Sanctions cut off vital Iranian revenues

25 July 2013

Fresh US and EU trade restrictions introduced this year have further damaged Iran’s ability to profit from its oil and gas resources

Additional US and EU sanctions targeting Iran’s energy and shipping sectors are likely to make it even more difficult for Tehran to maintain oil exports, its most vital sources of revenues. The country’s oil projects market has also slowed to a near standstill as Iran remains locked in unproductive international talks over its disputed uranium enrichment programme.

Exports of crude and condensate fell last year to the lowest level since 1986 as a direct result of sanctions, according to the Washington-based Energy Information Administration (EIA). Tehran’s net estimated oil export revenues dropped 27 per cent to $69bn in 2012, from $95bn a year earlier.

By volume, exports of crude and condensate declined 39 per cent to 1.5 million barrels a day (b/d), from 2.5 million b/d in 2012, the EIA estimates. Crude and condensate output is believed to have dropped by 17 per cent and liquid fuels consumption by 1 per cent.

Insurance sanctions

Perhaps the most damaging economic measure targeting the oil sector has been EU sanctions against insuring or reinsuring tankers carrying Iranian crude to European and Asian markets. The sanctions affect the London-based International Group of Protection & Indemnity Insurance Clubs, which covers more than 90 per cent of the world’s ocean-going tonnage.

Tehran has budgeted for a further drop in crude exports for the Iranian year starting 21 March 2013. Government budget planning official Rahim Mambini told Iran state media that crude exports are expected to average 1.3 million barrels a day (b/d) over the year.

“The latest sanctions broadens the range of companies affected by sanctions and Iran will feel the impact”

Jamie Ingram, IHS

Before oil sector sanctions were introduced in 2012, Iran exported an average of about 2.6 million b/d of crude, largely to Asian economies, so oil export volumes will have halved over a two-year period.

This could be a conservative estimate, with oil exports reported to have dropped 36 per cent month-on-month in June to just 800,000 b/d, according to the Paris-based International Energy Agency (IEA).

The IEA estimates that Iran lost more than $40bn in export revenues in 2012, amounting to about $3.4bn a month, as US-backed financial sanctions prevented the government receiving payments for oil shipments.

In 2011, before the insurance sanctions were introduced, the EU was the biggest buyer of Iranian crude, receiving 18 per cent of total exports, followed by Japan (14 per cent), India (13 per cent), South Korea (10 per cent) and Turkey (7 per cent).

Some countries were heavily reliant on the Islamic Republic’s oil exports. According to the IEA, 100 per cent of Sri Lanka’s crude came from Iran in the first half of 2011, while 51 per cent of Turkey’s oil imports, 25 per cent of South Africa’s and 10-13 per cent of Italy, Spain, India, China, Japan and South Korea’s were supplied by the Islamic Republic. For the countries heavily dependent on Iranian crude, the US has issued sanctions waivers in exchange for reducing the amount of crude they buy from Tehran. The waivers allow governments to maintain imports, while pressuring them to find alternative sources of fuel.

Waiver renewals

In June, Washington renewed six-month waivers for China, India, South Korea, Malaysia, Singapore, South Africa, Sri Lanka, Turkey and Taiwan. Earlier in the year, it handed new waivers to Japan and 10 EU countries.

India and South Korea have cut imports of Iranian oil and replaced supplies with other crudes in line with Western sanctions against Tehran. Indian imports dropped 41.8 per cent in the first five months of 2013, compared with the same period last year, according to data compiled by newswire Reuters, with replacement supplies sourced from Venezuela, Iraq and Oman.

South Korean imports fell 8.3 per cent in May year-on-year, according to the Korea Customs Service. Seoul also cut its imports of Iranian crude by more than a third last year to an average of 153,400 b/d.

While sanctions imposed in 2012 appear to have significantly curtailed Iran’s ability to export crude, both the EU and US have introduced fresh measures this year intended to further damage the Islamic Republic’s ability to profit from its vast oil and gas resources.

New EU sanctions from January have specifically targeted shipbuilders and repairers dealing with Iran. The measures prohibit the supply of “key naval equipment or technology” for use in shipbuilding, maintenance or refit, including technology used in the construction of oil tankers, to any Iranian person or for use in Iran.

The 2013 sanctions prohibit: ship classification services; supervision or participation in the design, construction or repair of ships; inspection, testing and certification of marine equipment; vessels flying the flag of Iran; and ships being chartered or operated by an Iranian person.

Additional measures

A new ban has also been slapped on the export of some metals and materials, including graphite and raw to semi-finished aluminium and steel. It also hinders the import of Iranian natural gas by the EU, or any brokering or insurance services covering these transactions.

The sanctions cover dealings with any company that is controlled by an Iranian resident, which includes many firms across the Gulf.

“There are a lot of companies out here in the Gulf that are controlled by Iranians or might be front companies for Iranian businesses, or might just be long-standing family companies whose owners happen to be patriarchs in Iran,” says Patrick Murphy, legal director at UK law firm Clyde & Co in Dubai. “They are now all grouped together and regarded as Iranian persons for the purposes of EU sanctions.”

Added to this, in January, the US introduced the 2012 Iran Freedom & Counter-Proliferation Act (IFCA), which targets the energy, shipping and shipbuilding sectors, along with metals, minerals and technology imports.

“Asian and Middle Eastern businesses are now liable to be penalised by the US for engaging in conduct that they were previously carrying out legitimately,” says Murphy. “I am aware of businesses in the region recalibrating their activities with Iran after reassessing them in light of IFCA.”

The IFCA states that the US president must block all property and transactions of anyone designated to be involved in Iran’s energy, shipping or shipbuilding sector, operating Iranian ports. It also targets anyone “knowingly providing significant… support… goods or services” to designated people or companies. 

As of 3 July 2013, designated companies include National Iranian Oil Company (NIOC), Islamic Republic of Iran Shipping Lines (IRISL), National Iranian Tanker Company (NITC), South Shipping Lines Iran Company and Tidewater Middle East Company.

“The IFCA makes a whole swathe of people in Asia and the [Middle East] region potentially liable to be sanctioned for what they were doing perfectly legitimately [under existing US and EU sanctions],” says Murphy.

Potential penalties for breaching the IFCA include denial of US financial services and export licences, denial of bidding for US government contracts, and restrictions on travel.

The IFCA also targets imports of precious metals into Iran, which should impact Tehran’s ability to use gold to barter for goods.

All sanctions have a final wrap-up provision saying the US president can, in theory, get rid of the sanctions overnight if a compromise is reached between Washington and Tehran. But with other examples of US sanctions, such as on Libya and Burma, it is more likely to be a staged roll-back to encourage the government to stick to the terms of the agreement.

Although the US and EU sanctions have become more comprehensive over the past 18 months, there have been few examples of firms in the Middle East falling foul of the restrictions.

In January 2012, Fal Oil Company, an independent energy trader based in the UAE, was sanctioned by the US after it was judged the firm sold more than $70m of refined oil products to Iran via multiple shipments in late-2010. Under the US sanctions at the time, companies were not allowed to close more than $5m of transactions with Iran over a 12-month period.

Fal Oil was barred from receiving US export licences, US Export-Import Bank financing, and loans above $10m from US financial institutions. The same penalties were handed from Washington to China’s Zhuhai Zhenrong Company and Singapore-based Kuo Oil during 2010 and early 2011.

Steering clear

Although few companies have been given official penalties, energy groups in the region have had to change strategies to avoid breaking sanctions. Dubai’s state-owned Emirates National Oil Company (Enoc) announced in January it had started importing condensate from Qatar to replace Iranian supplies and was close to finalising deals with other producers. Enoc was the largest buyer of Iranian condensate in 2012.

Jamie Ingram, country analyst for Iran at US-based consultancy IHS, says the IFCA is targeting the Iranian economy as a whole rather than the oil sector specifically.

“The latest raft of sanctions broadens the range of companies affected by sanctions and Iran will certainly feel the impact,” he says.

“In terms of exports and projects, Iran is already facing serious challenges. China, India and other major customers of Iranian crude are likely to continue to purchase Iranian hydrocarbons. However, [the IFCA] will make it more difficult for Iran to actually access the funds received.”  

Key fact

Iran lost more than $40bn in export revenues in 2012, amounting to about $3.4bn a month

Source: IEA

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