US bid to crimp Iranian oil sales to Asia stumbles

[February 15, 2012]  TAIPEI, Taiwan (AP) -- American attempts to get major Asian importers of Iranian oil to rein in their purchases are faltering as allies South Korea and Japan give U.S. officials a polite brushoff. Emerging giants India and China may even increase their purchases, further complicating Washington's efforts to force Iran to curtail its nuclear program.

In 2011, Japan, South Korea, India and China accounted for 60 percent of Iran's oil sales, and the U.S. initiative -- backed up by financial sanctions -- is meant to dig away at the $100 billion in oil revenues Tehran earned last year.

Iran will likely suffer some losses when a planned European Union oil embargo kicks in July, and those could be deepened by the discounted prices it may have to offer to Asian buyers in the face of the sanctions. That adds to the pressure on Iran's budget but seems set to fall short of the bruising blow that Washington hoped to land.

Neither South Korea nor Japan appear willing to cut back their Iranian purchases by very much, and both China and India might actually step up their imports as Iran's increased isolation as a supplier forces it to lower prices.

"These consumers depend on Iran for a good portion of their oil, particularly India and China," said Singapore-based oil analyst Victor Shum of consultants Purvin & Gertz. "It's very difficult for them to switch."

That's a concern for Washington, which hopes that its initiative -- combined with the EU embargo -- will be enough to force Iran into serious negotiations on the nuclear program the West believes is aimed at producing nuclear weapons. Iran says it is for peaceful purposes only.

Complicating matters are persistent Israeli threats to attack Iranian nuclear installations if sanctions efforts fail. While sympathizing with Israeli concerns over the specter of a nuclear-armed enemy, many western leaders fear an Israeli attack would wreak havoc throughout the Middle East and jeopardize the still fragile international economic recovery, as oil prices spike.

Longtime American ally South Korea, which in 2011 bought about 250,000 barrels per day of Iranian oil -- 10 percent of its total oil imports -- has been a big target for the American effort, recently hosting two visits by senior U.S. officials who came to try to persuade it to cut back or Iranian oil purchases.

So far at least, the results have not been not encouraging.

The Foreign Ministry in Seoul says that no decision has yet been made on the U.S. request, apparently out of fear that the country would be hard pressed to find alternative suppliers to fill in the gap left by Iranian crude.

The picture in Japan is similar. On Friday, Prime Minister Yoshihiko Noda said "the trend is we'll cut oil imports from Iran" amid continuing efforts to secure alternative supplies from other Middle Eastern countries.

However, Japanese authorities also pressed the U.S. to permit them exemptions from President Barack Obama's Feb. 6 executive order, which imposes sanctions on foreign institutions involved in helping finance Iranian oil sales. That suggests a determination to continue buying Iranian oil to a significant degree.

Japan, which in 2011 sourced 10 percent of its 3.4 million barrels per day of oil imports from Iran, has been gradually cutting back on Iranian oil, paring imports by about 40 percent over the past five years.

As a close Iranian ally, China has also dug its heels in -- in fact, far deeper than either South Korea or Japan. Beijing turned a blind eye to efforts by American Treasury Secretary Timothy Geithner to get it to cut back on Iranian imports during a January visit and earlier this month the Communist Party newspaper People's Daily described Western efforts to pressure Iran with an oil embargo as "casting a shadow over the global economy."

China is a massive purchaser of Iranian oil, averaging about 550,000 barrels per day in 2011, about 10 percent of its total imports. While purchases have declined over the past several weeks, oil analyst Mark Pervan of ANZ Bank in Melbourne attributes that to Chinese efforts to pressure Tehran to reduce prices in the face of the U.S. pressure.

Shum said that Chinese purchases of Iranian oil could increase substantially in coming months, particularly if Iran offers Beijing a discount on its oil sales.

"China wants to build its strategic reserve of crude and the Chinese are now in a good negotiating position as far as securing supplies," he said.

The reserve, which presently stands at 102 million barrels -- 21 days of imports -- is scheduled to add another 168 million barrels of storage facilities by early 2013. In a report earlier this month, the Paris-based International Energy Agency said that new Chinese storage centers "could materially affect Chinese crude oil demand in 2012," suggesting that if they were filled at a steady pace China would need to secure an additional 220,000 barrels per day. That does not take into account any additional accretion for economic growth or from falling domestic production.

Shum said it was still unclear how much of the increment China might try to source from Iran, particularly in light of the strong U.S. objections.

"There will be a bit of a political element to any decision," he said.

India, China's competitor in the Asian high growth sweepstakes, ramped up its purchases of Iranian crude to 550,000 barrels per day in January, largely on the back of additional supply availability stemming from the cutback in Chinese acquisitions. In 2011 it averaged around 340,000 barrels per day in Iranian oil purchases, accounting for some 12 per cent of its imports.

While it is uncertain whether the country can sustain the January level over the long term, a booming economy will keep overall oil imports high. And with many Indian refineries designed specifically to process Iranian crude, it seems likely that it will continue to source a major portion of its oil from Iran, notwithstanding objections from the United States.

Still, the impact of the American sanctions -- and parallel pressure from the European Union -- is now being felt. Indian oil payments to Iran, initially channeled through German-based Europaisch-Iranische Handelsbank, were moved to Turkey's Turkiye Halk Bankasi AS after EU intervention, though that channel may prove short lived in the face of the increasing heat from U.S. authorities.

To cope with the new sanctions, the Iranian ambassador to India announced last week that India and Iran have reached a deal allowing Indian oil companies to pay for 45 percent of their imports in Indian rupees, reducing the need for dollar-handling foreign banks as facilitators.

Some reports -- unconfirmed by Indian authorities -- have also suggested that India may consider a barter arrangement in lieu of oil payments, including exports of wheat and other grain as shortages of food commodities begin to bite in Tehran.

In contrast to the generally ineffective American efforts in Asia, the pending EU embargo of Iranian imports -- about 450,000 barrels per day in 2011 -- could have an impact when it goes into effect in July. According to Shum, this reflects a combination of slower European growth prospects and the ability of recently reinstated Libyan oil production to make up for large parts of any Iranian shortfall.

But with China and India undeterred by the American stance on Iranian oil, part of the European off-take might simply be transferred eastward.

[Associated Press; By PETER ENAV]

Associated Press writers Nirmala George in New Delhi, Mari Yamaguchi in Tokyo and Foster Klug in Seoul, South Korea contributed to this report.

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