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Japan and South Korea Seek to Ease Iran Oil Ties

Japan and South Korea are seeking new suppliers of crude oil to lessen their dependence on Iran, in response to US pressure to stop buying from the country.

An international oil tanker passes through the Suez canal in Ismailia, Egypt.
Getty Images
An international oil tanker passes through the Suez canal in Ismailia, Egypt.

The move comes as Tehran has threatened to block the Strait of Hormuz, through which a third of the world’s seaborne oil trade passes, if the west imposes oil sanctions against it.

JX Nippon Oil & Energy, Japan’s biggest refiner, said on Thursday it was talking to Saudi Arabia and other countries to find alternative supplies of crude oil. One person close to the government said Koichiro Gemba, Japan’s foreign minister, was using a visit to the Middle East to “pave the way to get more oil from Saudi”.

South Korea also said it would reduce imports of Iranian crude.

As part of its attempts to induce Tehran to give up its nuclear program, the US introduced sanctions last month to penalize financial institutions for dealing with Iran’s central bank, which clears most oil sales. Countries that reduce their imports from Iran can receive a waiver from the sanctions.

Signaling reluctance to bow completely to US pressure, South Korea said it would “strengthen diplomatic efforts” to avoid big reductions. Kurt Campbell, the US State Department’s top Asia official, said in South Korea that there was “anxiety in Seoul” over the US push.

The country’s two main buyers of crude, SK Group and Hyundai Oilbank, said they had not received instructions to switch supply lines from Iran, but would do so if the government ordered.

Tim Geithner, US Treasury secretary, plans to visit Beijing and Japan next week to discuss Iran. South Korea and Japan each depended on Iran for 10 percent of their crude imports, and China for 11 percent, in the first half of 2011, according to the US Energy Information Administration.

European Union officials have been pushing for an embargo on Iranian oil imports. However, amid diplomatic wrangling over the exact nature of that ban, Mario Monti, Italy’s prime minister, told a French newspaper that Rome would only back a gradually imposed EU embargo that also exempted from the ban billions of euros worth of oil-related debt owed to Eni, the Italian oil company.

The challenge facing Japan and South Korea is the dearth of alternatives to Iranian crude. Saudi Arabia, the only oil exporter able to ramp up production substantially when global oil supplies are disrupted, is the obvious choice. However, European demand for Saudi oil will also increase if it goes ahead with an embargo, leaving less available for the Far East. Growing appetite for Saudi oil will also eat into the Kingdom’s spare production capacity – a crucial safety cushion for the oil market.

The price of crude has risen in recent days amid the Iranian sabre-rattling over the Strait of Hormuz and oil markets have yet to recover completely from volatility caused by the cut-off of supplies from Libya.

Crude stocks in the industrialized world are tight and inventories on the US Gulf Coast are at five-year lows. Mike Wittner, an oil analyst at Société Générale, said Brent crude, currently trading at $113 a barrel, could rise to $125 a barrel with the imposition of an EU oil ban on Iran, and to $150 a barrel if other countries like Japan and South Korea joined the embargo.

China is the largest buyer of Iranian crude, importing about 0.5 million barrels a day. But Beijing opposes the unilateral sanctions imposed by the US. The foreign ministry this week said Chinese trade ties with Iran would not be affected by new US sanctions. Some Chinese buyers, including Sinopec, have reportedly pushed for better prices from Iran and have temporarily reduced purchases while negotiations are under way, according to Reuters. However analysts said there was as yet no clear indication of a drop-off in Chinese crude purchases.

India, a major importer of Iranian crude, has also come under growing pressure to reduce purchases from Iran. Ranjan Mathai, India’s foreign secretary, has insisted that Iran is “crucial” to India’ energy security, and says Washington understands his country’s position.

Leading Indian private companies like Reliance Industries and Essar have built petrochemical industries processing crude, from countries like Iran, and then re-exporting refined products.

Despite Japanese and South Korean efforts to diversify their supplies, analysts say Asia – which accounts for 75 per cent of Iran’s crude exports, will continue to be Iran’s biggest buyer of crude, and will not follow the US lead.

“Japan and India don’t have enough flexibility right now to shift to other sources for crude oil imports,” said an Iranian specialist at FGEnergy, the consultancy. “They need Iranian crude oil and they will continue to import.”

Japan’s refiners, which represent about 5 per cent of the world’s total refining capacity, will be under pressure to follow JX’s lead. Although refiners have been steadily reducing the percentage of oil sourced from Iran over the past five years, it remains Japan’s fourth most important source of crude, after Saudi Arabia, the UAE and Qatar.

The impact of supply disruption may be manageable for Japan. As the country has virtually no crude production of its own, it has tended to keep much bigger reserves than other developed economies.

Additional reporting by Guy Chazan in London