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Analysis: Japan, South Korea wary of loading Iran oil in January amid insurance puzzle

Tokyo — Japanese and South Korean refiners have so far resisted loading Iranian oil for January despite US waivers allowing them to restart the trades amid a lack of clarity over rules for shipping insurance.

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Both countries suspended imports from Iran before US sanctions snapped back November 5. If they do not load January barrels, that would leave them only about two months to load Iranian crude to ensure that any imports are delivered before their 180-day sanctions waivers from the US State Department expire May 4.

Washington expects importers in eight countries with "significant reduction exemptions" to complete all Iranian oil transactions before May 5, according to a US government official who spoke on condition of anonymity. The official declined to say whether the US would consider additional exemptions covering May-November 2019.

"If someone takes delivery or pays for Iranian crude oil when they do not have an active SRE, that transaction would be sanctionable," the US official said.

Iran exported an estimated 1 million b/d of oil in November, down from 2.4 million b/d earlier this year, according to S&P Global Platts Analytics, which expects exports to rise to an average of 1.4 million b/d over December-April as the eight importers work through contract and logistical lags from the waivers.

At least two Japanese refiners let a January-loading nomination deadline for National Iranian Oil Co pass without nominating any barrels, sources familiar with the matter told S&P Global Platts on condition of anonymity. They said they are keeping their options to resume loadings as soon as possible.

Another Japanese refiner is also looking at securing alternative supplies to Iranian oil mainly from other Middle Eastern suppliers as well as from elsewhere for January loadings, said a source familiar with the matter, while declining to elaborate whether it has nominated for Iranian supplies.

In South Korea, SK Innovation, a major buyer of Iran's South Pars condensate, said it was making best efforts to resume imports for January delivery.

"We hope insurances and other concerns would be addressed soon so that we can bring Iranian cargoes in January," a company official said.

But other South Korean importers of Iranian oil are not rushing to resume South Pars condensate imports from Iran amid competitive availability of naphtha as an alternative supply.

"We have imported condensate for producing naphtha for feedstock, so we can directly purchase naphtha if we face hurdles securing volumes from Iran," said an official with Hanwha Total Petrochemicals, South Korea's biggest importer of Iran's South Pars condensate.

Despite the difference in means of transporting Iranian oil and the use of shipping insurance coverage used by Japanese and South Korean companies, sources familiar with the matter confirmed that both have a common concern; to clarify recent reported advice from the US Treasury department's Office of Foreign Assets Control on Iranian oil shipping.

"It is further understood that countries holding SREs are being advised by the US administration to import Iranian crude only on NITC or IRISL vessels, or on vessels registered in the country holding the SRE and only where those vessels are insured under a sovereign guarantee issued by the government holding the SRE," the International Group of P&I Clubs said in a circular issued on November 26.

This statement has raised concerns over various issues - such as the availability of P&I, cargo and hull insurance cover and the need for sovereign guarantee - among companies in Japan and South Korea, according to sources familiar with the matter.

In Japan, refiners use their registered VLCCs and government-backed shipping insurance for protection and indemnity cover, as well as using cargo and hull insurance from Japanese nonlife insurers for Iranian oil imports.

Japanese refiners, shipping and insurance companies are now concerned that their full-set of insurance for Iranian oil shipping might be incomplete as their cargo and hull cover were not part of the current sovereign guarantee, sources familiar with the matter said.

The Japanese government is currently seeking official clarifications from OFAC over the reported need for a sovereign guarantee for Iranian oil shipping, a government source said.

South Korean refiners, meanwhile, use National Iranian Tanker Company's fleet with Iranian insurance for their ex-ship oil deliveries, said local sources, adding that the reported need for a sovereign guarantee is their main concern for the resumption Iranian oil shipping.

A South Korean foreign ministry official said Seoul continues to discuss the shipping insurance issue with Washington, but declined to elaborate.

Asked about Asian refiners' difficulty restarting shipments, the US official said the point of the exemptions was to "moderate the impact on global oil markets of a sudden dislocation of all of Iran's 2.5 million b/d of production."

"If importers decide, for whatever reason, that they would prefer to diversify away from Iran more rapidly than the SRE would permit them to do, we think that is a good thing," the US official said. "Because our preference is all importers go to zero as quickly as possible."

Elizabeth Rosenberg, director of the Center for a New American Security's energy program and a former sanctions adviser at the Treasury Department, said Iran will likely have to self-insure, as happened extensively in 2012-2015.

"I have heard that there is an awful lot of confusion in East Asia about the status of the Iran sanctions and what is permissible and what is not," Rosenberg said. "Given how unexpected it was that the SREs were handed out as generously as they were, many entities purchasing Iranian oil are probably quite confused about where things go from here."

--Takeo Kumagai, with Charles Lee in Seoul, Meghan Gordon in Washington, newsdesk@spglobal.com

--Edited by Wendy Wells, wendy.wells@spglobal.com