using flags of convenience to hide their tracks,” says the US Congress.
The West sees how these refineries have become an obstacle to the success of sanctions, since as long as there is a refinery in Shandong willing to buy, the sanctioned oil will always find a way to the market.
From Venezuela to Iran
With the income from the oil industry, some Western governments believe that Russia continues to finance the war in Ukraine, Venezuela obtains financial oxygen so that its economy does not collapse, and Iran continues with its nuclear program to enrich uranium.
But the capture of Nicolás Maduro in Venezuela and the war in Iran has changed the outlook for these Chinese refineries.
“After the US intervention in Venezuela, small refiners turned to buying more Iranian crude, especially heavy Iranian crude, which is similar to Venezuelan. They probably also looked for more Russian crude to take advantage of the enormous price difference between the sanctioned barrels and the commercially available substitutes,” Luisa Palacios, researcher at the World Energy Policy Center at Columbia University, tells BBC Mundo.
“However, discounts on Russian barrels disappeared after the start of the conflict in the Middle East, and the US blockade of Iranian ports means that small refiners could now struggle,” he adds.
The problem for them is twofold, because Beijing also puts pressure on them not to stop producing, either with cheap crude oil or at normal prices, since that would put their oil supply at risk. The “teapots” provide a quarter of the processing capacity needed by the Asian giant’s economy.
“The refineries teapot They are in a difficult situation not only because of high crude oil prices and low margins, but also because Beijing has pressured them not to reduce their production to satisfy Chinese demand for refined products. Since Beijing does not want these refineries to reduce their production, it probably does not want them to close while oil does not flow freely through the Strait of Hormuz,” estimates Downs.
Strategies to survive
Again this forces the teapot to turn to alternative strategies. “Following the sanctions imposed last year on several of these refineries, they have had difficulties receiving crude oil and have started selling their products under different names,” says Maia Nikoladze, associate director of the Economic Diplomacy Initiative at the Atlantic Council, a US-based judge tank.
“Chinese institutions with an international presence will comply with US sanctions, while smaller or domestically focused ones are more likely to continue trading through alternative solutions,” Nikoladze explains.
Despite their initial success, independents face a more difficult environment. And as happens in any market, everything indicates that the number of independent refineries will reduce in the next decade. The largest and most sophisticated ones will be able to continue, while the small and less efficient ones will disappear or be bought.
The question in the air is whether China will let this happen or intervene to ensure a supply of oil it needs to maintain the growth rate of its economy.
click hereto gape more stories from BBC Files World.
Subscribe hereto our new e-newsletter to receive a selection of our best content of the week every Friday.
You can also follow us on YouTube, instagram, TikTok, x, Facebookand on our channel WhatsApp.
And remember that you can receive notifications in our app. Download the latest version and activate them.
- “Behind the US intervention in Venezuela is Trump’s intention to stop China”
- Why the Strait of Hormuz is Iran’s most powerful weapon in the war against the US
- “What company in its right mind is going to invest in Venezuela?”: the obstacles facing Trump’s bet on Venezuelan oil
