Japan's cabinet ministers approved and submitted a special bill to parliament on Monday to enable the government to provide insurance cover for Iranian crude imports once a European Union ban on insurance and reinsurance takes effect on July 1.
The insurance scheme would enable the Japanese government to provide direct payments of up to $7.6 billion in the event of a critical incident on a tanker carrying Iranian crude bound for Japan, the transport ministry said in a statement.
Japan intends to keep importing oil from Iran and has been lobbying the EU to be exempted from the ban on insurance and reinsurance of Iran's oil exports, with no indication of success so far.
The ban is part of a raft of Western sanctions aimed at shrinking Tehran's oil revenues to force it halt its controversial nuclear program.
In March Japan secured a waiver from the United States on financial sanctions against Iranian shipments. Its imports from OPEC's second-largest producer have fallen sharply, despite an increase in overall oil demand after last year's Fukushima nuclear disaster.
A Japanese cabinet reshuffle in favor of the major opposition parties has increased prospects that the bill will secure early approval in parliament.
Under Japanese law, shipping companies entering the nation's territorial waters must obtain liability insurance against damages from accidents, including oil spills and fatalities.
Most of this coverage has been offered by the Japan Shipowners' Mutual Protection & Indemnity (P&I) Association, which in turn obtains reinsurance from other P&I clubs and other insurers to cover potentially large claims.
Insurers in the EU, the biggest market for reinsurance, will be prohibited from covering liabilities for tankers carrying crude from Iran.
Without the EU's reinsurance, liability provided by Japanese insurers would cover damages only up to $8 million.
The sovereign scheme would provide up to $7.6 billion more for a critical incident, with a maximum cover for oil spills at $1 billion given their higher frequency than other types of accidents.
Japan's Transport Minister aims to finish signing contracts with about 10 companies operating tankers bound to Japan by July 1 to avoid a major impact from the EU sanctions, a transport ministry official said.
"It is up to the parliament whether to meet the July 1 deadline," the official said in a telephone interview with Reuters, adding it usually takes at least two weeks for a bill to pass.
Japan's government is in talks with shipping companies over an annual fee for the additional coverage for Iranian crude of around 15 million yen ($189,000) per tanker, the ministry official said, compared with an ordinary fee of 20 million to 30 million yen without any limit on destination.