The shadowy network of Chinese oil refineries funding Iran

By Simone McCarthy, Teele Rebane, Isaac Yee, Yong Xiong, CNN

Cangzhou, China (CNN) — A few hundred miles from where Chinese leader Xi Jinping will roll out the red carpet for President Donald Trump this week, a shadowy ecosystem has long been at work pumping billions of dollars into Iran’s economy – now helping keep Tehran afloat in defiance of the US.

These are the ports, pipelines, and oil refineries of Shandong province and its borderlands, where the hulking architecture of oil storage tanks and spindly profiles of smokestacks jut up from barren, coastal flatlands.

Here, so-called “teapot refineries” – small, independent oil companies that operate with the permission of Beijing – quietly process US-sanctioned Iranian crude into gas, diesel and petrochemicals for the world’s second largest economy.

Now, as Washington looks to cut Tehran’s financial lifelines and force it to capitulate to end a months-long war, these activities are being yanked out of the margins and onto the negotiating table between Trump and Xi.

Tensions around this trade are deepening – playing out against a backdrop in which Beijing seeks stability in its relationship with the US, but also holds close economic and diplomatic ties with Iran.

On the eve of Trump’s departure for China, the US Treasury Department blacklisted 12 people and entities for their roles enabling the “sale and shipment of Iranian oil” to China.

Beijing earlier this month ordered firms to ignore US sanctions on refineries soon after Washington added another facility to its list. An ocean away in the Arabian Sea, US naval forces are chasing down so-called “shadow tankers” that ferry this crude from Iran – often to later be imported by operators in eastern China.

Treasury Secretary Scott Bessent recently accused China of helping to fund Iran’s terror networks with its energy purchases.

Earlier this week, along a desolate stretch of road lined with oil refineries just north of the border between Shandong and Hebei provinces, an awareness of that spotlight seemed palpable.

A visit to a US-sanctioned refinery

Security was tight around facilities run by the Hebei Xinhai Chemical Group – a refinery sanctioned by the US a year ago.

Masked guards stood outside entry gates to the processing complex, which sprawled across several blocks in an industrial port area.

Several vehicles, including one with the company logo, started tailing a CNN crew that drove along a public road in front of the facility, attempting to block the team’s ability to film, even out the window. Other facilities that the team passed in the area did not appear to have similar levels of security.

This company makes gas, diesel and chemicals like bitumen, used in making blacktop pavement.

Washington last May accused Hebei Xinhai of purchasing oil “associated with the Iranian military.” It also said the company had imported crude worth hundreds of millions of dollars carried on shadow fleet tankers, including those sanctioned for transporting Iranian goods. Hebei Xinhai declined an interview request from CNN.

The company is part of a growing US blacklist.

Four other Chinese oil refineries have been sanctioned since last year – most within a few hours’ drive of one another in this coastal, energy hub.

The industry in Shandong province cropped up decades ago to feed off the Shengli oilfields in the Yellow River delta, but now they import heavily from overseas – processing roughly a fifth of the oil China consumes.

And the source of those imports? Often sanctioned crude, analysts say.

“These are small plants that operate on thin margins,” said Erica Downs, a senior research scholar at the Center on Global Energy Policy at Columbia University. “The discounts that they’ve been able to obtain over the years on Venezuelan, Russian and Iranian crudes allow them to survive.”

One exception to the profile of sanctioned companies so far is Hengli Petrochemical, a much larger refinery in Dalian – a port city across the Bohai sea from Shandong. The company was hit by the US sanctions last month – in a sign that Washington is willing to come after bigger players.

US Treasury documents called Hengli “one of Iran’s largest customers for crude oil and other petroleum products.” The company, which has developed a facility outside Dalian with the backing of the government, denied these allegations in a public filing.

China doesn’t acknowledge importing Iranian crude in its customs data, and the origins of the imported oil has already been obscured upstream. But Beijing also rejects US sanctions and has ordered companies not to comply with Washington’s sanctions on refineries.

China’s Foreign Ministry pointed to comments from its spokesperson Tuesday saying the government “firmly opposes illegal unilateral sanctions,” in response to a question from CNN about purchases of Iranian oil.

The set-up in China’s oil industry allows independent firms and teapot refiners to take the risk – and even continue their almost wholly domestic operations despite US sanctions. Meanwhile, China’s massive national energy companies, with their deep inroads in international financial systems, can generally remain compliant, according to Columbia University’s Downs.

At Hebei Xinhai, the source of the oil that the facility was processing now – a year after its blacklisting – wasn’t clear.

But from the heavily-staffed front gates to the tankers rolling down the nearby roadway, business was clearly continuing to move.

A ‘steady supply’

As the historic global oil shock caused by the US war with Iran wears on, the independent refineries appear to be becoming even more central to China’s energy security – despite a US military blockade to stop oil-laden tankers from leaving Iran.

Iranian oil – mostly processed through these independent refineries – made up some 13% of China’s seaborne imports before the war. Last year, that likely cost an estimated $32.5 billion, with Iran seeing maybe two-thirds of that with fees deducted, according to Muyu Xu, a senior crude oil analyst at Kpler.

But last month, as Iran’s chokehold on the Strait of Hormuz disrupted exports from other nations, that proportion surged to 18%, Xu said.

“From Beijing’s perspective, they really want to maintain the steady supply of fuel and to ensure their energy security. Therefore, they are eyeing teapot refineries – they know the teapots are still able to get the feedstock,” she said.

Four ports lining the Yellow Sea coastline of Shandong province as well as Dalian have received an average of more than 1.5 million barrels per day in shipments of Iranian oil over March and April in total, according to analytics firm Vortexa.

And while analysts say imports are down slightly after the US imposed its naval blockade on Iranian ports, they assess that’s more due to prices than availability, as tens of millions of barrels remain in floating storage on tankers well east of the Strait of Hormuz.

A high-seas interception

Many of those barrels are in an area known as the Eastern Outer Port Limits (EOPL) anchorage near the Singapore Strait.

It’s long been a key node in the circuitous and clandestine trade of US-sanctioned crude from Iran to China.

Oil is typically ferried to places like the EOPL from Iranian ports by a network of vessels known as the “shadow fleet” – a collection of often outdated ships using evasive techniques to disguise their operations and the origins of their cargo.

Dozens of boats loiter at the EOPL with their tracking devices turned off, passing US-sanctioned oil between them to further obscure their cargo’s origins.

Ships receiving oil then continue to ports in China or elsewhere, with the product labeled as an export from a third country, like Malaysia or Indonesia.

Last month, at least seven vessels picked up Iranian crude at this location and headed to ports in Shandong, according to data provided to CNN by Kpler.

But the obscured origins and transfers leave Beijing free to claim that it doesn’t receive Iranian oil.

Satellite imagery helps tell a fuller story.

CNN pinpointed one transfer last month where the Iranian-flagged vessel Herby pulled up alongside another tanker, the Hauncayo, within the EOPL – a positioning consistent with the transfer of fuel.

Ownership data for the Herby provided by shipping tracker Marine Traffic links it to the state-owned National Iranian Oil Company.

Weeks later, in late April, as the Herby made its way back west toward Iran, it made another connection – this time with the USS Rafael Peralta, a guided-missile destroyer enforcing the US blockade.

Video released by the US Navy show the American warship riding close to the hulking vessel CNN assessed to be the Herby – with the US Central Command saying it intercepted the tanker as it was “attempting to sail toward an Iranian port.”

Images of the encounter show the tanker riding high on the water– a sign that it had likely already relieved its cargo, leaving the US Navy closing in on an empty ship.

An ocean away in eastern China, some three days later, data from Marine Traffic shows the Hauncayo loitering near a pier at Shandong province’s Yantai port.

Then, it disappears – going dark on the tracking system and reappearing three days later at the same position alongside the pier.

That’s a period consistent with the transfer of oil to a port terminal – and the completion of the suspected Iranian crude’s seaborne journey to China.

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This story has been updated with additional information.