Refiners on edge as EU mulls reinsurance sanctions

Although Korea has been exempted from U.S. sanctions on countries importing Iranian oil, anxiety prevails in the local refinery industry as Korea is not yet free of European sanctions on oil shipping reinsurance.

“The government delegation is now expressing to the European Commission its concern that if the transportation of Iranian crude oil is suspended, there could be some disruptions to the global oil market,” said Moon Jae-do, a high-ranking official at the Ministry of Knowledge Economy yesterday.

The results of the ongoing negotiations to determine whether Korea can stand outside the sanctions on reinsurance are due to come out on June 25.

Reinsurance is a way for insurers to manage risk by dealing with a second company that is guaranteed to step in and cover the policy should the original company be unable to.
More than 90 percent of local oil importers rely on European reinsurance companies when bringing Iranian oil to Korea. The nation’s top four refiners, who all import themselves, feel afraid of transporting oil without the reinsurance.

They claim they don’t want to switch to other, non-European Union reinsurers due to question marks over their size, fiscal management and reliability.

An insurance, or reinsurance, policy for one oil tanker is worth between 7 trillion won ($5.98 billion) and 8 trillion won. At present, EU companies are refusing to provide reinsurance for oil tankers that carry Iranian crude oil as part of its sanctions on Iran. If the EU maintains its current stance, the government will consider whether it can cover the huge cost by providing its own insurance guarantees.

Even without the insurance issue, the situation is set to become more complicated.

“If Iranian oil imports are halted from next month as scheduled, Korean refiners will have to switch to Brent oil, which will cause some confusion in importing channels,” said an industry official.

As for oil prices, the Knowledge Ministry forecasts that domestic oil prices are likely to remain below 2,000 won as international oil prices have become more stable at below $100 per barrel.

By Song Su-hyun [ssh@joongang.co.kr]