Some top oil buyers are thinking about shunning Iranian oil

TOKYO and SINGAPORE (Bloomberg) -- At least some buyers of Iranian supplies in the world’s biggest oil market are considering acquiescing to U.S. President Donald Trump’s demands.

As the American administration piles pressure on its allies to entirely halt purchases of Iranian supplies, Japan’s Fuji Oil Co. and Taiwan’s Formosa Petrochemical Corp. are considering ending imports from the OPEC member -- though they are yet to make a final decision. South Korea has already put some imports on hold while Emirates National Oil Co. in the UAE is trying alternatives to cargoes from the Islamic Republic.

The U.S. wants allies to end all imports of Iranian oil by a Nov. 4 deadline and isn’t offering extensions or waivers to that timeline, as it targets the Persian Gulf state’s economic lifeline with sanctions over its nuclear program. It’s boosted speculation that a global shortage will be exacerbated, lifting prices. Fuji Oil will likely replace its cargoes with those from Saudi Arabia, Qatar and Abu Dhabi while Formosa may opt for Saudi and Iraqi crude.

“We are preparing for different scenarios, the worst-case being a total ban on Iranian imports,” Formosa spokesman Lin Keh-Yen said by phone. “Iranian crude imports make up a small portion of FPCC’s total purchases; any loss in Iranian oil can be replaced with other grades from the spot market.”

Any lost barrels could help Saudi Arabia -- Tehran’s main regional rival -- recover market share in Asia that shrank after OPEC began output curbs last year to reduce a global glut. Now, the Middle East nation is said to be planning to pump record volumes to fulfill its pledge to fill any supply gaps. Yet, that may strain its spare capacity at a time when the oil market is already coping with the collapse of Venezuela’s oil industry and turmoil in Libya.

Government discussions

Fuji Oil will decide on the Iranian purchases after holding discussions with the government and other Japanese refiners, spokesman Takaaki Sobue said on Wednesday. Formosa Petrochemical will make a final decision after meeting with refinery executives and Taiwanese government officials in the coming weeks, said people with knowledge of matter, asking not to be identified as the information is private.

JXTG Holdings Inc., Japan’s biggest refiner, plans to follow its government’s guidance on the sanctions, and if the refiner has to end Iranian purchases, it’ll ensure stable supply from other sources including in the Middle East, West Africa and potentially the U.S., a company spokesman said.

Government negotiations with the U.S. are ongoing, Takashi Yamada, director of petroleum policy at Japan’s Ministry of Economy, Trade and Industry, said last week.

Refiners in South Korea, one of Iran’s leading customers, are shunning a type of oil known as condensate from the Middle East nation to feed the nation’s petrochemical plants. SK Innovation Co., Hanwha Total Petrochemical Co. and Hyundai Oilbank Co. have all rushed to procure supply of an alternative -- naphtha -- instead.

An official at South Korea’s Ministry of Trade, Industry and Energy said last week that the U.S. expressed its willingness to take a hard-line approach in imposing sanctions on Iran, and declined to comment on discussions about oil trade.

South Korea’s government is in ongoing talks with the U.S. to seek an exemption to minimize any impact from the suspension of Iranian crude imports, the Asian nation’s Ministry of Trade, Industry and Energy said in an emailed statement on Wednesday.

Meanwhile, ENOC in the United Arab Emirates bought Equatorial Guinea’s Alba and the U.S.’s Eagle Ford condensate as it sought to run its facility in Jebel Ali. It predominantly used Iranian South Pars and Qatari condensate when the U.S. had imposed sanctions on the Persian Gulf state earlier this decade.

At the heart of the problem for Iran’s biggest customers is a U.S. threat to cut off access to the American banking system for foreign financial institutions that settle trades with the Middle East nation’s central bank. Trump last month announced he was was quitting a 2015 nuclear accord between world powers and the Islamic Republic that had called for it to curb its nuclear program in return for the easing of sanctions.

Biggest buyers

Much will depend on what is done by China and India, Iran’s two biggest oil customers. It’s unclear if either have made a decision yet. While Beijing has held strategic talks with the Middle East nation, it hasn’t disclosed whether it might scale back imports in light of renewed U.S. sanctions. When the restrictions were in place earlier this decade, the Asian nations had persisted with purchases from the Islamic Republic in spite of American criticism.

Meanwhile, India plans to seek some exemptions to continue Iranian oil imports, and is looking at alternate payment mechanisms, two government officials said earlier this month, asking not to be identified citing internal policy.

There haven’t been any discussions with the government so far, said R. Ramachandran, director of refineries at India’s Bharat Petroleum Corp., adding that its imports from Iran are of a “very small quantity.”

“It’s a call the government will have to take and we will be guided by that decision,” said Arun Kumar Sharma, finance director of Indian Oil Corp., the country’s biggest refiner. “Finding an alternate supply source, if at all, won’t be a problem. In the global market of oil, sources are plenty.”