Sanction side-step: Iranian oil flows back into China

The Wall Street Journal

After a three-month break, China has resumed importing Iranian fuel oil, a practice that has helped it avoid U.S. sanctions designed to punish countries that import crude oil from Iran.

China is unique in that it has a significant amount of small refineries, called teapot refineries, that are configured to process fuel oil — a cheap byproduct of refining — rather than crude oil. This gives China the ability to make more valuable fuels such as gasoline and diesel without the need to raise imports of crude oil.

The U.S. has stepped up sanctions (pdf) against Iran over the past decade in response to Western charges that Tehran is seeking to develop nuclear weapons — charges the Iranians deny. In late 2011, Congress passed a law penalizing financial institutions that conduct oil trades with Iran’s central bank by banning them from doing business in the U.S.

However, the State Department was given the flexibility to exempt countries that show a “significant” — thought unspecified — reduction in Iranian crude purchases. State has repeatedly given exemptions to China on the grounds that Beijing is buying less crude oil from Iran. China won its third such six-month waiver in June.

China’s workaround stems from a gap in the sanctions law: When discussing exemptions, the sanctions mention only crude oil, not fuel oil.

Customs data this weeks showed China imported 2.75 million barrels of Iranian fuel oil in September, bringing total imports to 8.14 million barrels worth $736 million in the first nine months of this year. By contrast, it imported less than $1 million worth of fuel oil in all of 2012.

In fact, the last time China imported even close to this year’s amount was in 2008, when it imported 7.97 million barrels.

China’s fuel-oil imports pose a delicate issue for the U.S., which is trying to curb Iran’s nuclear ambitions without harming relations with fast-growing Asian countries that depend on Iranian oil. Adding to pressure on the Obama administration are China’s Iranian crude purchases, which haven’t shown much of a decline. Although imports were down by 1.9% in the first half of the year from the same period in 2012, they are now up 1.4% in the January-to-September period, according to customs data.