Lifting US sanctions on Iran could crush China’s ‘teapot’ oil refineries

FILE PHOTO: Oil and gas tanks are seen at an oil warehouse at a port in Zhuhai, China October 22, 2018. REUTERS/Aly Song

Lifting US sanctions on Iran could crush China’s ‘teapot’ oil refineries

Reuters-May19th2025

By Ron Bousso

LONDON, May 19 – The possible lifting of U.S. sanctions on Iran’s oil exports could deal a fatal blow to independent Chinese refineries that have thrived by processing Tehran’s discounted crude, while also putting further downward pressure on oil prices.

President Donald Trump has taken a dual-track strategy with Iran, applying a “maximum pressure” campaign of tightening economic sanctions, while simultaneously engaging in direct high-level talks over Tehran’s nuclear programme. Last week, Trump indicated the sides were getting very close to a deal.

Of course, nuclear talks between Iran and Western powers have always been extremely complex – full of stops and starts – and Trump’s recent statements surrounding a potential deal include much hedging.

But if there is a breakthrough deal, it would almost certainly include a repeal of many U.S. economic restrictions on Iran’s oil industry, which would have a profound impact on global energy markets.

Strict U.S. sanctions on Iran’s oil industry have been in place since Trump pulled out of a U.N-backed nuclear deal in 2018. While sanctions have dented Tehran’s exports – the country’s major source of revenue – they have never succeeded in reducing exports to zero, as Trump vowed seven years ago.

Iranian exports reached 2.8 million barrels per day (bpd) in May 2018 and hit a low of just 150,000 bpd in May 2020, before steadily recovering to an average of around 1.65 million bpd so far in 2025, according to analytics firm Kpler.

Chinese privately owned refineries, commonly known as teapots, have been the main buyers of Iranian crude in recent years, attracted by the heavy discounts. Concentrated in the eastern Shandong province, these small independent refineries have capacity of around 4 million bpd, or roughly one-fifth of China’s total refining capacity.

Large volumes of sanctioned crude have made their way into China in recent years through a complex web of shell companies and a so-called “dark fleet” of tankers that transfer oil between different vessels to obscure the origin.

The precise total volumes involved in this trade are unclear as official Chinese customs data suggests the country does not import any Iranian oil. However, Kpler, using ship tracking and satellite technology, estimates that China imported 77% of Iran’s 1.6 million bpd of exports last year.

So far this year, China’s share averaged around 50%, probably as a result of new U.S. sanctions targeting several Shandong teapot refineries and port operators, a theory supported by the fact that the amount of Iranian crude sitting on ships at sea, instead of being discharged, has reached the highest level since November 2023. If sanctions are loosened, this oil would be sold swiftly.