Chinese LPG importer Oriental Energy has terminated its relationship with Kunlun Shipping in reaction to the imposition of US sanctions.
Two VLGCs set for delivery next year by Shanghai Jiangnan Changxing Heavy Industry are now free from any connection with Kunlun after Shenzhen-listed Oriental Energy quietly cut a complex set of contractual links between the two companies in late September.
Oriental Energy walked away from a six-ship acquisition and newbuilding programme, which it had already funded to the tune of at least $119m.
The break-up followed the sudden announcement of financial sanctions against Kunlun for allegedly trading with Iran.
‘Effective tool’
Kunlun director Xu Bin and a holding company linked to him, China Concord Petroleum, were also targeted by the US Treasury Office of Foreign Assets Control (Ofac), as were some oil-shipping subsidiaries of China Cosco Shipping and affiliates.
“Sanctions are an effective tool and do have an impact on the market,” Oriental Energy vice president Karen Zhou Fengzhi said in response to an enquiry about whether her company had been adversely affected.
Sanctions like those against Kunlun and Cosco are “bound to cause confusion and adjustments to all market participants, be it suppliers, charterers, buyers or banks. Hence, the answer is yes”, she wrote.
“However, this does not come as a surprise for it and we made preparations before the announcement of the imposed sanctions.”
Filings with the Shenzhen Stock Exchange fill in more details of the former far-reaching shipbuilding and chartering relationship with Kunlun from which Oriental Energy and its main shareholder, Oriental Petroleum — a private holding company controlled by Oriental Energy chairman Zhou Yifeng — have extricated themselves.
The ties to Kunlun included charters of four existing VLGCs to Oriental Energy, plus a commitment to charter the two now under construction. Two further ships would have made a set of eight VLGCs chartered for 10 years from Kunlun to Oriental Energy.
However, the complex contractual relationship did not originally include Kunlun. The deal was agreed between listed Oriental Energy and private Oriental Petroleum. Kunlun stepped into Orient Petroleum’s role through the transfer of the agreement three years after it was conceived, according to financial filings.
Kunlun officials have not responded to enquiries since the sanctions were announced. But TradeWinds understands that the parties came to an understanding to terminate the contract after Ofac imposed sanctions on Kunlun.
Oriental Energy officials said this week that their company never directly operated the four ships that Kunlun chartered to it in 2018. Instead, Oriental Energy chartered them out to third-party end users, which the officials did not name. The charters to these third parties were also terminated by mutual consent following the sanctions, they added.
The situation with the two newbuildings now under construction for delivery in June and September next year is more complicated, because they were not ordered by Kunlun but by Oriental Petroleum before the contract transfer. For the time being, Oriental Energy is not willing to confirm whether it and Oriental Petroleum have resumed their chartering relationship, with the private company as contracting shipowner.
Sanctions are bound to cause confusion and adjustments ... However, this does not come as a surprise... and we made preparations before the announcement
Karen Zhou Fengzhi
“Currently these two VLGC newbuilds are contracted by Oriental Petroleum, however, regarding Oriental Energy’s connection to Oriental Petroleum’s ships under construction, according to Chinese laws and regulations, we are only able to disclose the information when we’re allowed to and in a way that is required by such laws and regulations,” Zhou Fengzhi told TradeWinds.
In 2018, TradeWinds reported plans by Oriental Energy and Kunlun to pool their VLGC fleets. Stock exchange filings flesh out what was going on between the parties at that time.
They show that in 2015, Oriental Energy contracted with Oriental Petroleum to charter eight VLGCs for 10 years with a $15m purchase option, with deliveries to begin in 2017.
Last year, the parties decided it would be better to outsource the shipbuilding and chartering to a more experienced third-party shipowner, according to the filings and an Oriental Energy official. Kunlun stepped into Oriental Petroleum’s contractual shoes, with Oriental Petroleum guaranteeing performance.
Stock exchange query
The timing of deliveries was delayed and the final two ships were put on indefinite hold, depending on business requirements.
In January this year, the sums paid to Kunlun were questioned by Shenzhen Stock Exchange authorities. Oriental Energy disclosed that it had paid Kunlun $119m in connection with this contract — $93m to assist in acquiring four ships and $26m in payments to the shipyard.
On 29 September, the termination of the Oriental Energy-Kunlun relationship was disclosed to investors as the eighth of nine items on a board meeting agenda.
