European oil companies face hurdles with Iran ban

SINGAPORE (MarketWatch) -- A European Union ban on Iran's oil from July could have major consequences for European oil companies in Asia, as little-understood provisions in the sanctions law could see them facing investigation despite their best efforts to stay legal.

EU oil companies and their overseas units cannot buy, import into the EU or transport even tiny amounts crude or refined oil of Iranian origin under rules coming into effect July 1.

However, the way many oil transactions are carried out in Asia mean they could inadvertently break the rules, and even their best efforts to comply will be further undermined by a widespread industry practice of blending fuel oil from several sources. A major component of Iran's oil exports is fuel oil, used to power ship engines or in power stations.

"Our experts have confirmed the interpretation that the prohibition should apply when there are reasonable grounds to suspect the inclusion of Iranian oil, in whatever proportion," an EU official, who declined to be identified, told Dow Jones Newswires.

Although some traders agree that trade in blended Iranian fuel by an EU company would be a violation of the embargo, others contend the EU's interpretation wouldn't be easy to enforce since the issue of blending isn't explicitly dealt with in the embargo text.

"We don't see the wording of the EU sanctions covering that. They talk about Iranian product only and don't cover blends," said a senior fuel oil trader at a major European trading firm.

Traders also said the EU law's surprising exemption of non-EU-based subsidiaries from the sanctions could also allow at least some European companies to continue their existing business in Iranian oil, while others may have to exit.

The sanctions apply only to EU-based companies and their overseas branches. Their non-EU-based subsidiaries aren't forced to enforce the embargo. although "such subsidiaries must not be used to circumvent sanctions," the EU official explained.

"To make that distinction, lawyers would check whether the subsidiary was acting independently or on behalf of the mother company," the official said.

While those European trading and shipping companies that need to avoid Iranian-blended fuel could seek water-tight assurances from sellers that Iranian oil isn't present in their fuel, a widely used trading system in Asia's oil hub Singapore could spread the Iranian fuel more widely in the market and make it even more difficult to isolate.

Benchmark prices for many types of oil in Asia are assessed by Platts, a unit of McGraw-Hill Cos. MHP -0.51% , using a day-long process called market-on-close, or MOC, which concludes with a 30-minute session in which many traders, ranging from European and U.S. oil majors to small local traders, are active.

Known popularly as the window, the session facilitates trading in a market where there is no formal exchange for many products, and helps the process of price discovery in what is a largely secretive business.

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