FEATURE | Sanctions force Western partners to exit $20b Chinese refinery

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 focussed mainly on smaller operators, often for violating US 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 US 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, 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.