How North Korea gets its oil from China: lifeline in question at U.N. meeting

FILE PHOTO: The logo of CNPC (China National Petroleum Corporation) is pictured at the 26th World Gas Conference in Paris, France, June 2, 2015. REUTERS/Benoit Tessier/File Photo

By Chen Aizhu | BEIJING

As the United Nations Security Council decides whether to tighten the sanctions screws on North Korea, the country's increasingly isolated government could lose a lifeline provided by state-owned China National Petroleum Corp (CNPC).

For decades, the Chinese oil giant has sent small cargoes of jet fuel, diesel and gasoline from two large refineries in the northeastern city of Dalian and other nearby plants across the Yellow Sea to North Korea's western port of Nampo, five sources familiar with the business told Reuters. Nampo serves North Korea's capital, Pyongyang.

CNPC also controls the export of crude oil to North Korea, an aid program that began about 40 years ago. The sources said the crude is transported through an ageing pipeline that runs from the border town of Dandong to feed North Korea's single operational oil refinery, the Ponghwa Chemical factory in Sinuiju on the other side of the Yalu river, which splits the two nations.

The plant makes low-grade gasoline and diesel, the Chinese sources said.

The five people outlined previously unreported details about CNPC's deals with Pyongyang and how it came to dominate that business, giving insight into the two countries' relationship and what's at stake as decades of close ties sour badly because of growing concerns about North Korea's missile programs and development of nuclear weapons.

U.S. Secretary of State Rex Tillerson will press the U.N. Security Council on Friday to swiftly impose stronger sanctions in the event of further provocations by the reclusive state, including a long-range missile launch or sixth nuclear test.

President Donald Trump's administration is focusing its North Korea strategy on tougher economic sanctions, possibly including an oil embargo, a global ban on its airline, intercepting cargo ships and punishing Chinese banks doing business with Pyongyang, U.S. officials told Reuters earlier this month.

North Korea imports all its oil needs, mostly from China and a much smaller amount from Russia.

It bought about 270,000 tonnes of fuel, from gasoline to diesel, last year, according to China's customs data.

Crude oil exports from China to North Korea have not been disclosed by customs for several years, but the sources say it's about 520,000 tonnes a year.

OIL EMBARGO

In North Korea, diesel has been critical for farming, especially at this time of year, ahead of the planting season and also around October for harvesting. Gasoline is mainly used by the transport industry and the military, experts say.

Earlier this month, the Global Times, an influential Chinese tabloid whose stance does not necessarily reflect official policy, raised the possibility of cutting oil shipments to North Korea if it were to conduct another nuclear test.

Most analysts argue such a harsh policy would be potentially destabilizing to the regime of Kim Jong Un and say curbing oil imports may be a more realistic option.

"China could potentially be convinced to cap volumes like they did with coal, at the UNSC (United Nations Security Council) as part of a new sanctions resolution following another nuclear test," said Bonnie Glaser of the Center for Strategic and International Studies in Washington.

Any loss of the North Korea trade will have only a tiny effect on Dalian. Dalian's two refineries having a combined capacity to process over 600,000 barrels of crude oil per day, about 40 times North Korea's requirements.

CNPC, which controls both refineries, started to dominate the North Korea business in the late 1990s.

Wang Lihua, who ran CNPC's trading arm from 1998 until her retirement this month, was the mastermind behind the dealmaking, beating out state rivals like Sinochem, the sources said.

"CNPC has all along been the most politically minded among state energy firms, aiming for that role of North Korea's dominant supplier even if the business makes little money," said one of the sources, who is close to CNPC.

CNPC and Sinochem did not respond to Reuters' requests for comment.

Pyongyang's increasing nuclear and ballistic missile tests have already put the brakes on the trade. Beijing quietly suspended a decades-long aid program of 50,000 tonnes annually of aviation fuel in 2013. The government officially announced a ban on jet fuel only last June.

Russia appears to have replaced China as the top supplier of jet fuel, according to sources in China familiar with the trade.

But experts are skeptical whether Moscow would be willing to become Pyongyang's lifeline for other fuels given the country's financial straits.

"They might fill some of the gap, but I'd be shocked if Russia wanted the burden of becoming a lifeline to North Korea," said Glaser.

(Additonal reporting by Gavin Maguire and Florence Tan in Singapore and Josephine Mason in Beijing; Editing by Josephine Mason, Raju Gopalakrishnan and Martin Howell)