European refiners mull options on Iran crude

A reinstatement of US sanctions on foreign buyers of Iranian crude could push European importers to seek Iraqi or Russian alternatives.

US President Donald Trump will say later today whether he will pull the US out of the Joint Comprehensive Plan of Action (JCPOA) — the agreement that in January 2016 lifted restrictions on Iran's crude exports in exchange for concessions on its nuclear programme.

Asia-Pacific remains the main buying region for Iranian crude, with exports to that region accounting on average for 68pc of Iran's total since sanctions were lifted in January 2016. Europe has accounted for about 30pc of total Iranian crude exports since then, and the region could require as much as 630,000 b/d on average from elsewhere if buyers are unable to continue purchasing Iranian crude.

Some suggest clauses in term contracts that buyers have with Iran allow lifters to stop purchasing cargoes if sanctions are reimposed. But the EU, European governments and companies oppose renewal of sanctions and will try to forestall an end to imports. Should the US move to reimpose sanctions, this would not automatically lead to a resumption of sanctions by the UN and the EU. In any case, US sanctions would not lead to an immediate halt to imports of Iranian crude by European buyers.

The main European buyer of Iranian crude is Turkey's Tupras, which bought around 214,000 b/d last year, up by about 63pc on purchases made in 2016 after sanctions were lifted. Italy ranks as number two European buyer, with about 167,000 b/d of Iranian supply sailing to the country last year, more than double the country's intake in 2016. Iranian crude often discharges at Sarroch, Milazzo and Taranto where Italian firms Saras and Eni operate refineries.

France took receipt of about 116,000 b/d of Iranian crude last year, down by 5pc year on year. Total is the main buyer in the country. The company has declined to say how it would react to US sanctions on Iranian crude, but it is keen to play a role in upstream development in Iran. Total's president for exploration and production Arnaud Breuillac said: "If the US government does not renew the sanctions waiver, we will seek a specific waiver for South Pars phase 11, which is what we did for South Pars 2 and 3."

Greece — among Europe's top five purchasers of Iranian crude — took about 93,000 b/d of Iranian crude last year, up on the year since sanctions were lifted. Greek buyers are Hellenic Petroleum and Motor Oil. Spain took receipt of 87,000 b/d of Iranian crude last year.

If sanctions are reimposed, European buyers could turn to Iraqi medium sour Basrah Light, the main Mideast Gulf competitor for Iranian crude in Europe. Greece purchased about 124,000 b/d of combined Iraqi Basrah Light and Heavy in 2017, making it Europe's top buyer of Iraqi crude that year. But the current Opec, non-Opec production cut agreement to which Iraq is bound notionally limits the opportunities for the country — or indeed other signatories — to fill the gap. Capacity constraints mean Baghdad would only be able to fill Iran's position in Europe by cutting supplies going east.

Decreasing flows of Iranian crude into Europe could see an increase in buying interest in Russian medium sour Urals. Iranian Light — with 33.7°API and a sulphur content of 1.5pc — is a direct competitor of Urals — 29.77°API and 1.5pc sulphur — in the Mediterranean, and has displaced some Russian volumes at traditional export destinations recently. Poland's PKN Orlen and Lotos, Hungary's Mol and and Croatia's Ina picked up Iranian shipments this year and last.