Some Japanese buyers of Iranian oil are starting to look for alternative supplies as they prepare to lose full insurance cover for shipments from Iran on July 1 when EU sanctions come into force, sources familiar with the matter told Platts Tuesday.
Japan, which has already agreed to reduce its imports of Iranian oil in return for an exemption from US financial sanctions that take effect on June 28, now faces further difficulties in maintaining its supplies from Iran as the peak demand months of July and August approach.
The Japanese government has been lobbying Brussels to allow EU-based insurers to continue to provide protection and indemnity cover for shipments of Iranian crude beyond July, when an EU embargo on imports of oil from Iran and other associated provisions comes into force.
But EU foreign ministers did not discuss the Iranian sanctions at a meeting in Brussels on Monday, leaving continued uncertainty about the availability of insurance cover for Japan's shipments from Iran's main export terminal at Kharg Island.
Japanese buyers of Iranian oil now have limited options for their response to the possible - or even likely - loss of P&I cover, the sources said.
One option would be to seek further flexibility in their contracts with the National Iranian Oil Company, the sources said.
NIOC has already agreed to additional force majeure clauses Japanese companies could invoke in the event of sanctions preventing or limiting execution of contracts. This would require notice of 30 days from the Japanese companies.
REDUCE NOTICE PERIOD
But with the ban on insurance cover looming and no deal yet in sight on an extension of insurance cover provision, Japanese buyers may ask NIOC to reduce the advance notice period to around 20 days, the sources said.
Some companies may also try to put off July deliveries, for which the nomination deadline is June 5, until late in the month to ensure they have sufficient time to exercise their rights to invoke force majeure because of sanctions if the EU does not agree to allow insurance cover to continue.
But if they do secure a shorter notice period from NIOC, some Japanese buyers are considering nominating for deliveries earlier in the month to avoid shipping congestion.
EU foreign ministers could still decide to extend P&I cover for non-EU shipments of Iranian oil beyond July 1. They are next scheduled to meet on June 25 but, according to an EU source, could call an earlier ad hoc meeting if Iran were to offer concessions at talks on the nuclear issue with six world powers on May 23 in Baghdad.
In the meantime, however, Japanese buyers are looking at the possibility of increasing imports from Saudi Arabia and Kuwait by exercising their contractual flexibility, sources said.
"The Japanese will definitely have to look at buying Kuwaiti and Saudi Arabian crude cargoes," a source with a Japanese shipowner said. Kuwait blend and Saudi Arab Medium are seen as possible alternatives to Iranian Heavy and other sour grades, sources said.
One Japanese VLCC broker discounted the likelihood of Japanese companies using South American barrels to compensate for lost Iranian supplies, saying it would be expensive to move grades like Ecuador's Napo to Japan.
"I don't they will take it [crude] from South America," he said, noting that it cost $4 million to move crude to Japan from the Persian Gulf, cheaper than the approximately $4.6 million cost of moving oil from the Caribbean or South America.
Meanwhile, even as it continues to press the EU on the insurance issue, the Japanese government has begun weighing options to provide a framework that will guarantee the country's shipments of Iranian oil beyond July 1, though it has given no details.
At the moment, Japanese shippers face the prospect of having to make up for some 70%-80% of reinsurance cover normally provided by EU insurers.
Source: Platts