Chinese banks have scaled down lending due to an economic slowdown, creating an opportunity for trading houses to step in, just as they had after the 2008-2009 financial crisis when risk appetite fell as bank regulation increased.
Based in Shandong province -- home to many of the non-state refineries known as teapots -- Qingyuan operates a 104,000 barrel per day refinery and is one of China's largest independently run lubricant producers.
Non-state owned refiners make up roughly a fifth of China’s total crude oil imports.
"Trafigura is using credit as a way of cementing ties with Qingyuan and positioning itself for a deeper footprint in the Chinese wholesale and retail market, given that it is now opening up," Michal Meidan, director of the China Energy Programme at the Oxford Institute for Energy Studies, said.
The deal is worth $955 million to be repaid over three years, banking sources said. The loan is backed by banks and Trafigura has put up $30 million. China's state oil firm CNOOC will take base oils as part of the agreement.
CNOOC and Qingyuan did not respond to a request for comment.
"Qingyuan is a key relationship for Trafigura and one of the largest and most complex independent refineries in China," a Trafigura spokeswoman said.
"Trafigura is pleased to have contributed as the majority crude oil supplier for Qingyuan, as well as to participate in this substantial largest prepayment transaction for an independent refinery."
Prepayments are widely-used in commodity finance as they are considered one of the most secure forms of lending. Lenders provide upfront cash and get repaid with future physical oil sales.
Independent refineries hit the world stage in 2015 when Beijing lifted a ban on private companies importing their own oil. They are now tapping global financial markets in greater numbers.
"The teapots were a no-go territory a few years ago. In the beginning, Chinese banks issued letters of credit on behalf of the big traders. Over time, the teapots began asking for open credit. Gradually more traders gave those terms to them for crude deliveries," one senior banking source said.
"But teapots are still considered a risky proposition."
Oil majors, such as Shell, Total, and trading houses Mercuria and Vitol remain cautious about offering open credit.
Last year, BP has several cargoes of crude stranded off China's east coast for several months before Qingyuan offloaded the barrels.
"On the crude sales side, there has always been the risk of defaults by cash-constrained refiners, with product sales, the risks are different. Few teapots have their own retail outlets so they rely on sales to the majors, so they sometimes need to cut product prices," Meidan said.
Since the end of last year, BP has signed two offtake agreements with so-called teapot refiners. At the end of last year it closed one with Sinochem Hongrun Petrochemical for $485 million over 3 years backed by deliveries of oil products.
In April, BP signed another $200 million deal over two years with the Shandong Wonfull refinery to be repaid with petrochemicals and bitumen. It was the firm's first foray into foreign financing, a source close to the deal said.
BP declined to comment.
(Reporting by Julia Payne, additional reporting by Chen Aizhu in Singapore and Muyu Xu in Beijing, editing by Louise Heavens)
By Julia Payne