Iran Oil Costs to Surge with EU Ship Insurance Ban

By and | March 29, 2012

A widely expected ban on European insurance cover for Iranian oil exports from July 1 is threatening to curtail shipments and raise costs for major buyers such as Japan and South Korea, insurance industry sources say.

Last week the European Union partly exempted some insurers from its embargo on the Iranian oil trade until the start of July. EU ministers plan to review whether to extend these waivers next month.

Japan and South Korea have lobbied for exemptions, but insurance and shipping executives say a complete ban now looks likely.

“The limited exception in the regulation providing a grace period until July 1 for third party liability insurance, environmental liability insurance and reinsurance seems to me to simply postpone the inevitable,” said Michele White, general counsel with INTERTANKO, an association whose members own the majority of the world’s tanker fleet.

Iran sells most of its 2.2 million barrels per day of oil exports in Asia, where China, India, Japan and South Korea are the four biggest buyers of Iranian oil. They have either made a cut in imports or pledged to do so in the face of growing sanctions pressure by the West intended to compel the Islamic Republic to halt its disputed nuclear program.

European insurers provide cover for the majority of the world’s oil tanker fleet. Industry officials say ship owners who can still legally trade with Iran will be hard pressed to find sufficient alternative insurance, which is also likely to be less comprehensive.

“Post July 1 the only way for non-EU members to lift crude from Iran would be to find insurance cover via an independent and viable insurance sector totally unconnected to the EU and US,” White said.

“I doubt that exists to cover the full extent of liabilities that might arise from a major tanker incident.”

A source with one of South Korea’s biggest shipping companies said under such circumstances it would be “almost impossible” for them carry Iranian oil and also doubted if alternative cover could be found. A South Korean economy ministry source added separately they were working hard to solve the issue with the EU, declining to give details.

In Japan, shipping and energy companies face similar pressures. Last month, Japan’s main shipping insurer said it would only be able to provide a fraction of cover for tankers.

“There is clearly no way to avoid the sanctions,” a Japanese shipping insurance source said. “Only the European and the U.S. insurers can cover the insurance that deals with oil spills. If the EU says no beyond July 1, the shippers would not be able to operate.”

Ship industry players say the dislocation in the European insurance market will also raise costs for those still looking to pick up crude from Iran.

“With fewer ship owners in the market, freight rates are likely to go up, which will add cost to the endeavor of transporting oil out of Iran, and thus make the Iranians hurt even more,” said Jakob Larsen, maritime security officer with BIMCO, the world’s largest private ship owners’ association.

A growing number of international sanctions have already hurt the Iran’s ability to trade, with its oil business particularly affected.

The EU in January imposed an immediate ban on new contracts to import, purchase or transport Iranian crude and petroleum products. EU members with existing contracts, however, can honor them until July 1.

Shipping sources said this week the Royal Bank of Scotland had halted payments to a Greek ship owner which transported Iranian oil for an Indian shipping company.

“More stringent application of the sanctions regime for countries … who continue to import Iranian oil, is a possibility. We have already seen some shipping companies cancel some spot cargoes,” said Alan Fraser of security firm AKE.

“So any more stringent application would likely see more shipping companies opt out of agreements to export Iranian oil.”

The main impact of a complete insurance ban will be on the availability of liability insurance, which covers ship owners against personal injury and pollution claims. In the event of a serious accident, these typically far exceed the cost of damage to the vessel itself.

The market for marine liability insurance is largely controlled by Europe-based protection and indemnity (P&I) clubs, specialist insurers who are owned by their ship owner customers.

“The objective seems to be to drive people who can lawfully trade with Iran into less effective insurance arrangements,” said Andrew Bardot, executive officer of the International Group of P&I Clubs, whose members provide liability cover to 95 percent of the world’s tankers.

“If you tinker with liability insurance, you’re not going to impact on the target of your sanction, but potentially you’ll cause damage and loss to other parties who may end up inadequately compensated.”

The International Group of P&I Clubs has been leading the insurance industry’s lobbying effort against the bloc’s trade embargo, and plans to continue pushing the case for exempting liability insurance, Bardot said, although he added “the door may be closed”.

(Additional reporting by Meeyoung Cho in Seoul, Osamu Tsukimori in Tokyo and Sebastian Moffett in Brussels; Editing by Giles Elgood)

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