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European Refiners Wary of Potential Iran Oil Ban

European refiners will struggle to find enough crude oil to replace lost Iranian supply should the European Union ban imports from Iran at a meeting on Thursday.

Such a move would also likely result in higher costs and hit the industry's already shaky competitiveness in the global market, industry executives, traders and analysts said. Finding crude similar in quality to what they have been using will be difficult, so refiners are likely to end up paying more for higher-quality grades.

ENLARGE

That, in turn, could lower profits and result in higher prices for consumers, potential shortages of heating oil in the winter and possibly the closure of some refineries in Europe, analysts said. Conversely, Europe's Asian rivals, as well as some U.S. refiners, stand to benefit, because they will be able to export more refined products such as diesel and heating oil to Europe.

"As an embargo will be only in Europe, it will hurt European refiners and not Iran, because Iran will continue selling oil to Asia and getting paid for it," said a knowledgeable person at a southern European refinery. Iran ships two-thirds of its oil to Asia.

As tensions escalate over Iran's nuclear program, European Union foreign ministers will meet to discuss new sanctions that could include a ban on oil imports.

Further raising tensions, the U.K. closed its embassy in Iran on Wednesday and expelled Iranian diplomats from London after accusing the Iranian government of consenting to the storming of Britain's embassy in Tehran a day earlier.

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According to the International Energy Agency, Iran exported 870,000 barrels a day to Europe in the second quarter, mostly to Spain, Italy and Greece. The Islamic Republic is one of Europe's top three suppliers of crude oil.

While a ban isn't certain, oil traders and refiners are already looking to Saudi Arabia, Russia and West Africa as potential alternative suppliers. But there may not be enough oil there to fill the gap. For one thing, Saudi Arabia prefers to sell its crude to the booming Asian economies, where it commands a higher price than in Europe.

Iran's Oil Exports

Russia, already Europe's top oil supplier, is also more focused on capturing valuable market share in Asia. Russia does have plans to increase its oil exports to Europe by 80,000 barrels a day next year, but that increase is much smaller than the additional barrels it will pump to Asia, said Igor Dyomin, spokesman at state oil pipeline operator OAO Transneft.

"It will require an extraordinary effort to replace Iranian barrels in Europe," he said.

Crude from Libya, where production is being restored following the prolonged conflict, and oil from West Africa would be an expensive substitute for Europe's refiners because it is predominantly light and sweet, meaning it contains low amounts of sulfur and can more easily be processed into products such as gasoline, compared with Iran's cheaper medium-to-heavy sour grades. Also, not all refineries are able to process other types of crude. For those that can, the switch will take weeks.

A potential loss of Iranian supply comes after what has already been a difficult year for the European refining industry. The interruption of Libyan crude exports, followed by the ban on Syrian oil, pushed up the prices refiners pay for their crude feedstock and hit profits hard.

According to the IEA, European refining margins, or profits from processing crude into oil products, turned negative in June and then again in September, leaving many refineries operating at a loss.

Consequently, many refiners extended their seasonal maintenance period. In some European countries, refinery use has fallen sharply from a year earlier despite the prospect of winter demand.

In September, Italian refiners used just 72% of their capacity, compared with 79% a year earlier and the 87% average seen in the U.S.

Refiners elsewhere are in a better position to weather the storms that have roiled European refining companies in the past year.

U.S. Midwest refineries have benefited from lower crude prices than their European counterparts due to a regional supply glut, while Asian refiners with their newer and more-advanced plants are able to turn a profit even when crude prices are higher.

Write to Benoit Faucon at benoit.faucon@dowjones.com

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