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Analysis: UN resolution to cap N Korea oil supplies welcomed but analysts skeptical

Washington (Platts)--13 Sep 2017 401 am EDT/801 GMT


The resolution passed by the United Nations Security Council on Monday against North Korea should slash oil supplies to the isolated nation by 30% -- a level which would have significant impact on the country -- but is unlikely to have much impact on regional supply and demand balances, while monitoring of the compliance will be a major challenge.

China-North Korea oil pipeline details"The key issue is monitoring," said Yonghun Jung, adjunct professor in the energy systems department at South Korea's Ajou University. "A transparent, accountable and traceable monitoring inflows of crude and oil products into North Korea is very important now and for the future, as so far we have not had access to actual trade data."

"However, it will be difficult to monitor all crude oil and oil products trades over borders between North Korea and China as well as North Korea and Russia," said Jung, who was formerly a counselor on energy for South Korea's minister of trade, industry and energy.

Trade with North Korea has been notoriously opaque. China, for example, has not reported a shipment of crude oil to North Korea since 2013 despite continuing to send regular volumes into the neighboring country.

During a US House Foreign Affairs Committee hearing Tuesday, a US Treasury official said that North Korea has also used "deceptive practices", including masking the origin of coal and other commodities coming into and out of North Korea. Ships from China, for example, have been found to shut off their transponders to stop and load a cargo in North Korea before traveling to Russia and then returning to China to offload that cargo, according to Marshall Billingslea, Treasury's assistant secretary for terrorist financing.

"It's sanctions evasion," Billingslea said.

The UN resolution, passed unanimously Monday by the 15-member council, is a pared-back version of one the US was pushing last week calling for a ban on crude oil exports to North Korea.

Tokyo and Seoul, which together worked with Washington to push for an oil ban against North Korea, welcomed the UN Security Council resolution Tuesday, saying that it represents a tough sanction against the reclusive state.

"This resolution included the limit of crude and oil products supply volumes to North Korea for the first time" among other measures, Japan's Chief Cabinet Secretary Yoshihide Suga said at a press conference Tuesday.

Citing an estimate from the US, Suga said that the resolution should slash about 30% of crude and oil products supplies into North Korea.

A South Korean government official also said the new sanctions would be "effective" as they are expected to cut oil supplies to North Korea by 30%.

The resolution calls for a ban on all condensate and natural gas liquids supply to North Korea and limits exports of refined products to a total of 500,000 barrels from October 1 to December 31 and to 2 million barrels for all of 2018.

The resolution also bars UN members from exporting more crude to North Korea than they exported over the previous 12 months. The resolution allows the council to approve additional crude exports on a "case-by-case basis" if it determines that more exports are needed for the "livelihood" of the North Korean people and are unrelated to the country's nuclear or ballistic missile programs or other activities barred by previous UN-backed resolutions.

The new sanctions will cut North Korea's supply of gas, diesel and heavy fuels by 55%, according to Nikki Haley, the US ambassador to the UN.


POSSIBLE IMPACT FROM OIL SUPPLY CAP


Takayuki Nogami, chief economist at Japan Oil, Gas and Metals National Corp, said the actual effectiveness of the latest UN Security Council resolution could be impacted by ensuing moves by North Korea.

"In the meantime, it would be difficult to confirm whether China actually cut its crude oil supplies via a pipeline to North Korea," said Nogami, adding that the 30% supply cut, if implemented, could have a serious impact on North Korea's economy.

"The reduced oil supplies are expected to deliver a blow to the North Korean military and lead to hikes on oil prices in the country," Kim Kyung-sul, a senior researcher at the Korea Energy Economics Institute said.

Cho Bong-hyun, a senior analyst at state-run IBK Economic Research Institute, said the sanctions fell short of expectations but added that the "oil-related measures could have a psychological impact on the North."

North Korea produces no crude and has relied almost exclusively on shipments from Russia and China, mostly through aid deals.

China aids North Korea by sending very small volumes of crude from the Daqing block to North Korea's 1.5 million mt/year (30,000 b/d) Ponghwa refinery through a pipeline, according to two Beijing-based senior traders with different state-owned oil companies.

The sole pipeline for crude exports is 30 km long and links China's border city of Dandong in Liaoning province with the Ponghwa refinery. China sends crude from the Daqing block in Heilongjiang province by train to Dandong. The Ponghwa refinery is configured to process only Daqing crude, according to the senior Chinese traders.

According to China's official customs data, the last crude exports to North Korea were in December 2013 at 92,223 mt, with a total of 578,002 mt (4.24 million barrels) of exports to the country that year.

After that, no crude exports to North Korea are recorded. But market sources in North Asia say North Korea currently takes about 6 million barrels/year of Chinese crude.

Jung said he understood China supplies about "10,000-20,000 b/d" of Daqing crude via a pipeline to North Korea and noted it is "not a significant volume, only about two or three cargoes on VLCC a year."

"The impact on the supply and demand balance in North Asia will be limited," he added.

During Tuesday's US House hearing, California Representative Brad Sherman, a Democrat, said sanctions on petroleum flows would likely have little, if any impact. North Korea's total petroleum consumption, for example, accounts for roughly 150 US retail gasoline stations.

"It's going to be tough to put the regime under enough pressure to even freeze [it's nuclear program]," Sherman said.

It is not clear how much oil Russia supplies to North Korea but Russia's energy minister Alexander Novak said September 5 that Russian oil products supply to North Korea were "close to zero."

When asked what his view on the potential oil embargo was, Novak said: "I think this issue is not to have any material impact on us because we practically don't supply oil and oil products to North Korea. If we look into statistical data by the Russian customs service, then we'll see [figures] close to zero," he told reporters on the sidelines of the Eastern Economic Forum in Vladivostok.

--Takeo Kumagai, takeo.kumagai@spglobal.com
--Charles Lee, newsdesk@spglobal.com
--Brian Scheid, brian.scheid@spglobal.com
--Edited by Alisdair Bowles, alisdair.bowles@spglobal.com

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