Traders Suspect Venezuela Oil in China as Bitumen Flows Soar

(Bloomberg) -- Chinese refiners have massively boosted imports of diluted bitumen in a sign of either their desperation to produce fuel and asphalt for a rebounding economy, or that they’re skirting local import quotas and even international sanctions.

The sticky, black tar-like substance, known as bitumen mixture in customs declaration forms, saw imports soar to the equivalent of 292,000 barrels a day in May and June, up over tenfold from last year. Bitumen, also known as pitch or tar, dates back to Biblical times and can be used to build roads and roofs in its raw form, or be processed into fuels in oil refineries.

The mixture is also chemically similar to a blend of Venezuelan oil known as Merey, which was popular among Chinese refiners before U.S.-led sanctions halted official flows of the crude. Further driving speculation is the fact that the bulk of the imports are from Malaysia, which hasn’t significant boosted its bitumen-making capabilities but is a hub for transferring crude and petroleum products from one tanker to another, sometimes to mask the origin.

The spike in bitumen imports could comprise “some heavy crude blends, including Venezuelan Merey, that transit through ASEAN countries,” said Michal Meidan, head of China research at the Oxford Institute for Energy Studies. It’s also being driven by strong demand for infrastructure work on the back of government stimulus, and an uptick in real estate activity, she said.

Importers also benefit from buying bitumen mixture because it enjoys an 8% import tax exemption, and because it doesn’t count against government-issued quotas for crude oil imports by Chinese independent refiners. Teapots, as they’re called, used to heavily rely on bitumen mix as a feedstock to make gasoline and diesel until 2015, when they were first allowed to import crude quotas and import licenses.

Similar Quality

China’s General Administration of Customs didn’t reply to a fax seeking comment about the surge.

People who were offered cargoes of bitumen mix from Malaysia told Bloomberg that the grade looked similar in quality -- specifically, density and sulfur content -- as Merey. At least one customer was sent a sales document for bitumen mix that included an assay for Merey, a grade that’s produced by Venezuela’s state-owned oil producer PDVSA, a U.S.-sanctioned company.

The waters off western and southern Malaysia are popular locations for vessels to conduct ship-to-ship transfers, where oil from one vessel is transferred to another in risky out-at-sea operations. While such activities are often used to collate smaller shipments onto larger tankers, or vice versa, they can also be used to obscure the origin of cargoes.

Back in June and early-July, it was probably attractive for Chinese teapot refiners to buy bitumen mix as their crude-import quotas were running low, said Meidan. Although additional quotas can be purchased from other companies, the cost of these were prohibitively high, she added.

Road Construction

According to customs data, China hasn’t officially imported Venezuelan crude since September last year. In order to get around sanctions, traders have been using inventive methods to disguise cargo’s origin with crude from Venezuela go through ship-to-ship transfers in the Malacca Straits before coming to China, Bloomberg News reported in June.

To be sure, China’s refiners may be seeking more diluted bitumen because of changing demand trends thanks to post-pandemic government stimulus. Typically bitumen mix isn’t preferred because it produces less high-value fuels like gasoline and diesel, and more low-value products like asphalt. But with strong demand for infrastructure products, that could be tilting the playing field, said Chen Jiyao, Singapore-based analyst with energy consultancy FGE.

“It will be peak demand season for road construction soon after the flooding and raining end and right before the winter season starts,” Chen said. “With Merey being cut off as the feedstock on the supply side, alternative raw material such as bitumen mix naturally had a boost.”

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With assistance from Bloomberg