Analysis: Time running out for Asian buyers of Iran oil

Iran's top crude oil buyers in Asia have just weeks to come up with ways to keep imports flowing without falling foul of the toughest Western sanctions to date against Tehran's oil trade. Solutions have proved elusive so far.

A year ago, Iran was selling around two-thirds of its crude exports, or roughly 1.45 million barrels per day, to China, Japan, India and South Korea, securing vital flows of foreign exchange for a government many Western nations accuse of running a secret nuclear weapons program.

Those imports have already dropped by about a fifth after the European Union and the United States drew up fresh sanctions, and they could drop further after the end of this month when those financial restrictions come into force.

South Korean refineries have already given up, industry sources said. They will switch to other sources of crude supply from July 1.

China, India and Japan are scrambling to deal with the biggest headache - an EU ban on insuring shipments of Iranian crude from July 1 - and are considering sovereign guarantees.

Europe dominates the world's tanker insurance market, so Asian buyers are finding it difficult, if not impossible, to replace mandatory cover, which for a supertanker means liability protection on personal injury and pollution of $1 billion.

"No responsible financial institution is going to take on this kind of risk lightly," said Jonathan Hare, senior vice president for Oslo-based maritime insurer Skuld.

"This doesn't mean that it can't happen, but it is going to require a significant commitment on the part of governments or potential underwriters."

To be sure, alternative supplies are sufficient enough that the big Asian buyers do not need the Iranian crude.

Global growth is also stumbling, reducing the urgency for many countries affected by the sanctions to find replacement supplies and undermining the argument among oil consumers that loss of Iranian crude could harm economic growth.

"What we are worrying about is not supply, it is demand," said an official at a Chinese refinery, who declined to be identified because he is not authorized to speak to the media.

Some governments, particularly China and India, do not want to cut off Iranian oil flows entirely either, fearing that would jeopardize broader ties with Tehran.

INSURANCE HEADACHE

In what could be the first sign of whether Asian crude buyers have found a way around the sanctions, refineries over the next week must start chartering tankers if they intend to receive Iranian crude in July.

South Korea, which has a term import agreement with Iran for 200,000 bpd, plans to halt all imports by the time the ban takes effect, industry sources have said.

Japan could follow suit, unless the government decides to provide sovereign insurance guarantees for oil tankers. Japan is preparing a bill that would enable the government to provide insurance cover.

Japan secured an exemption from U.S. sanctions in March after cutting Iranian crude imports by 15-22 percent in the second half of 2011, but Tokyo has hit a wall in the EU insurance ban.

"We are waiting for the government to come up with a solution. Without insurance we cannot do any business," said a trading source at a Japanese buyer.

China and India are also considering sovereign guarantees for tankers. But even without these assurances, industry sources expect the two countries to carry on importing Iranian crude.

Lacking another choice, China will pay for Iran to deliver and insure the crude, while India's shipping firms will ship the crude with reduced insurance cover, industry sources said.

The U.S. financial sanctions aimed at slashing Iran's oil export revenues and funding for its controversial nuclear program - which Tehran counters is for peaceful purposes - are due to take effect at the end of June.

On July 1, the European sanctions, which include an EU oil embargo, come into force.

They have already had a dramatic impact as the sanctions cut off financial networks and made it difficult to make or receive trade payments with Iran, even affecting the SWIFT system, which handles most international cross-border payments.

India is paying for some oil in rupees and Iran has swapped oil and gold for food. On the streets of Iran, prices for food in dollar terms have doubled or tripled as the country struggled to import rice, cooking oil and other staples for its 74 million population. It buys 45 percent of its rice and most of its animal feed from abroad.

DEMAND FALTERING

Morgan Stanley researchers estimate Iran exports had fallen to just shy of 1.7 million bpd in April. That would compare with 2.2 million bpd in 2011.

When President Barack Obama signed the U.S. sanctions into law late last year and the EU followed with its own sanctions plans, oil prices were rising, offering some comfort to Iran as it faced the prospect of reduced exports.

Now, oil prices are a fifth lower.

Top oil exporter and key U.S. ally Saudi Arabia is pumping at its highest rate in 30 years. Asian buyers have also sought crude to replace Iranian oil from other Middle East suppliers.

"With maximum production out of OPEC and global inventories built up, we are not likely to get a shortage situation," said Victor Shum, senior partner at oil consultancy Purvin & Gertz.

"Saudi Arabia has definitely prepared for the possible loss of Iranian supplies."

Indeed, Saudi Oil Minister Ali al-Naimi said in May that global supply now exceeded demand by about 1.5 million bpd.

While supply is ample, demand is showing signs of faltering.

Implied oil demand in April in China, Iran's biggest oil customer, dropped to a six-month low and posted its first yearly decline in at least three years. China's annual economic growth has slipped for five straight quarters.

China imported 14 percent more Saudi crude in April compared to a year ago, and also took more from Angola and Russia, government data showed.

Japan and India have also turned to Saudi Arabia and other OPEC producers for extra barrels at the expense of Iran.

"Supplies from Middle East countries such as Saudi Arabia and Kuwait are quite ample," said a Chinese oil trader who buys Iranian oil and declined to be identified because he is not authorized to speak to the media.

"Moreover, Chinese oil demand is slowing down, so the timing is good to allow Chinese oil firms to cope with the EU sanctions."

So far this year, South Korea and India have imported 10 percent less Iranian crude compared to a year ago, while Japan and China have taken around 30 percent less.

Source: REUTERS