The Impact of U.S. Sanction on Trade of Oil between Iran and China

Document Type : Research Paper

Authors

1 Assistant Prof., Department of Public Law, Faculty of Law and Political Sciences, University of Tehran, Tehran, Iran

2 Prof., Department of Public Law, Faculty of Law and Political Sciences, University of Tehran, Tehran, Iran.

3 Ph.D. Student in Oil and Gas Law, Department of Public Law, Faculty of Law and Political Sciences, University of Tehran, Tehran, Iran

Abstract

The People's Republic of China is regarded as the biggest importer of crude oil and the second-largest producer of petroleum and petrochemical products. The Chinese oil market consists of two main players, with Chinese state oil companies being the primary actors. Companies such as China National Petroleum Corporation (CNPC), China National Offshore Oil Corporation (CNOOC), National Petrochemical Corporation (SINOPEC), and China National Chemical Import and Export Corporation (SINOCHEM) are the most prominent among them.
Since the re-imposition of US sanctions against Iran, commercial relations between these corporations and the Islamic Republic of Iran, including oil trade, have been halted. This challenge is primarily attributed to the transformation of Chinese state oil companies from National Oil Companies (NOCs) to International Oil Companies (IOCs).
Today, Chinese state oil companies have made significant investments in oil-rich countries and established numerous subsidiaries worldwide to facilitate their commercial activities. As China requires substantial amounts of crude oil for its economic growth, state companies often acquire oil through their foreign investments and transfer it to China via their subsidiaries. Moreover, these companies are highly active in major financial markets, having raised capital through listings on the Hong Kong, New York, and Shanghai stock exchanges.
Within the Chinese oil industry, state companies have formed partnerships with renowned international oil corporations. This trend emerged after China's accession to the World Trade Organization, which allowed foreign investment in the upstream, midstream, and downstream sectors of the Chinese oil industry, making it an attractive destination for international oil companies. Consequently, Chinese state oil companies are no longer merely national entities with limited partners and duties. They now resemble other global international oil corporations.
This article also examines the legal standards of designation within the US sanctions regime, which include ownership links (direct and indirect) and control links.

Direct ownership links enable the United States to easily designate any company where 50% or more of its shares are owned by sanctioned entities or individuals.
Indirect ownership links are designed to prevent sanctions circumvention by subsidiaries. Under this framework, all subsidiaries of a company in which sanctioned entities or individuals own 50% or more of the shares are subject to designation.

Besides ownership, the United States utilizes the "control" standard to determine which person or entity exerts dominant influence over a company. One key indicator of control is the ability of sanctioned shareholders to appoint directors and/or managers. Therefore, if directors have any business, professional, or family ties to sanctioned entities, the company may be sanctioned regardless of its ownership status.
This article analyzes Chinese state oil companies and US sanctions standards, concluding that the current structure of these companies makes them highly susceptible to the devastating consequences of US sanctions. Due to their extensive global operations and numerous subsidiaries, they cannot risk purchasing Iranian sanctioned crude oil. Their corporate governance often involves 50% or more ownership of subsidiaries and intermediaries, and many directors in subsidiaries previously held significant positions within state oil companies. Consequently, purchasing Iranian sanctioned crude could expose state oil companies to financial sanctions that could easily extend to their global subsidiaries, severely impacting China's oil imports. It is crucial to note that more than three-quarters of China's refining and petrochemical capacity belongs to complexes owned by state oil companies. Therefore, any disruption in crude oil imports would not only result in significant financial losses but also pose a national security challenge for the Chinese government.
Finally, the article critiques the current policy of the Islamic Republic of Iran, which relies heavily on Chinese independent refineries for oil trade due to the reluctance of state oil companies. While these independent refineries are currently the primary buyers of Iranian crude, this reliance presents several challenges:

Import Quotas: Independent refineries are subject to crude oil import quotas announced four times a year by the central government, making their purchasing patterns unpredictable and unreliable for oil producers like Iran.
Spot Market Reliance: Independent refineries primarily purchase crude oil through spot market contracts, which lack a price formula based on international benchmarks. This exposes Iranian oil sales to significant price fluctuations.

Therefore, it is concluded that Chinese independent refineries cannot effectively substitute Chinese state oil companies as long-term and predictable partners for oil trade.

Keywords

Main Subjects

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Journal of Legal Studies
Volume 16, Issue 4 - Serial Number 54
January 2025
Pages 185-220

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