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Iran's Asia-Pacific crude buyers eye possible sanctions

08 May 2018 15:37 (+01:00 GMT)
Iran's Asia-Pacific crude buyers eye possible sanctions

Singapore, 8 May (Argus) — Iran and its crude customers await US president Donald Trump's announcement today on whether he will re-impose US sanctions against Iran over its alleged nuclear activities. Trump has said his decision — to wholly or partially remove the waiver on sanctions that are part of the international nuclear deal (JPCOA), or to leave it in place — will come by 14:00 Washington time (18:00 GMT).

Asia-Pacific buyers have been taking roughly 70pc of Iranian crude this year although Tehran says that Europe now takes up to 40pc. Major Asia-Pacific buyers are already locked in to annual term contracts for 2018, so meaningful cuts to imports would be unlikely to come in until early next year. And the lack of international support for a US return to sanctions means there is less incentive to enforce immediate import cuts.

For Iran's largest buyers — China and India — commercial considerations are likely to trump any impulse to please the White House. The rise in crude prices this year to three-and-a-half year highs has increased import bills for refiners in Asia-Pacific. Iran was careful not to publicly discount its prices last time sanctions were imposed. But state-owned NIOC gave its customers in China and India more subtle commercial incentives, including longer payment terms, the ability to pay for part of their imports with local currencies, and discounted shipping reckoned to be worth $1/bl.

That said, Asia-Pacific buyers have been reducing their reliance on Mideast Gulf imports in general because of both government-led diversification strategies and tightened supply of medium sour crude and consequent higher prices because of the Opec, non-Opec cuts programme.

China

Chinese purchases of Iranian crude slumped after the imposition of sanctions in 2012, from 620,000 b/d in November 2011 to 250,000 b/d in October 2013. But their recovery was even more dramatic, hitting 780,000 b/d in June 2016 and averaging 650,000 b/d in the first quarter of this year, 17pc higher than a year earlier.

Imports of Iranian crude by state-controlled refiners Sinopec, PetroChina and Zhuhai Zhenrong have been steady, a situation unlikely to alter if unilateral US sanctions are adopted. Uptake could even increase if Iranian volumes are pushed out of the market. But Zhuhai Zhenrong's position may be complicated by its merger with Macau-based downstream oil firm Nam Kwong. And independent Chinese refiners such as Zhejiang Petrochemical and Huajin that planned to buy a mixture of Iranian Light and Heavy crude may reconsider.

India

Iran was India's second biggest crude supplier after Saudi Arabia, shipping nearly 350,000 b/d in 2010, before sanctions and before Iraqi supplies rose. Imports from Iran declined to less than 215,000 b/d in 2013, leaving it as India's seventh-largest supplier.

But, as with China, the resumption of imports was rapid. India's Iranian purchases doubled to 470,000 b/d in 2016. And India plans to boost imports of crude from Iran to more than 500,000 b/d, while Tehran wants to ship up to 600,000 b/d, in the 2018-19 fiscal year.

Delhi and Tehran have some experience in getting round the effective ban on using dollars to trade Iranian crude. India switched to paying Iran in rupees deposited in an Iranian account at Indian banks under the last sanctions regime. India paid 55pc of its bill. But the Halkbank route was blocked, and Indian refiners built up $10bn in debts to Iran by 2016. These have been all but cleared since sanctions were lifted. Delhi routed some of the payments through Halkbank using euros. It also transferred around $1.6bn through the UAE central bank, which was able to pay Iran in dirhams. India continues to pay for Iranian crude in euros.

Political factors will come into play if the US re-instates sanctions. Delhi may try to use the situation to its advantage in settling the dispute over the development of Iran's offshore Farzad-B gas field. But Iran has been working hard to resolve the spat and may have managed to take it out of the equation today. Potentially in Iran's favour is the more nationalist stance of India's BJP-led government of prime minister Narendra Modi which may want to assert itself against a White House that is targeting India over a trade deficit.

Japan

Japan is likely to stand by the Iranian nuclear deal. But the country's imports of Iranian crude fell by 40pc in 2012 and have not fully recovered due to falling domestic demand.

Japan continued to import Iranian crude between 2012 and 2015 under a waiver deal that meant it had to reduce imports from Iran by 15-20pc/yr. Japan's imports of Iranian crude dropped to a low of 170,000 b/d in 2014, compared with 315,000 b/d in 2011. Imports rose to over 225,000 b/d in 2016 but fell back to 170,000 b/d in 2017.

Iranian crude customers in Japan are likely to have a clause in their term agreement that would release them from their obligations to NIOC if unilateral sanctions are re-imposed. But they are unlikely to trigger the clause unless there is a tangible impact on their access to US financial markets.

Showa Shell — which is tied up with a merger with fellow refiner Idemitsu Kosan — Fuji Oil and JXTG are the main buyers of Iranian crude in Japan. Saudi Aramco is a shareholder of Showa Shell, which is in turn a stakeholder of Fuji Oil. Showa Shell's ownership is likely to give it easy access to replacement crude from Saudi Arabia. But Fuji Oil, which has been receiving Iranian crude under a volume incentive deal, may find it less commercially viable to replace Iranian crude with alternatives from Saudi Arabia or other Mideast Gulf producers.

Japan's largest refiner JXTG is only a small buyer of Iranian crude and is likely to have the flexibility to replace them with alternative grades.

Sanctions could encourage buyers in Asia-Pacific to increase purchases of Caspian CPC Blend, in place of Iranian condensate, supply of which has been falling as domestic demand builds. The majority of Asia-bound May shipments Caspian light sour CPC Blend is expected to be delivered to Japan. Japanese refiners purchased around 13,000 b/d of Iranian condensate across January-April and almost 18,000 b/d of CPC Blend. Refiners switching from South Pars condensate will be unfazed by the corrosive mercaptan content found in CPC Blend.

Japan is in a stronger position now than in 2012, when it was also suffering from the Fukushima nuclear crisis that resulted in soaring fuel import bill costs. Tokyo has reinforced ties with Saudi Arabia and the UAE, the top two oil suppliers for Japan, and expanded joint crude storage deals in efforts to better address emergency supply shortages. Premier Shinzo Abe focused on regional peace and cementing economic ties with the UAE during his 29 April-3 May tour of the Middle East, while skipping visiting Tehran ahead of the imminent US decision on the Iranian nuclear deal.

South Korea

Like Japan, South Korea's imports of Iranian oil have slumped after an initial surge after the nuclear deal. South Korean imports from Iran fell from 240,000 b/d in 2011 to a low of 115,000 b/d in 2015. They then hit 405,000 b/d in 2017 but have slid to 315,000 in the first quarter this year, nearly 40pc lower than a year earlier.

Part of the fall reflects lower exports of Iranian condensate to South Korean splitters. Iran's rising domestic demand this year, and the loss of 1mn bl of condensate on the tanker Sanchi, which sank while delivering the cargo to Hanwha Total Petrochemical joint venture on 14 January, have limited shipments. South Korean refiners are expected to do as they did in 2012-2015 and request waivers that allow them to continue importing Iranian crude and condensate. It is still unclear whether the buyers will agree to reduce their intake by 15-20pc/yr.

Taiwan

Taiwan's state-controlled CPC and private sector refiner Formosa are both long-term buyers of Iranian crude but neither imports significant volumes.

CPC imports just over 20,000 b/d of Iranian crude, while Formosa's intake is around half that amount on a term basis. The refiners pay for Iranian crude with Japanese Yen through a bank in Taiwan and are hoping that their small import volumes and relatively low exposure to the US dollar will spare them significant consequences if sanction are re-imposed.

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