By Brian Spegele

BEIJING -- The U.S. is intensifying efforts to cut off Iran's most vital financial lifeline -- its secretive oil trade with China -- by turning up the heat on a business ecosystem that grew from modest beginnings to funneling tens of billions of dollars a year to Tehran.

While the U.S. moves to squeeze Iran by blockading its ports and intercepting tankers, Washington has taken new steps in recent days to target the privately run Chinese refiners, known as "teapots," that soak up nearly every barrel of oil Iran exports.

The U.S. Treasury Department imposed sanctions last week on a unit of Hengli Petrochemical, a refiner that it said has purchased billions of dollars of Iranian petroleum, along with 40 shipping firms and vessels allegedly involved in the trade.

Then, on Tuesday, the department warned financial institutions that they could be targeted for facilitating transactions for Chinese refiners using Iranian oil.

But the teapots are survivors, having endured not only U.S. sanctions but also efforts by the Chinese government itself -- in the years before they became so useful to Beijing -- to shut them down.

For China, the more than 100 teapot refiners are a critical tool for working around U.S. sanctions. A spokesman for China's Foreign Ministry said this week that unilateral U.S. sanctions "have no basis in international law" and that the country would defend the rights and interests of its companies.

By outsourcing the Iran oil trade to largely private firms operating independently of China's state energy giants, Beijing can support Tehran and secure access to Iran's oil while balancing relations with the U.S. and Middle Eastern powers, energy analysts say.

With many entities involved in the Iran oil trade already blacklisted by the U.S. -- including ships, ports and refineries -- a parallel system has developed with little overlap with China's sanctions-compliant oil market.

Some companies involved in the Iran trade have grown less scared of sanctions, said Emma Li, a China analyst at ship-tracking firm Vortexa. "The sanctioned market itself has become so big that people feel like, 'Oh, sanctions are not that bad.' "

For now, China's teapots appear to have access to Iranian oil, including from shipments that left Iran before the U.S. blockade. A long-term blockade, however, could force refiners to turn to other countries.

Elaborate lengths

On paper, China doesn't buy oil from Iran. Chinese customs authorities haven't reported any crude imports from the country from 2023 onward.

Instead, Iranian sellers, Chinese teapots and middlemen go to elaborate lengths to hide their activity, according to U.S. sanctions notifications and indictments. Tankers switch off their transponders to avert detection and perform risky ship-to-ship oil transfers to disguise the origin of Iranian crude. Iranian front companies help facilitate payments, U.S. officials say. Five teapot refiners have been targeted by U.S. sanctions since last year.

Unlike large state refiners, the teapots have few overseas assets and less to lose if they get cut off from the U.S. banking system. They can also settle the trade with Iran in Chinese yuan instead of dollars. This has insulated them from the effects of sanctions and provided China with a workaround to keep the oil flowing.

The teapots are now at the forefront of one of China's most crucial energy relationships. An estimated 12% of China's oil imports came from Iran in 2025.

The logistical network supporting this multibillion-dollar trade has grown rapidly. U.S.-based advocacy group United Against Nuclear Iran says that as of earlier this year it had identified nearly 600 ships that it suspects of covertly transporting Iranian crude or petroleum products, up from 70 in late 2020.

"It's the teapot refineries that are keeping the regime in Tehran in business," said Daniel Roth, research director at UANI.

The trade is now so large that shutting it down completely would be difficult, if not impossible, energy analysts say. To succeed, they say, the U.S. would have to take far more drastic steps such as intercepting many more ships or destroying Iranian energy-export infrastructure.

Such moves would push up global oil prices and risk angering Beijing, which has spent years trying to insulate itself from supply disruptions.

Survivors

How the teapots emerged as top buyers of Iranian crude "is almost certainly the result of happenstance rather than design," said Erica Downs, a scholar who has researched China's teapots at Columbia University's Center on Global Energy Policy.

For many years, the teapots were a thorn in Beijing's side as the central government sought to focus the nation's refining sector under two state-owned giants, Sinopec and China National Petroleum.

As part of that effort, teapots were prevented from importing crude oil directly, which limited their ability to compete against the state-owned refining giants.

The teapots found ways to survive. Many, based in the coastal province of Shandong, received protection from local officials who valued the jobs they created, including helping the teapots take advantage of loopholes in the tax system, according to Downs.

And in 2015, the government changed course, allowing some teapots to import crude as Beijing sought to expose state oil giants to more competition.

At first, Iran wasn't a top supplier. Russia, Angola, Venezuela and Brazil were preferred; the Mideast firms were less flexible on pricing, one teapot executive said in 2016.

The calculus shifted in 2018, when President Trump accelerated U.S. sanctions on Iran. Suddenly, buying Iranian crude was too dangerous for China's national oil companies and the product became a discounted commodity.

The teapots seized the opportunity. Between 2017 and last year, China's imports of Iranian oil are estimated to have more than doubled to roughly 1.4 million barrels a day, according to Kpler, a commodity research firm tracking tanker movements.

At Hengli, the refiner targeted by U.S. sanctions last week, revenue has more than tripled since 2018 to around $30 billion last year, according to financial reports from the company, which is listed on Shanghai's stock exchange.

The Treasury Department said Hengli purchased billions of dollars of petroleum from Iran in recent years, making it one of Tehran's most important customers.

There is no mention of business with Iran in Hengli's recent public financial reports. Hengli denies the U.S. allegations and said in a stock-exchange filing that it "has never had any trade dealings with Iran."

Hengli said this week that it was operating normally despite the sanctions and would continue to settle crude-oil purchases in yuan instead of dollars. Its stock price initially dropped by around 10% on news of the sanctions before gaining back much of what it lost.

Write to Brian Spegele at Brian.Spegele@wsj.com

(END) Dow Jones Newswires

May 01, 2026 22:00 ET (02:00 GMT)

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