UPDATE 1-Asian buyers to deepen Iranian crude import cuts in 2013

Fri Dec 21, 2012 5:08am EST

* Asian buyers to further slash Iranian imports as sanctions tighten

* Reduction likely from 10 to 20 percent from this year's level

* Cuts may result in a further loss of $5 bln for the year for Iran (Updates with latest import numbers for China, South Korea and India)

By Chen Aizhu and Manash Goswami

BEIJING/SINGAPORE, Dec 21 (Reuters) - Asian buyers of Iranian crude will deepen import cuts in 2013 and struggle to send cash to Tehran to pay for oil as tightening Western sanctions choke the flow of hard currency to Iran's coffers.

Tough sanctions from the United States and Europe to force Iran to curb its nuclear programme have already cut Iran's oil exports by more than half this year, costing it more than $5 billion a month. The reduced cash flow has contributed to a plunge in the value of Iran's currency, the rial.

Iran says it is enriching uranium to fuel power plants, not make bombs.

Almost all of Iran's remaining exports flow to China, South Korea, Japan and India. The additional cuts Asian importers will make in 2013 would translate into a fall in sales of about 135,000 barrels per day (bpd), resulting in a loss of about $5 billion next year based on today's oil price, according to Reuters calculations.

The United States requires buyers of Iranian crude to progressively cut imports to ensure they secure exceptions to the sanctions when they come up for review every 180 days.

Making matters worse for Iran is a little-noticed provision in U.S. sanctions, which goes into effect on Feb. 6, that states funds being used to pay for oil must remain in a bank account in the purchasing country and can be used only for non-sanctioned, bilateral trade between that country and Iran.

Any bank that repatriates the money or transfers it to a third country faces a sanction risk, including being cut off from the U.S. financial system.

That could halt most of the flow of petrodollars to Iran, given that the value of its oil exports is far higher than what it imports from its biggest customers.

Saudi Arabia, Iraq and West Africa are some of the producers that have gained as Iran's market has shrunk. To continue with exports, Iran is becoming increasingly creative in dodging Western sanctions, managing to sell a rising volume of fuel oil to generate revenue equal to up to a third of its crude exports.

Reuters previously reported that Iran had exported its own fuel oil to Malaysia on a National Iranian Tanker Company vessel, before transferring it at sea to a Vitol-chartered tanker. Iran also used a little-known port off the East Malaysia coast to hide millions of barrels of oil.

CHINA

Iran's top oil buyer and the world's second-largest importer, China, may reduce its purchases by a further 5 to 10 percent in 2013, according to preliminary indications, industry sources said. That would indicate a reduction of 20,000 to 40,000 bpd, according to Reuters calculations.

"A general policy seems to be 'let's manage and control the risk in lifting Iranian oil'," a Chinese industry official said. "Transportation was not a huge issue but Sinopec still sees it a political risk dealing with Iran."

Sinopec is China's state oil company and the top Asian refiner.

China reduced imports from Iran by 23 percent to 422,800 barrels per day (bpd) from January-November this year, from the same months a year earlier.

China is Iran's top trading partner and China has repeatedly voiced its opposition to unilateral sanctions outside the purview of the United Nations, such as those imposed by the United States.

But it cut imports sharply in the first quarter of 2012, as exclusively reported by Reuters, due to the differences in contract terms. Later, the flow was cut further as Iran struggled to ship the oil to China after EU sanctions halted the provision of insurance for ships transporting Iranian crude.

INDIA FOLLOWS CHINA

India plans to cut oil imports from Iran by 10 to 15 percent in the next fiscal year, and more if Iran does not lower prices to help cover higher costs resulting from Western sanctions, Reuters reported on Dec. 19.

"Next year our imports will be 10 percent to 15 percent less than this year," said a government official with direct knowledge of the matter, who declined to be identified because he is not authorised to speak to the media.

"If they don't cut prices, the decline will be substantial. Indian refiners have genuine problems with credit availability."

India's oil imports from Iran fell 17 percent to 270,000 bpd in the first eight months of the contract year that started in April, and November purchases fell 44 percent from a year ago.

The pressure India is putting on Iran for better contract terms is similar to what China did early this year when negotiating annual term volumes with the Islamic Republic.

As rising international pressures forced other buyers out of the market for Iranian oil, Sinopec strong-armed Iran into giving it better terms for its annual oil purchases. As China haggled with the National Iranian Oil Corporation (NIOC) over price and terms, imports fell by nearly a third in the first quarter of the year.

JAPAN, SOUTH KOREA

A steeper cut will mean a reduction in imports by more than half for Japan and South Korea from the pre-sanctions levels of 2011 as the two have already slashed purchases by 40 percent this year.

Japan's oil imports from Iran may be about 15 percent lower next year, capped roughly at 160,000 bpd and may possibly be cut further, Yasushi Kimura, the chairman of JX Nippon Oil & Energy Corp, the country's top refiner, told reporters.

Japan's imports of Iranian crude oil fell to zero in July for the first time since 1981, according to Trade Ministry data, as the EU sanctions barred insurance companies providing cover on tankers carrying oil from Iran.

Shipments resumed after the government agreed to provide sovereign cover to local shipping companies to bring the oil, but the overall volume for January-October is down 41 percent to about 188,000 bpd, ministry data show. Japan's Trade Ministry data for November is due out next week.

Further cuts by smaller Japanese buyers would make it difficult to arrange shipping, industry sources familiar with the matter said. They said bigger buyers such as JX and Showa Shell, which together consume about 80 percent of Japan's total Iranian imports, would have room to reduce purchases further.

Following the cuts made this year, smaller buyers such as Idemitsu and Cosmo Oil have been forced to lift cargoes on a sporadic basis. If they make additional cuts, it would mean they would be buying less than one cargo, making shipping difficult. One Middle East crude cargo is typically about 500,000 bbls.

"I have the impression that it would be impossible to import the same volumes as this year in order to get the exemption," an industry source familiar with the talks said. "I don't know how much we will reduce by, but we are mentally prepared."

South Korean refiners will cut imports of Iranian crude during the six months to May by about a fifth from a year earlier, Reuters reported on Dec. 10.

The country hasn't spelt out its plans for the rest of the year, but all indications point to a reduction by the same amount to ensure it qualifies for the exception from sanctions.

The cut from December to May would imply imports of about 147,814 bpd, since the country imported 184,767 bpd of Iranian crude from December 2011 to May 2012.

South Korea became the first major Asian consumer of Iranian crude to announce a halt in imports in July. As a result, imports from Iran slumped 39 percent to 150,513 bpd in the first 11 months of the year.

Taiwanese buyers are still in talks with NIOC for next year's contract volume. They are likely to keep the volumes unchanged, with an understanding that the actual lifting may be a lot lower due to sanctions.

"We couldn't charter a boat because of shipping insurance issues so that made delivery a problem this year," a source said. Taiwan increased its supply from other Gulf producers such as Saudi Arabia, Kuwait, Oman, UAE and Iraq to cover the shortfall, government data showed.

Malaysia's Petronas early this year indefinitely suspended its annual contract to purchase crude from Iran. It is buying Middle Eastern and West African spot cargoes. (Reporting by Aizhu Chen in Beijing, Nidhi Verma in New Delhi, Meeyoung Cho in Seoul, Osamu Tsukimori in Tokyo; Writing by Manash Goswami; Editing by Simon Webb and Robert Birsel)