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Asia steps up efforts to diversify from Iranian oil

Tokyo — Asian oil importers are stepping up efforts to diversify crude sources and Iranian oil payment mechanisms after the US announced it is pressing buyers to completely eliminate Iran imports by November 4.

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The US State Department confirmed Tuesday it is taking a hard line on sanctions enforcement and is working with Middle East allies to prevent an oil supply shock.

Around 60%-65% of Iranian oil shipments head to Asia.

At least one Japanese refiner is considering suspending Iran imports from the August loading program amid sanction fears, a source with direct knowledge of the matter said Wednesday.

The refiner was not overly concerned about supply, as Saudi Arabia could provide similar grades. A few Japanese shipping companies have decided in principle not to accept Iranian oil from loadings in August to clear their transactions before US sanctions are re-instated, the source said.

A source at another Japanese refiner said the US announcement would have a "big impact on Japan as we use Iranian grades." But the source said the refiner may still be able to buy Iranian grades for October and November as the Japanese government is still negotiating with the US to secure a waiver.

A senior executive at Chinese state-owned oil group Sinopec said Wednesday the Chinese government will push for a system where purchases from Iran are insulated from the dollar-denominated system and payments are made through banks which qualify.

"This is a policy matter which government will decide [at] a very high [level], but imports from Iran are taking place," the executive said, adding Chinese refining and shipping companies will follow the government's decision.

INDIA TO GIVE UP EURO PAYMENT

In India, Asia's second-largest importer after China, state-run refiners will have to give up the euro payment mechanism for Iranian crude imports from November when US sanctions against Iran come into force but still could continue imports if Iran accepts an alternative payment or offers a longercredit period, oil ministry officials said Wednesday.

Indian refiners offered Iran some respite even after the announcement of US sanctions last month, as the South Asian crude oil importers adhered to their term supply contract obligations with the Persian Gulf producer.

State Bank of India has already told Indian refiners the euro mechanism after will not be available after November 3.

Indian refiners were exploring options to source crude from other destinations in the Middle East, the US and Russia in case Iranian crude imports fall to zero as a result of the US sanctions.

India pays Iran in euros using European banking channels. The payment mechanism involves Indian refiners transferring funds to the state bank then uses Germany-based Europaeisch-Iranische Handelsbank to pay euros to Iran.

"Indian refineries have wide complexities to absorb diverse crude grades from suppliers in the Middle East, US and Russia," one senior oil ministry official said. Officials said the onus lies with Iran to continue trade with India once the current payment route is blocked.

"Tehran has to decide whether to trade with us in our currency or sell crude on credit on the assumption that payment channels would open in future," an official working with one of the state-run refiners said.

SOUTH KOREA PURSUING DIPLOMACY

South Korea is still verifying the report with the US State Department.

"The government is continuing diplomatic efforts to win exemption from the US sanctions," a ministry official said, noting local refiners have sharply reduced Iranian crude imports to get a sanction waiver as they did in 2010.

"We are ready to further reduce crude and condensate shipments from Iran in line with the government policy as we have increased light sweet crude [imports] from alternative sources, such as Russia and Kazakhstan," top South Korean refiner SK Innovation said.

"There is quite a lot of alternatives. It is just a matter of price," anothersource with a South Korean refiner said. "There is still oil out there, but we will have to pay up."

"Light grade alternatives could be North Sea crudes -- Forties. Persian Gulf grades could be anything...There is big availability of Iraqi crudes," thesource said.

-- Takeo Kumagai, takeo.kumagai@spglobal.com

-- Andrew Toh, andrew.toh@spglobal.com

-- Ratnajyoti Dutta and Charles Lee, newsdesk@spglobal.com