LONDON (Dow Jones)--European refiners are casting a wary eye towards Thursday's meeting to discuss an EU ban on Iranian oil imports as the move will likely result in higher costs and hit the sector's already shaky competitiveness in the global market, industry executives, traders and analysts say. Not only will embattled European refiners struggle to find enough crude to replace the Iranian barrels, they will also struggle to find similar quality crude and will end up having to pay more for a higher quality oil than they have been running through their refineries. Lower profits could result in higher prices for consumers, potential shortages of heating oil in the winter and possibly even the closure of some refineries in Europe, analysts said. Conversely, Europe's Asian rivals, as well as some U.S. refiners, stand to benefit as they will be able to export more refined products such as diesel and heating oil to Europe. Iran meanwhile, despite losing its European market in the event of an embargo, will still be able to continue selling its crude into Asia, where it already ships two thirds of its oil. "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 source at a southern European refinery. As tensions escalate over Iran's nuclear program, European Union foreign ministers are meeting Thursday to discuss new sanctions against Tehran, including a possible oil import ban. While it's not certain a ban on Iranian oil will ultimately be adopted, oil traders and refiners are already eying barrels from Saudi Arabia, Russia and West Africa as potential substitutes for Iranian oil. 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 crude oil suppliers. But there may not be enough of these alternative barrels to fill the gap, refining and oil industry sources said. Key swing oil producer Saudi Arabia prefers to sell its crude to the booming Asian economies where they command a higher price than in Europe. 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 they will be pumping to Asia, Igor Dyomin, spokesman at state oil pipeline operator OAO Transneft (TRNFP.RS). "It will require an extraordinary effort to replace Iranian barrels in Europe," Dyomin said. Crude from Libya, where production is fast ramping up, and oil from West Africa would be an expensive substitute for Europe's refiners as the crudes are predominantly light and sweet compared to Iran's cheaper medium-to-heavy sour grades. But it is not just the price of the crude. Not all refineries are even technically able to use other crudes as feedstock, and for those that can the switch will take weeks. Indeed, a potential loss of Iranian supplies comes after what has already been a very difficult year for the European refining industry. The interruption of Libyan crude exports due to the fighting there earlier this year, followed by the ban on Syrian oil pushed up the prices refiners pay for their crude feedstock and hit profits hard. According to the International Energy Agency, 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 utilization has fallen sharply compared to last year despite the prospect of an uptick in seasonal demand due to winter. In September, Italian refiners only used 72% of their capacity, compared with 79% in the same period a year earlier and the 87% average seen in the U.S. Refiners elsewhere are in a much 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. -By Benoit Faucon in Geneva, Konstantin Rozhnov in London and Summer Said in Riyadh, Dow Jones Newswires +44 207 842 9956; benoit.faucon@dowjones.com; konstantin.rozhnov@dowjones.com; summer.said@dowjones.com

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