Iran's wary oil customers hang tight for now

Tokyo/Beijing: Nippon Oil Corp's decision to ease out some Iranian crude due to rising political risks has rattled customers of the world's fourth-biggest oil producer, but is unlikely to be followed by a wave of defections.

Several small Japanese buyers said they were under corporate pressure to scale back imports as Iran's rating as a stable supplier is called into question amid the ongoing dispute with the West over its nuclear aims. But refiners across the region said they were not contemplating similar action.

The move highlights the difficulties Iran may face in finding new markets as Tehran lags other producers in investing in overseas refineries, locking in future demand.

Japan's top refiner Nippon Oil said on Wednesday it would trim Iranian crude imports by 15 per cent this year due to growing country risks. It said it would buy less from Japanese trading houses, not reduce its own direct contract supplies.

The 22,000 barrel-per-day cut (bpd) is just half a per cent of Japan's total imports. However, the ramifications would be huge if other oil firms also turn their back to Iran, which many traders fear could cut off supplies if faced with sanctions by the UN Security Council over its atomic programme.

With oil supplies expected to remain tight until new oilfields come onstream over the next few years, however, few customers appear ready to risk upsetting Tehran by cutting imports now, particularly with few alternatives at hand.

"Overall Asia's choices are limited, they have to face the consequences if there is an interruption," says Kang Wu of the East-West Centre, an energy think tank in Hawaii. "Its very hard for Asia to find any other source for its oil."

National Iranian Oil Company (NIOC) officials said no other companies had reduced volumes due to the nuclear issue.

Asia takes about two-thirds of Iran's 2.4 million-bpd of exports, the rest flowing to Europe, Africa or Latin America.

Fears of the nuclear dispute spilling into the oil trade have lifted the risk barometer to its highest since the Iranian Revolution in the late 1970s the last time Iranian crude flowed into US refineries or the Iran-Iraq war of the 1980s.

Surprisingly, Nippon Oil said it was hoping to boost crude imports from Iraq long considered the least secure in the region to limit dependence on Iran.

If enough customers gave up on Iranian crude, Tehran could resort to selling cargoes on a short-term basis, as Iraq did briefly after the US invasion in 2003. While few see that happening yet, the shift in perception has been stark.

"They may become a supplier of last resort," said an industry source with a major oil company.

Other major Japanese refiners contacted by Reuters said they would maintain their imports from Iran, which is Japan's third-largest oil supplier, at a steady pace this year. About a quarter of Iran's exports go to Japan.

But sources with two Japanese trading companies, who often act as intermediaries for refiners, said this could change.

"Our company's management is pressing us to cut because of the political risks related to Iran," said an official with one active trading company.

In China, where plans for new refineries are stirring a scramble for extra supplies, refiners have been clamouring for more of Iran's light crude, but have not been able to secure it.

"All we want is to increase Iranian crude imports," said an official with Sinopec Corp.