China National Petroleum Corp may cut Kunlun bank's ties to Iran: sources

SINGAPORE (Reuters) - China National Petroleum Corp (CNPC) [CNPC.UL] may stop its banking unit from conducting most of its Iranian-related financial services because of concerns over U.S. sanctions, two persons with knowledge of the matter told Reuters.

FILE PHOTO: A man walks past a Bank of Kunlun branch in Beijing, China January 12, 2017. REUTERS/Stringer/File Photo ATTENTION EDITORS - THIS IMAGE WAS PROVIDED BY A THIRD PARTY. CHINA OUT.

Bank of Kunlun, which has been the main official channel for money flows between China and Iran since before the last round of sanctions which started in 2012, is majority owned by CNPC's listed financial arm CNPC Capital 000617.SZ.

U.S. President Donald Trump in May ordered sanctions to be reimposed after withdrawing from a 2015 nuclear accord with Iran that ended the previous round of restrictions. The U.S. left the accord because of concerns over the country’s ballistic missile program and its support for Syria’s embattled leader Bashar al-Assad and rebel fighters in Yemen.

Iran was the world’s fourth-largest producer of liquid hydrocarbons, including crude oil, in 2017, according to data from BP Plc. China is the country’s biggest oil buyer.

With U.S. authorities applying increasing pressure on global institutions to cut off trade with Iran, CNPC now views the bank’s Iran business as a liability that is hindering the company’s other regular financial services that cover insurance and leasing, the sources said.

Reuters reported in October that Kunlun, which started in a remote oil town in northwest China, stopped handling payments from Iran because of the sanctions.

However, Kunlun still holds an Iranian central bank account into which Chinese national oil companies make about $18 billion worth of payments for annual oil imports.

The sources said CNPC is lobbying Beijing to let one or more smaller Chinese commercial banks take over the business, or put it directly under a government agency.

“CNPC is exploring the possibility of having some mid- or small-sized bank or banks that barely handle any dollar-denominated transactions take over (Iran transactions),” said one of the sources, who has direct knowledge of CNPC’s internal discussions over Kunlun’s Iran business.

The bank may continue to handle only CNPC’s own investment in Iranian oil fields.

The sources did not identify potential candidates or indicate if CNPC has initiated any discussions with them, adding that it would not be easy to find local banks willing to take over the business.

A CNPC spokesman declined comment.

The secretary of CNPC Capital’s Board of Directors did not respond to an email seeking comment. The Bank of Kunlun did not respond to repeated requests for comment.

A second source, who is involved in discussions about China’s Iranian financial settlements, said the bank has become a talking point in trade negotiations between China and the United States.

CNPC Capital in late 2016 injected 5.848 billion yuan ($849 million) into Kunlun Bank and holds a 77.09 percent stake, CNPC Capital said in its 2017 annual report.

CNPC Capital said in the same report that its financial status could be adversely affected due to Kunlun’s Iranian ties.

“Subsidiary units such as Kunlun Bank... may fall under local laws and sanctions from other countries because of their operations in politically unstable regions... that will have unfavorable impact on the company’s financial performance,” it said.

($1 = 6.8884 Chinese yuan renminbi)

Reporting by Chen Aizhu; Additional reporting by Shu Zhang in BEIJING; Editing by Christian Schmollinger and Kirsten Donovan