As of today, Iran labours under the toughest ever sanctions against its oil sector since bitter British reaction to its nationalisation under Mohammad Mosaddegh in the 1950s.
EU sanctions, which add to latest US sanctions that took effect on 28 June, dramatically reduce Iran’s access to oil export markets. The effect of the deadline has been widely pre-empted by oil consumers.
The sanctions, coming on top of four rounds of sanctions ratified by the UN between 2006 and 2010, are intended to pressurise Iran’s political leaders to abandon a nuclear weapons program which western countries say is being conducted with the aim of building a nuclear weapon. Iran denies this and insists it has the right to nuclear development, which it says is for civilian purposes only.
There is now a total ban on EU member states or companies importing Iranian oil. A ban on financial support and insurance for Iranian oil tankers is particularly effective, as 95% of worldwide tanker insurance is reported to be issued in London. There is also a ban on financial and technical assistance for the oil and gas industries.
The IEA says most of Iran’s 39 tankers remain anchored in the Persian Gulf and are being used to store up to 42 million barrels of oil unable to be exported.
The EU imported some 600,000 barrels of Iranian oil per day last year, according to the International Energy Agency, making it a key market for Iran together with India and China. Poorer EU countries, such as Greece, had the greatest reliance on Iranian oil.
The US has a similar ban and has introduced measures which actively shut out countries from the US economy which pay the Iranian central bank for Iranian crude after 28 June.
India, Japan, South Korea, Singapore and China – together comprising two thirds of Iran’s customer base in 2010 – have all been granted exemptions after these countries have been deemed to have cut their reliance on Iranian crude sufficiently. The exemptions must be renewed every six months.
The exemptions to China and Singapore were granted on Thursday, with the former merely reflecting China’s unwillingness to bend to US pressure and the US’s inability to cut off a critically important trading partner.
Malaysia, South Africa, Sri Lanka, Turkey and Taiwan and ten other minor importers also hold exemptions.
The US estimates that its measures are costing Iran $8 billion a quarter in lost oil revenue.
The exemptions are in line with the US’s softer stance on taking Iranian crude off oil markets. US policy appears instead to focus on ensuring Tehran’s budget suffers from striking a lower oil price by empowering Asian consumers to strike harder deals for taking shipments of Iranian crude.
DUCKING THE BAN
Tehran has applied its long-standing sanctions-busting expertise to use. Small banks have begun to take oil payments after EU and US sanctions targeted the country’s central bank and larger financial institutions, aided by a new law allowing private companies to sell up to 20% of Iran’s oil.
According to a BBC report, Iranian oil tankers have re-registered in obscure tax havens, with 15 now flying the flag of Tuvalu, a remote group of Pacific islands. The BBC report suggests Iran may be able to blend its crude with oil from non-sanctioned sources via Egypt.
These measures ensure the EU and US will be kept busy plugging the gaps in their sanctions regimes.
LONG TERM IMPLICATIONS
In the short term, it appears oil markets are absorbing the loss of around 1 million barrels a day – 40% of Iran’s 2011 rate – of Iranian crude without a price spike, due to a surge in production from Arab Gulf producers and weak economic performance in consumer countries.
The March peak was driven by fears of a closure of the Strait of Hormuz, which cooler heads recognize is extremely unlikely. Recovery of Brent to $97 a barrel over the last few days has been driven by improved Euro zone news rather than sanctions fears.
Given the sanctions are open-ended and there appears to be little progress in nuclear negotiations, the long-term implications of a crippled Iranian oil sector require exploration. Far-reaching supply implications are unavoidable.
Forcing shut-ins of Iranian production – which in a few months will be inevitable as Iran runs out of places to store its excess production – makes for good politics in both the US and EU. The less vaunted implication is the countries’ increased call on supplies from Saudi Arabia, Iraq, Kuwait and the UAE.
Iran will not be able to recover output levels as quickly as it shuts them in. its oil fields are mature and short of investment. Shut-ins could take months to undo and could potentially damage oil fields permanently.
Narrowing spare supply margins have held up prices above $90 a barrel, despite new data suggesting that significant quantities of Saudi’s recent production surge have been stored by emerging markets rather than used, implying weaker than forecast demand.
If Saudi withdraws its oil stimulus to 2011 levels, prices will rise. If Saudi and fellow Gulf producers are making a play to permanently replace part of Iran’s export profile, supply markets will be tighter until new sources are available.
The expansion of Iraq’s production capacity is now more important, and the timing could not be worse. The government in Baghdad is besieged by coagulating groups of political opponents, dysfunction and sclerosis in state bureaucracy precludes decision-making, and security fears after the US drawdown are being realised.
If nuclear talks fail and Iran continues to suffer, the risk of military disruption increases. While an attempt to close the Strait of Hormuz remains unlikely – and would in any event be unraveled by Western forces within a few weeks – Tehran could decide to run harassment campaigns and ‘inspections’ of tankers from Kuwait, Saudi Arabia, Qatar, and Iraq. Saudi Arabia and the UAE have newly-commissioned contingency pipelines which can divert part of part crude away from the Strait; the rest do not.
Iran meddled extensively in Iraq after the US-led invasion in 2003, and could do so again in a bid to prevent further progress in its oil sector. A recent surge of attacks on Shiites give Iran-backed operatives ample excuse for reprisals, a cycle of which from 2004 delayed Iraq’s recovery by several years.
For all the talk of pricing in, it is best to expect the unexpected from Tehran.
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