South Korea's release of Iran's frozen funds unlikely to lead to oil trade resumption

South Korea's release of Iran's frozen assets held in local banks is unlikely to lead to Iranian oil trade resumption for now, government officials as well as banking and refining industry sources in Seoul and Tehran said Aug. 11-14.

The Korea Economic Daily reported last week that Seoul and Washington were discussing ways to release $7 billion worth of Iranian funds held in Woori Bank and the Industrial Bank of Korea with the condition that Tehran release US hostages held in Iran and limit its nuclear development process.

"The [South Korean] government has engaged in close consultation with relevant countries, including the US and Iran, to address the issue of the frozen funds," a South Korean Foreign Ministry official said Aug. 11.

Iranian oil minister Jawad Owji said Aug. 13 that the funds, which were payments due for Iranian condensate sold to South Korea in the late 2010s, have been released by the South Korean government.

South Korea's Finance Ministry declined to comment on the fund transfer and related procedures when contacted by S&P Global Commodity Insights Aug. 14.

"There was an order to proceed and release the funds back to Iran, but we cannot confirm the status of the transfer with anyone yet," said a banking sector source based in Seoul with close knowledge of Woori Bank and IBK's management of Iranian funds.

Iran has been calling for South Korea to unlock the frozen assets in the bank accounts for many years amid Iran's economic challenges.

Seoul-Tehran relations soured after Iran detained a South Korea-flagged chemical tanker in the Strait of Hormuz in 2021.

Ties remained tense after South Korean President Yoon Suk Yeol described Iran as the "archenemy" of the UAE during his visit to Abu Dhabi in January.

Oil trade resumption remains in doubt

Local refining industry and oil trading participants cheered Seoul's efforts to resolve the frozen asset issue as Iran was once an extremely valuable crude supplier and a trade partner for Asia's fourth biggest economy.

However, geopolitical matters are typically highly volatile, and it would require a drastic shift in the Washington-Tehran diplomatic stance to see Iranian oil freely trade in international markets once again, analysts at Korea Petroleum Association based in Seoul as well as traders at major South Korean refiners and petrochemical companies said.

"We wish to jump right in and buy Iranian crude and condensate right now, but this is something that private companies and businesses cannot resolve ... we refuse to take any false sense of hope and it's highly unlikely to see sanctions against Tehran to be lifted any time soon," said a feedstock manager at a major South Korean refiner who declined to be identified due to the sensitive nature of the matter.

"Even if the [frozen] funds are released, it won't guarantee anything and there's still a long way to go for the resumption in Iranian crude imports to be allowed," said a condensate trader at a South Korean petrochemical maker.

Important crude supplier

Although South Korean refiners have halted purchasing Iranian crude oil for several years due to the ongoing international sanctions on Tehran, the two nations have strong economic and cultural ties, refining industry sources and analysts said.

Prior to the sanctions on Tehran, South Korea used to be one of the world's top three customers of Iranian crude oil and Asia's biggest Iranian condensate, or ultra-light crude, importer.

"In times like this when inflation remains high, [OPEC+] supply is tight and oil prices are rising ... you'd wish for a free flow and trade of Iranian barrels," the condensate trader said.

In 2017, South Korea received 148 million barrels of crude and condensate from Iran, making the Persian Gulf producer its third biggest refinery feedstock supplier in the year, data from state-run Korea National Oil Corp. showed.

Major South Korean refiners including SK Innovation as well as petrochemical makers like Hanwha TotalEnergies were previously avid buyers of Iran's South Pars condensate.

South Korean refiners and petrochemical companies indicated that they remain highly fond of Iranian oil, especially South Pars condensate, as the ultra-light crude typically traded at a discount of at least $2/b to Qatar's Deodorized Field Condensate, or DFC, in the market.

Platts, part of S&P Global Commodity Insights, assessed the price spread between South Pars and DFC at an average of minus $3.74/b over 2018-2022.