If the price is right, Iranian oil will sell

The country needs to employ some canny marketing to win back its customers in Asia-Pacific, writes Azlin Ahmad

The lifting of US sanctions is widely expected to trigger a revival in Iranian crude sales to Asia, but the picture is complex and buyers say the price must be right.

Iranian oil will need to be competitively priced. But even then, Tehran could struggle to rebuild sales to markets such as South Korea and Japan, leaving it more dependent on the region's biggest economies — China and India.

China, India, South Korea and Japan were Iran's biggest Asian crude customers before the imposition of US-led economic sanctions in late 2018 (see table). Most refiners in Asia-Pacific say they are open to resuming Iranian purchases when sanctions are lifted, but would evaluate the economics against other similar Mideast Gulf grades that they buy from Saudi Arabia, the UAE and Iraq.

"We did buy Iranian heavy crude, Iranian mix [before the sanctions]," Indian refiner HPCL chairman MK Surana told Argus recently. "The UAE and Saudi crude compete with them and Iraqi crudes too. In the past, they [Iran] did offer better terms on credit and freight, etc, and that goes into the evaluation."

Iran supplied nearly 500,000 b/d of crude to India, or 11pc of its imports, in 2016-18. Sanctions forced India to halt purchases by May 2019, when the US chose not to renew waivers for Iranian crude buyers. Shipments slumped to 135,000 b/d in January-November 2019. Other Indian refiners, such as BPCL, IOC, MRPL, Reliance and Nayara, were also Iranian crude buyers before sanctions. BPCL previously took 40,000 b/d of Iranian crude, and says it would cut US crude purchases to make room for Iranian oil if sanctions are relaxed.

China has resumed buying Iranian crude despite sanctions and is most likely to become Iran's largest Asian customer again. Iran gradually increased exports through sales to China's independent refiners late last year, delivering 460,000 b/d in May, Vortexa data show. But the few firms prepared to clear sanctioned crude through Chinese customs exhausted their import quotas, causing deliveries to back up in storage. A new batch of quotas should be released this month, potentially reviving the flow of crude to refineries. China's state-owned oil firms, which have not touched sanctioned Iranian oil, are likely to supplant independent refiners as Iran's main customer if sanctions are lifted and Iranian grades lose their sanctions price discount. Sinopec formerly bought two-thirds of China's Iranian crude imports.

Point of no return

But Iran may struggle to claw back market share elsewhere in Asia-Pacific, at least initially. South Korea was a big buyer of Iranian crude in 2017 after a previous round of international sanctions against Tehran, but imports dropped in subsequent years. Only two refiners, SK and Hyundai, were taking Iranian oil. Hyundai has since signed a 20-year deal to buy 250,000 b/d of Saudi crude.

South Korea also took Iran's South Pars condensate for its condensate splitters before turning to Qatar, Russia and west African sources after sanctions resumed. It is likely to continue buying Qatari condensate. But some longer-haul supply may be supplanted if Iranian shipments start up again. South Pars exports may also themselves be restricted by expansions in Iran's splitter capacity.

Downstream consolidation, refinery closures and Covid-19 restrictions pushed Japan's crude imports down to the lowest for at least 52 years in 2020, making it less fertile ground for Iran's crude marketing efforts. Japan was importing 500,000 b/d of Iranian crude 15 years ago. But purchases had fallen to less than 200,000 b/d in early 2019 under the US' temporary sanctions waiver programme. Nonetheless, Tokyo's decision to continue providing sovereign shipping insurance for tankers carrying crude to Japan could make it easier for refiners Idemitsu, Cosmo and Eneos to resume purchases if sanctions are lifted.