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Tsvetana Paraskova

Tsvetana Paraskova

Tsvetana is a writer for the U.S.-based Divergente LLC consulting firm with over a decade of experience writing for news outlets such as iNVEZZ and…

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North Korean Sanctions May Hurt China’s Oil Giants

China MK

Tensions over North Korea’s flexing of its nuclear capabilities over the past few months reached a new peak last weekend when Pyongyang conducted its sixth and most powerful nuclear test so far. South Korea, Japan, and the United States are on high alert, and U.S. President Donald Trump is stepping up his rhetoric aimed at the countries who continue to do business with North Korea.

“The United States is considering, in addition to other options, stopping all trade with any country doing business with North Korea,” President Trump tweeted on Sunday after news of the latest North Korean test broke.

The country that is doing business with North Korea, and is said to still supply Kim Jong-Un’s regime with crude oil, is China.

So far, the U.S. has targeted only minor Chinese banks and companies for trading and/or doing business with North Korea, and for propping up its economy, but Trump is threatening to cast a wider net, which may include China’s big guns in the oil industry.

The possibility of broader sanctions against major Chinese companies could affect the U.S. operations of several of China’s oil giants, as well as many of Beijing’s biggest banks with assets in America. However, a major widespread sanctioning of big Chinese companies could result in retaliation on U.S. firms—including major S&P 500 companies—with their business in China, analysts who have spoken to Bloomberg warn.

China is said to continue to supply oil to North Korea, and while the latest round of U.S. sanctions on North Korea’s oil trade is likely to stop major companies from trading due to reputational risks, it is unlikely to stop China’s crude oil supplies to Pyongyang, according to S&P Global Platts.

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Imposing widespread sanctions on Chinese financial institutions and other companies is on the table, U.S. Treasury Secretary Steven Mnuchin told Fox News Sunday.

“We’re going to strongly consider everything at this point. And again, I will draft a package for his [President Trump’s] strong consideration that would go as far as cutting off all trade and other business,” Mnuchin said.

“And if countries want to do business with the United States, they obviously will be working with our allies and others to cut off North Korea economically,” the Treasury Secretary added.

Big Chinese oil firms would be under pressure if the U.S. were to extend sanctions to major state-held energy companies. China is supplying nearly all of North Korea’s oil, and most of the shipments from Beijing are being made by its largest oil producer, state-held China National Petroleum Corp (CNPC), Kim Kyung Sool, a senior research fellow at the Korea Energy Economics Institute, told Bloomberg.

Although CNPC doesn’t have U.S. energy assets, it is the majority shareholder—with 86 percent—in PetroChina, in which JPMorgan Chase and BlackRock also hold small stakes.

Then, there are Chinese companies with exposure to U.S. assets. Sinochem bought 40 percent of 207,000 net acres in the Wolfcamp from Pioneer Natural Resources in 2013, for US$1.7 billion. Sinopec acquired a stake in Chesapeake Energy’s acreage in the Mississippi Lime in northern Oklahoma for US$1.02 billion in cash. China’s CNOOC Limited controls Nexen, which has assets in the Gulf of Mexico, and interests in projects in Colorado, Wyoming, and Texas, as well as in Canada.

Apart from oil operations and assets, tougher sanctions on China could also affect trade and put pressure on Chinese banks.

Several Chinese banks held a total of US$144.4 billion worth of assets in the U.S. as of December 31, 2016, with the Bank of China holding as much as US$78.483 billion.  

U.S. goods and services traded with China totaled an estimated US$648.2 billion last year, and China is currently the biggest goods trading partner of the U.S. with US$578.6 billion in two-way goods trade.

In terms of energy trade, in recent months China has increased its crude oil imports from the U.S., as America is bumping up exports and reaching more markets since it lifted the export restrictions at the end of 2015. EIA data shows that in February and in April this year, China was the biggest importer of U.S. oil, outstripping Canada.

Chinese companies may proceed at any time to negotiate all types of contractual arrangement with U.S. LNG exporters, including long-term contracts, the U.S. Commerce Department said in May, in what Wood Mackenzie described as having the “potential to alter global LNG trade, opening the door of the world’s largest LNG growth market to the world’s fastest-growing LNG supplier.”

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If the U.S. were to sanction big Chinese companies, however, it could face retaliation that would hurt companies with large shares of their revenues coming from China. Such companies would be Apple, Intel, Qualcomm, and Boeing, according to Bloomberg calculations based on the companies’ latest full-year reports.

Wider sanctions would disrupt trade and energy links, and are currently an option for discussion in the U.S. as it is trying to cut off North Korea entirely and pressure China to rein in its nightmare neighbor.

By Tsvetana Paraskova for Oilprice.com

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