Japan Refiners Eye Force Majeure Clauses Due to Lack of Insurance

Japanese buyers of Iran crude may ask Tehran to include a force majeure clause in contracts if they are unable to pay Iran or lift Iranian oil due to lack of insurance cover for tankers under European Union sanctions, industry sources said on Friday.

Some oil refiners are set to demand the clause when they start negotiations for term contracts that start from April to avoid unexpected difficulties in lifting Iranian oil, the sources said.

Japan’s main shipping insurer will only be able to provide a fraction of the coverage to tankers transporting Iranian oil under new EU sanctions starting in July, and sources say that Japanese shipping firms would likely find it hard to carry crude from Iran unless the issue is resolved by then.

New Western sanctions imposed on Iran to punish it for its suspected nuclear weapons programme have hampered traders’ ability to do business with Tehran.

Japan, Iran’s third biggest crude oil customer, is looking to reduce its dependence on the OPEC member due to pressure from the EU and the United States.

Starting in July, European insurers and reinsurers will be prohibited from indemnifying ships carrying Iranian crude and oil products anywhere in the world in line with the sanctions on Tehran.

Although Japan’s P&I Club, which provides insurance for shipping companies, does not directly fall under the sanctions regime, it is largely dependent on the European reinsurance market to hedge its risk.

“Shipping firms say it would be difficult to load oil if the insurance is not covered,” a source familiar with the matter said.

“We are considering (having such a clause for contracts that start from April). It is not our intention, but it could be a grave risk if we would be forced to pay due to a buyer’s fault even if we cannot accept the delivery on insurance reason.”

Another source said that a Japanese oil refiner would likely convey the request to state-owned National Iranian Oil Company (NIOC) soon.

“We’re thinking of a force majeure clause for not only ships, but insurance and money (payment),” the source said.

EU sanctions prohibited all new contracts to import Iran oil from Jan. 23, but it remains unclear if Japanese shippers would be affected when Japanese buyers sign the contracts for loading from April onwards.

“It’s a grey zone,” one of the sources said.

The second source said that Japan would approach the EU on the matter.

Although some Japanese buyers have no plans to lift cargoes in April, they have been waiting for formal instructions from the government on their imports.

Japan P&I Club will only be able to provide coverage worth a maximum $8 million per tanker, down from the current $1 billion coverage.

Any reductions would force club members who want to continue to import Iranian oil to obtain additional coverage from outside the Japan P&I Club, possibly in China, Russia or the Middle East.

Japan is in the final talks with Washington to obtain a waiver, which can be granted if there is a significant cut in trade with Iran. Tokyo had already cut its oil imports from Iran by 40 percent during 2007-2011, and is offering to make further cuts.

Japan may cut Iranian crude oil imports by a more-than-expected 20 percent as it seeks a waiver from U.S. sanctions, a newspaper reported last week, a move which would spare its banks from a major blow but also boost its rising fuel import bill.

(Reporting by Osamu Tsukimori; Editing by Sugita Katyal)