Japan Cuts in Iran Crude Imports Could be Over 20%.

Tokyo: Japan is in final talks with Washington on an agreement on cuts in Iranian crude oil imports that could amount to a higher-than-expected 20 percent or more a year, a newspaper reported on Thursday, as Tokyo seeks to win waivers from US sanctions.

Japan and the United States will reach a basic agreement by the end of February, the Washington-datelined Nikkei business daily report said, without citing sources. Washington is pushing ahead with sanctions because it fears Iran might use its nuclear program to develop nuclear weapons.

Such an agreement would spare Japan's three main banks that currently handle payments to Iran from penalties.

Avoiding sanctions is essential to protect the Japanese financial sector's operations abroad, but shifting oil purchases to other countries could boost prices just as Japan needs to buy more fossil fuels because almost all its nuclear reactors are off-line after the Fukushima nuclear disaster a year ago.

"We have relatively large oil inventories, so if this is just temporary, the impact could be limited. But an additional impact could come from prices," said Masaaki Kanno, chief Japan economist at JPMorgan Securities in Tokyo. "It would be an impact not only for Japan, but probably all major economies."

Japan's trade and foreign ministers said earlier this week that Tokyo was close to an agreement with Washington but gave no indication of the size of the cuts in crude imports from Iran. Another Japanese newspaper had earlier reported the two sides would settle on cuts of at least 11 percent.

Cuts of 20 percent would therefore be much larger than anticipated even as Japan's reliance on imports has grown since a massive March 2011 earthquake and tsunami triggered the Fukushima radiation crisis. That led to most nuclear reactors at Japanese power plants being shut down, mostly for safety checks, and all 54 are likely to be offline by late April.

A Japanese government official declined to say if Tokyo had tabled a specific percentage target for cuts that would exceed average declines of 11 percent per year that Tokyo points to from 2007-11.

Japan imported 313,480 barrels per day (bpd) of Iranian crude oil in 2011. If cuts of more than 20 percent were agreed, Iranian crude imports would fall by more than 62,700 bpd to less than 251,000 bpd this year, according to reports.

China, India and Japan, the top three buyers of Iranian oil, together buy about 45 percent of Iran's crude exports and all of them are planning cuts of at least 10 percent.

China's total cuts this year will amount to 14 percent, according to a reports.

US "STRONG CARD"

Iran, the biggest producer in OPEC after Saudi Arabia, denies Western suspicions that its nuclear program has military goals, saying it is for purely peaceful purposes.

The United States in turn has said it will punish financial institutions that deal with Iran's central bank, the main clearing-house for oil revenues, by shutting them out of U.S. markets. A country can earn a waiver from the sanctions if it significantly reduces trade with Iran.

"How far a 20 percent cut in volume will affect Japan's economy depends on how such measures push up oil prices, but chances are, given a recovery trend of the global economy and loosening policy in emerging markets, WTI would rise to as much as $120, up from $105 now," said Toshihiro Nagahama, chief economist at Dai-Ichi Life Research Institute.

"We don't have a simulation for the $120 scenario, but in case prices shot up to $150, that will squeeze profit at Japan's big and small business by more than 10 percent," he added.

Japan has also had close diplomatic ties with Iran in the past, but the prospect of sanctions on its banks weighs heavily.

"The United States has a very strong card," JPMorgan's Kanno said, referring to possible sanctions on Japan's mega-banks.

The new US sanctions go into effect for non-petroleum transactions with the Iranian central bank on February 29 and for oil-related transactions on June 28.

"We are significantly improving our understanding of each other," Foreign Minister Koichiro Gemba told a news conference on Wednesday. "There is a time limit, so I want to reach a firm conclusion by then."

A deal would win a waiver for Japan's three megabanks -- Mitsubishi UFJ Financial Group, Mizuho Financial Group and Sumitomo Mitsui Financial Group.

The European Union has imposed its own embargo on oil imports from Iran, to start from July 1. In response, Iran ordered a halt of oil sales to Britain and France on Sunday in a move symbolic of Tehran's anger with the West.

Source : zeenews.india.com