International sanctions aimed at slashing Iran's main economic lifeline, its oil revenues, could have an impact on the country's export volumes well beyond the 500,000 barrels per day (b/d) of crude that a European Union ban will displace from July.
Iran hopes to find customers in Asia for the oil that will no longer be able to go to Europe when the EU embargo comes into effect. But U.S. efforts to persuade the Islamic Republic's top buyers in the region at least to reduce their imports of Iranian oil appear to be having some success, despite China's public stance and India's insistence that it will continue to trade with Iran.
The European embargo does not come into effect until July 1, giving refiners several months to find replacement supplies. Iran's latest response to the looming ban came on Feb. 19, when Tehran announced that it had halted oil sales to Britain and France. A subsequent warning went to other European customers that they too might face a cutoff in supply.
Brussels was quick to point out that that Britain had not imported Iranian oil for two years, that some EU member countries had also halted imports completely and that others had begun to reduce their volumes.
Iran's main customers in Europe are Italy, Spain and Greece, all of which have already begun reducing imports. Supplies to Spain in January were less than half of the 2011 monthly average while Italy's December imports were almost 50% lower than those of June, the commission said.
Cash- and credit-strapped Greece, which received favorable credit terms from Iran, raised its dependence on Iranian crude as its own financial crisis deepened. The commission said Greek reliance on Iran had reached a peak in September but had subsequently diminished.
Austria and Portugal stopped buying in 2010, the Czech Republic in 2011 and Belgium at the beginning of this year. The last Dutch company importing Iranian oil stopped in January.
The commission said Europe was currently well stocked with crude and refined products and would be able to withstand even an "abrupt" halt in supplies from Iran. Indeed, it said, it had enough oil stockpiled to cope with a four-and-a-half-year absence of Iranian oil.
The commission said it had no official information for France but said French major Total had stopped importing Iranian crude. International Energy Agency estimates put France's average imports at just 58,000 b/d in 2011.
Total chief executive Christophe de Margerie said earlier this week that the company was currently sourcing crude from Saudi Arabia and elsewhere to replace the volumes it had previously imported from Iran.
The 500,000 b/d-odd that Iran ships to Europe represents between 20% and 25% of the Islamic Republic's total crude exports and is roughly the same as the volume of Iranian crude imported by China.
But statistics released this week by Beijing showed that crude imports from the Islamic Republic in January were at 2.08 million metric tons (Mmt), or about 492,000 b/d, 5% down from January 2011 and a whopping 14.3% down from the 2.43 Mmt imported in December. The month-on-month fall in Iranian volumes contrasted sharply with the 6.8% increase in China's total crude import volumes.
This may not be in any way attributable to the various international sanctions. The delayed renewal of state-owned trader Unipec's contract for 2012 may offer a partial explanation for the lower volumes.
And Chinese imports of Iranian crude were even lower than the January level in September, August and February. Indeed, it may well be that China's February imports will show an increase following Unipec's contract renewal, news of which came last week.
But China may not be entirely immune to U.S. sanctions, which bar from the U.S. financial system entities trading with Iran, and to the EU sanctions on shipping insurance, which have a reach far beyond the shores of Europe.
"It shall be prohibited to provide, directly or indirectly, financing or financial assistance, including financial derivatives, as well as insurance and reinsurance, related to the import, purchase, or transport of Iranian crude oil and petroleum products," the EU legislation says.
Sources with charterers and ship owners say that tanker operators with protection and indemnity (P&I) insurance cover from mutual clubs based in Europe are not accepting crude cargoes loading from Iran, despite being offered a premium to standard rates.
P&I clubs provide insurance cover for broad, indeterminate risks such as third-party liabilities, which include a carrier's liability to the owner of a cargo for damage to the cargo, the liability of a ship after a collision, environmental pollution and war risk insurance.
Ship owners and operators such as Nova Tankers, Maersk Tankers, Frontline and OSG, all of which have large fleets, are already avoiding Iran.
Big Chinese crude lifters, such as Unipec, have contract of affreightment (COA) deals with Chinese ship owners to lift cargoes from the Persian Gulf, including ports in Iran. Under a COA arrangement, a ship owner agrees to move a specified quantity of oil at a specified rate between designated loading and discharge ports over a given period of time.
But Chinese state-owned trader Zhuhai Zhenrong—on which the U.S. has slapped sanctions for allegedly supplying Tehran with refined products—is often seen hiring vessels from the spot market to load from Iran.
The Indian government's apparent resolve to continue taking in Iranian oil could also be tested by the shipping insurance issue. Indian state-owned refiner HPCL, one of the country's biggest buyers of Iranian crude, has a COA deal with the state-owned Shipping Corporation of India to ferry Iranian crude.
But some Indian refiners have struggled to find vessels on the spot market willing to lift from Iran and Indian shipping sources are less than sanguine about future chartering options.
Japan has told the U.S. that its oil imports from Iran have been falling for several years and that this trend is set to continue.
But Washington wants something more concrete and Japanese refiners have delayed fixing term contracts for the 12 months beginning in April while Tokyo continues to negotiate with Washington for an exemption from the U.S. sanctions for its financial institutions.
Sources familiar with the negotiations say expectations are for a commitment by Japan to cut imports of Iranian crude by at least 10% a year. In fact, this pretty much equates to the 40% fall over the past five years to around 300,000 b/d from 500,000 b/d.
Iran, meanwhile, says its oil exports have remained steady in recent months at an average 2.2–2.3 MMb/d and that stocks are at a minimum level because of high demand for Iranian crude.
Iran to Honor Commitments
Deputy oil minister Ahmad Ghalehbani said Feb. 22 that Iran intended to honor its commitments to foreign companies such as Italy's Eni that are owed oil and condensate in return for work carried out in the past under so-called buyback contracts until the debts are repaid.
The various sanctions are aimed at persuading Iran to compromise over its nuclear program.
Tehran says it wants only to generate electricity, but the West suspects that Iran is trying to build atomic weapons.
Tension has risen in the region, driven by Iran's repeated threats to close the Strait of Hormuz, the strategic waterway through which some 17 MMb/d of Gulf oil exports pass, and by fears of an Israeli or U.S. strike on Iran's nuclear facilities. (See related map: Strait of Hormuz—the world's greatest oil chokepoint.)
These concerns have helped drive international oil prices to their highest levels since last May, Brent crude futures trading as high as $122.48/bbl on Feb. 22, just $25 below the all-time high traded for U.S. light sweet crude in July 2008.
Iran has written to the European Union's foreign policy chief, Catherine Ashton, saying it is ready to resume talks on the nuclear issue with Britain, China, France, Russia and the U.S.—the five permanent members of the UN Security Council—and Germany.
The initial response from the EU and U.S. was cautiously positive, but Iran's refusal to allow a team of UN inspectors visit a key military site this week could jeopardize a new round of talks. A previous round in Istanbul in January last year collapsed.
Margaret McQuaile, Platts