Oil Industry Sees China Winning, West Losing from Iran Sanctions

As the European Union prepares to ban Iranian oil and the United States turns the screw on payments, oil executives and policymakers say China and Russia stand to gain the most and Western oil firms and consumers may emerge the biggest losers.

Iran will continue to sell much the same volume of oil - 2.6 million barrels per day or around 3 percent of world supply - but almost all of it will flow to China, they reason. And being pretty much Iran's only remaining customer, Beijing will be able to negotiate a much reduced price.

The EU will ban Iranian oil from July. The United States plans sanctions on Iran's central bank and possibly its shipping firm. European headquartered oil firms such as France's Total and Royal Dutch Shell have already abandoned Iranian oil purchases or are in the process of doing so.

Japan and South Korea have signaled they may reduce purchases of Iranian oil to comply with U.S. sanctions designed to put pressure on Tehran over its nuclear program.

That leaves a growing number of buyers competing for alternative supplies. Inevitably attention has turned to Saudi Arabia, the world's biggest exporter and the only country that can quickly increase oil output and help the West avoid a price spike that would deal a severe economic blow.

The IMF said this week that crude oil prices could rise 20 to 30 percent if Iran were to retaliate by halting its oil exports altogether. Oil industry executives meeting in Davos said energy markets can afford to lose half of Iran's 2.6 million barrels per day. That would be roughly equivalent to supplies lost during Libya's civil war in 2011. They are confident Saudi Arabia will fill the gap.

"What we say is that oil is fungible. Iranian oil will still find its way into the market, to Asian markets, China and possibly at a lower price," a top Saudi source told Reuters, speaking on condition of anonymity because of the sensitivity of the matter.

"But if let's say 50 percent of Iranian oil is lost, we have spare capacity, we have the capacity to replace it as Libya has shown," he added.

The chief of Saudi state oil monopoly Saudi Aramco, Khalid al-Falih, moved from one bilateral meeting to the next during the World Economic Forum this week. Over the past month or so the kingdom has received requests for additional oil from the European Union, Japan and South Korea. The European Union and Turkey buy almost a third of Iranian oil exports with the rest going to China, Japan, South Korea, India and South Africa.

"As a regular conversation we talked about increased supplies. Saudi Aramco is always positive," Jun Arai, the head of Japan's Showa Shell, told Reuters.

Russia too stands to gain from Western sanctions on Iran. The world's biggest oil producer is well positioned to raise its market share in Europe, despite misgivings among some Europeans about relying too heavily on Russia for oil and gas. Payment disputes between Russia and neighboring Ukraine have in the past threatened transit gas supplies to Europe.

"I'm sure Moscow is watching the situation with big interest," said José Sergio Gabrielli, chief executive of Brazil's Petrobras. Arkady Dvorkovich, the Kremlin's top economic aide, concurred that Russia stood to benefit from sanctions that were guaranteed to keep oil prices at least at current levels around $100 a barrel by his reckoning.

Showa Shell buys 100,000 barrels per day from Iran under a deal that expires in March and like other firms would be exposed to U.S. sanctions if not given a waiver under the latest ban on dealing with Iran's central bank. "We are waiting for guidance from the government," said Arai.

For Total the guidance has been clearer. French President Nicolas Sarkozy has been one of the main advocates of tough sanctions. "We have already stopped (buying from Iran)," said Total's chief Christopher de Margerie. The firm was previously lifting 80,000-100,000 barrels per day (bpd) from Iran.

Peter Voser, chief executive at Royal Dutch Shell, said his company might take some time before suspending purchases, which market sources estimate at 100,000 barrels per day.

"We are a European company and therefore we are affected by the sanctions and we will obviously oblige and implement the sanctions. I need to study all the details in order to see how it goes forward," he said.

Apart from Total and Shell, Europe's biggest buyers of Iranian oil are Italian, Spanish and Greek companies.

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China has so far refrained from buying more Iranian crude but the perception in the industry and among diplomats is that the world's No.2 oil consumer will find it hard to resist buying unsold Iranian oil at a knockdown price.

"I think (the Iranian) oil will go somewhere else ... Iran may give a discount to make it easier and quicker but nothing will change," said De Margerie.

Robert Hormats, U.S. under secretary for economy, energy and agriculture, could not say with certainty that sanctions would reduce Iran's oil exports but he predicted more pain for the Iranian economy.

"You cannot predict what they (Iran) will do and how much they will discount their oil. But it will certainly cause more and more discomfort to the Iranian economy," he said, adding that China too had an interest in a 'constructive outcome'.

"No one has an interest in Iran continuing its non-peaceful nuclear program," he said. Iran says its nuclear program is for peaceful purposes - electricity generation and medical equipment.

To maximize the impact of the sanctions, the U.S. will apply waivers very "selectively" and "responsibly," Hormats said. In addition, the U.S. administration is talking to Congress about extending sanctions to Iran's shipping fleet although the discussion is at an early stage, he added.