Trump Playing Hardball Gives Iran Oil Buyers Costly Headache

The biggest buyers of Iranian oil are being struck by deja vu, and it’s not conjuring up pleasant memories.

Six months ago they were scrambling to secure alternative supplies as the U.S. prepared to impose sanctions on Iranian oil exports, though last minute waivers eventually gave them a reprieve. Now, the Donald Trump administration says it won’t renew those same waivers, forcing the buyers to find a replacement for the Persian Gulf barrels.

Asia is more dependent on oil imports than any other region and has been repeatedly buffeted by America’s campaign to isolate Iran, once OPEC’s second-largest producer. While they’ll be able to find other supplies, they face the prospect of having to pay more, potentially accelerating inflation and putting pressure on their economies.

Importers had been expecting the waivers to be extended, perhaps with a cut in permitted volumes instead of an outright ban, according to refinery officials in Asia. They’d put purchases for May on hold as they awaited the U.S. decision.

One buyer, South Korea’s Hanwha Total Petrochemical Co., said it’s possible to find alternatives, but they’ll cost more and potentially affect the firm’s profits because they largely depend on the price of raw materials. The company has been importing and testing other supply from areas such as Africa and Australia, a spokesman said.

The White House said on Monday that its decision is intended to bring Iran’s oil exports to zero and squeeze the Persian Gulf state’s principal source of revenue. The U.S. wants to force Iran back to negotiations over its nuclear program. Any buyer importing crude after the waivers expire on May 2 faces the risk of being cut off from the American financial system.

Elusive Alternatives

While Trump said in a tweet that Saudi Arabia and other producers in the Organization of Petroleum Exporting Countries will make up for any shortfall, that prospect will not necessarily bring relief to buyers. South Korea, for example, is highly dependent on a type of ultra-light oil known as condensate from Iran that’s used by the Asian nation’s petrochemical producers.

These companies will be hit especially hard by the U.S. decision to eliminate waivers, according to four condensate traders interviewed by Bloomberg. That’s because Saudi Arabia and the United Arab Emirates—among the biggest OPEC producers—export only limited supplies of the ultra-light oil, which is used in units known as splitters to produce petrochemicals and plastic components, they said.

Unipec, the trading arm of China’s state-owned refining giant Sinopec, hasn’t been approached by Saudi Arabia or the U.A.E. with more oil offers, said a person familiar with its procurement plan who asked not to be identified as the information is private. While the firm expected America to renew waivers at least with limited volumes, it had a contingency plan for an end to shipments, said the person, adding that it will seek to import more from the Middle East, West Africa and the U.S.

Caught by Surprise

An official at another major South Korean refiner also said it was caught off-guard by the U.S. decision, and still remained hopeful that the U.S. would ultimately extend waivers allowing at least some Iranian imports. Based on Bloomberg’s ship-tracking data, Asian buyers such as China, India, Japan and South Korea accounted for more than 80 percent of the Islamic Republic’s total crude and condensate exports in March.

Saudi Arabia, for its part, will coordinate with other crude producers to ensure that adequate supplies are available and the market “does not go out of balance,” Energy Minister Khalid Al-Falih said after the Trump administration announced the end of the waivers.

One person familiar with the U.S. decision announced Monday said that some of the countries that had previously received waivers would be given a little more time to wind down purchases. The person described that not as a waiver but more as a brief grace period.

Crude Gains

Global benchmark Brent crude rose to a six-month high, moving toward $75 a barrel in London after the U.S. decision. Front-month futures were at $74.33 a barrel at 11:43 a.m. in London. West Texas Intermediate, the American marker, also jumped and is trading near $66 a barrel in New York.

Some refiners in India—which had been negotiating hard with the U.S. for the waivers to be renewed—sought to play down the impact on Monday. Indian Oil Corp., the nation’s top importer of Iranian crude, has enough supplies of alternative feedstock, said a company official who asked not to be identified because of internal policy.

The company intends to use built-in options in its oil contracts with Kuwait, Abu Dhabi, Saudi Arabia and Mexico to procure more crude from those sources, thus making up for any shortfall from the Persian Gulf state, the official said. Fellow domestic refiner Hindustan Petroleum Corp. is confident there won’t be supply constraints, according to Chairman M.K. Surana.

HPCL has reduced its purchases from the Islamic Republic and has limited exposure to U.S. sanctions, he said in a phone interview, though he added that a halt in supplies from Iran would likely push oil prices higher in coming months.

Photo: Bloomberg

Sinopec Persists With Iran Refinery Upgrade

This article has been republished with permission from Argus Media.

China's state-controlled Sinopec is pressing ahead with a USD 1.06bn upgrade project at Iran's 400,000 b/d Abadan refinery, despite the imminent return of US sanctions on Iran's energy sector.

Sinopec is contracted to build a new 210,000 b/d crude distillation unit (CDU) to replace three distillation units with a combined 250,000 b/d that were built more than 70 years ago. Its commitment will come as some relief for Tehran ahead of the 4 November re-imposition of US sanctions on its energy sector.

Companies have been rethinking plans to invest in Iran since the US withdrew from the nuclear deal and reimposed sanctions. Some contracts have been cancelled with state-owned NIOC and its subsidiaries.

Total, the most high-profile foreign company to finalize a deal with Iran following the lifting of US and EU sanctions in January 2016, has pulled out from a USD 4.88bn project to develop phase 11 of the giant offshore South Pars gas field.

South Korean construction company Daelim Industrial cancelled a USD 2.13bn contract to upgrade and expand the 375,000 b/d Isfahan refinery. South Korea's SK Engineering and Construction has halted all work on a USD 1.88bn contract to upgrade the 110,000 b/d Tabriz refinery.

But Sinopec looks to be pressing on at Abadan.

"The second-phase development of the Abadan refinery began roughly 14 months ago, and thankfully is progressing on schedule," Abadan Refining Company managing director Ali-Akbar Mirghaderi said. "The duration of this project is 48 months, and we expect it to be completed on time." The first-phase upgrade was also carried out by Sinopec.

Abadan is the largest and oldest of Iran's nine refineries. It sustained heavy damage in 1980 during the Iran-Iraq war.

The upgrade is being carried out with state-owned engineering company NIOEC. It will result in Abadan's capacity falling to 360,000 b/d but will inprove the quality of all products to at least a Euro-5 standard. Production of higher-value products like gasoline and gasoil will increase in the place of lower-value products like fuel oil.

Sinopec was awarded the contract by Iran's state-owned refiner NIORDC in mid-2017 as part of a wider USD 2.7bn agreement between Iran and China struck in early 2017. Financing for the project is coming from China's state-owned export credit insurance agency Sinosure.

NIORDC has a a USD 34bn program to modernize five of Iran's six largest refineries and build an additional 1.41mn b/d of refining capacity. That would raise Iran's crude refining capacity by around 25pc to 2.28mn b/d by March 2022.

Photo Credit: ILNA