Exclusive: China's CNPC suspends fuel sales to North Korea as risks mount - sources

BEIJING (Reuters) - China National Petroleum Corp has suspended sales of fuel to North Korea over concerns the state-owned oil company won't get paid, as pressure mounts on Pyongyang to rein in its nuclear and missile programmes, three sources told Reuters.   

It's unclear how long the suspension will last. A prolonged cut would threaten critical supplies of fuel and force North Korea to find alternatives to its main supplier of diesel and gasoline, as scrutiny of China's close commercial ties with its increasingly isolated neighbour intensifies.   

CNPC and the Ministry of Commerce did not respond to requests for comment. North Korea's embassy in Beijing declined to comment.

Chinese foreign ministry spokesman Lu Kang, asked about the sale suspension and whether the Chinese government put pressure on CNPC to make this decision, said: "I do not understand this situation you are talking about" and declined to elaborate.

A source with direct knowledge of the matter said CNPC decided to put fuel sales on hold "over the last month or two" and described it as a "commercial decision". 

"It's no longer worth the risks," said the source. Chinese and international banks are stepping up compliance checks on companies dealing with countries on the U.S. sanctions list, such as North Korea, he said.

The North Korean agents who mostly buy the diesel and gasoline have been unable recently to pay for the supplies -- CNPC normally requires upfront payments, the source said.

Reuters was unable to determine if the agents have started facing credit problems with Chinese and international banks worried about sanctions compliance issues.

Two other sources briefed about CNPC's decision confirmed the suspension of diesel sales, but did not know directly about the gasoline move. The three people declined to be named due to the sensitivity of the matter and are not authorised to speak to the media.

   

PRICES SURGE IN NORTH      

Last year, China shipped just over 96,000 tonnes of gasoline and almost 45,000 tonnes of diesel worth a combined $64 million to North Korea, where it is used across the economy from fishermen and farmers to truckers and the military.[O/CHINA4]       

Most of that was sold by CNPC, which has grown over the past two decades to dominate China's energy trade with Pyongyang.

Data for May released on Friday showed China supplied significantly lower volumes of diesel and gasoline compared with a month earlier, although monthly tonnages can vary widely. June data will be released in late July.   

Fuel prices in North Korea, meanwhile, have sharply risen in recent months, suggesting a tightening in supply.

A Reuters analysis of data collected by Daily NK showed the price of gasoline sold by private dealers in Pyongyang and the northern border cities of Sinuiju and Hyesan had hit $1.46 per kg on June 21, up almost 50 percent from April 21. Until then, they had remained relatively stable since late last year.

Diesel prices averaged $1.20 per kg as of June 21, more than double over the same period, according to Daily NK, a website run by defectors who collect prices via phone calls with North Korean fuel traders.

   

U.S SCRUTINY

North Korea's unprecedented pace of nuclear and ballistic missile tests has prompted China, which handles 90 percent of North Korea's trade, to start squeezing Pyongyang. 

In February, Beijing suspended coal purchases until the end of the year, cutting off North Korea's main export revenue source. In 2016, North Korea sold 22.5 million tonnes of coal to China, worth about $1.9 billion, according to Chinese customs.

The United States has pressed China to exert more economic and diplomatic pressure on North Korea, but Beijing has said its influence on North Korea is limited and it is doing all it can.

President Donald Trump, frustrated over Beijing's inaction on North Korea and bilateral trade issues, is now considering possible trade actions against China, three senior administration officials told Reuters on Tuesday.

The sources in China saw no sign yet that Beijing is cutting crude oil to Pyongyang. China has not disclosed its crude exports to North Korea for several years, but industry sources say it supplies via an aging pipeline about 520,000 tonnes of crude a year to North Korea, worth about $170 million at current market prices.

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

(Reporting by Chen Aizhu in BEIJING; additional reporting by Heekyong Yang; in SEOUL, Lusha Zhang and Ben Blanchard in BEIJING; Editing by Josephine Mason and Bill Tarrant)