The dispute between Chinese state refining giant Sinopec and the National Iranian Tanker Co (NITC) threatens to delay the sale of millions of barrels of crude exports from Iran as it faces tough Western sanctions targeting its oil sector.
China and Iran appear to be negotiating freight terms on a tanker by tanker basis and at least 4 million barrels of Iranian oil are on their way to Chinese refiners, said a Chinese crude trader familiar with the negotiations.
"Looks like the freight negotiations are not a package, but voyage by voyage," said the trader, who declined to be identified due to the sensitive nature of the matter.
China is Iran's top trading partner and buys an increasing share of its oil exports which have dwindled after traders cut or halted imports to comply with U.S. and EU sanctions aimed at curbing Iran's nuclear programme.
The West believes Iran is trying to build an atomic bomb. Iran says its nuclear activities are for civilian purposes.
The EU sanctions bar tankers carrying Iranian oil from accessing the Western-dominated insurance market and have forced Sinopec to rely on NITC for delivery of the 500,000 barrels per day of crude it buys from Iran.
NITC wants Sinopec to pay a premium to use its tankers since the Iranian shipper is handling the insurance, but the Chinese refiner is seeking a lower freight rate.
China last month requested that Iran deliver July-loading oil to Chinese ports and provide price quotes on a cost-insurance-freight basis.
WANING CHINESE DEMAND
China appears to have the upper hand in the shipping negotiations, as high inventories and a slowing economy have dulled demand for oil in the world's second-largest crude importer. China's total crude imports fell in June to their lowest level since December.
Iran, on the other hand, has been forced to shut off wells at its vast oilfields and reduce output to levels unseen in more than two decades as oil sales fall by more than half year-on-year and storage space runs out.
"The Iranians believe they have a right to ask for higher freight since they are bearing the shipping risks," said the Chinese trader. "The Chinese believe their request is also reasonable, since refineries are cutting back on runs and they don't need that much crude."
China has nominated about 15 million barrels of Iranian oil for July, sources have told Reuters, a level steady from April, when the two sides resolved a dispute over 2012 contract terms.
If all the 15 million barrel shipments, worth some $1.35 billion, are loaded, China would account for nearly half of Iran's total July exports, estimated at 1.1 million bpd.
Sinopec, Asia's largest refiner, buys Iranian oil via its own trading arm Unipec and state trader Zhuhai Zhenrong Corp in separate contracts with the National Iranian Oil Company.
Zhuhai Zhenrong, formerly an affiliate of China's defence industry, has dealt with the Iranians for longer but Unipec plays a more dominant role in annual supply talks and the freight negotiations, sources said.