Iran oil sanctions to shrink foreign buyers

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Iran faces new hurdles to getting paid for its oil as the US tightens financial sanctions to deter buyers from the world’s third-largest crude exporter. The US approved additional curbs on Iran’s banking system and oil industry on Nov 21, hoping to thwart the country’s nuclear program, and the European Union may follow. Current sanctions have led Indian importers to route payments for Iranian crude through a Turkish bank. These refiners, concerned Turkey may stop cooperating amid the latest US rules, are asking banks in Russia to arrange alternatives, said three people with direct knowledge of the situation.
“The idea of the sanctions is to shrink the circle of buyers and so increase their ability to extract discounts from Iran,” said Robin Mills, an analyst at Dubai-based Manaar Energy Consulting, who worked for a decade at Royal Dutch Shell Plc (RDSA) in the Middle East. The US is stepping up pressure after a Nov 8 report from the United Nations’ International Atomic Energy Agency concluded that Iran was working on a nuclear weapons program. At stake is crude supply from the OPEC nation, whose exports last year were exceeded only by those of Saudi Arabia and Russia. Oil is Iran’s main source of income, earning it $56 billion in the first seven months of 2011, according to US Energy Department estimates. The country pumped 3.6 million barrels a day last month, a Bloomberg survey showed, and exported an average 2.58 million barrels a day in 2010, according to Organization of Petroleum Exporting Countries statistics.

European Pressure
“On Iran, we need to step up pressure,” EU President Herman Van Rompuy told ambassadors today in Brussels. “The EU is preparing new restrictive measures,” he said. France has proposed that the EU ban Iranian oil, French Budget Minister Valerie Pecresse said Nov 23. Maja Kocijancic, an EU spokeswoman, said the same day that European foreign ministers will discuss the topic at a meeting scheduled for tomorrow. Iran, which is already subject to some UN and EU sanctions, denies it is developing nuclear weapons. Iranian protesters broke into and vandalized the British Embassy’s compound in Tehran yesterday. U.K. Prime Minister David Cameron, in a statement, called the attack “outrageous and indefensible” and said all staff had been accounted for. Britain today ordered the closure of Iran’s embassy in London.

Financial Impact
“The latest measures will make it even harder for people to finance trade with Iran,” said Nick Grandage, a London-based partner at law firm Norton Rose LLP, who specializes in trade finance. Sanctions have stifled trading of Iran’s oil in London, Europe’s financial hub, and may have forced importers to pay for crude in non-dollar currencies, he said in a Nov 22 interview. Should Europe adopt more formal restrictions on Iranian crude, the Persian Gulf nation would likely be forced to offer oil more cheaply to refiners in Asia, its biggest market, Olivier Jakob, managing director at Oberwil, Switzerland-based Petromatrix GmbH, said in a Nov 28 note to investors. By targeting financial transactions and stopping short of sanctioning international trade in Iranian oil, the US aims to pressure Iran without risking a surge in crude prices at a time of global economic fragility, said Mills of Manaar Energy.

Russia Option
Indian refiners, which got 11 per cent of their imported oil from Iran in 2010, are trying to arrange a conduit for payments via Russia, said the three people familiar with the matter, declining to be identified because the talks are private. Vladimir Lavrov, a spokesman for Russia’s central bank, declined to comment this week about the Indian effort. The US sanctions against Iran are “unacceptable and violate international law,” Russia’s Foreign Ministry said Nov 22. Turkey, which gets half its oil imports from Iran, also criticized the US action.
Turkiye Halk Bankasi AS (HALKB), the Ankara-based lender Indian refiners have used to transfer cash to Iran, declined to comment on its transactions other than to say Halk complies with UN rules, according to a bank official, who cited company policy for declining to be identified. Iran’s past flexibility over payment terms makes it an attractive supplier. The country gives Indian refiners 90 days to pay their bills, compared with 30 days from Saudi Arabia, according to the people with knowledge of those purchases. When Indian importers were unable to pay on time because of sanctions, Iran kept supplying them even as they amassed $5 billion in unpaid invoices.

Saudi Crude
Saudi Arabia will increase oil shipments to Indian refiners next year, four people with knowledge of the plans said Nov 15. India’s Petroleum Ministry Media Director R. C. Joshi didn’t answer two calls for comment to his mobile phone yesterday. Refiners in Europe, collectively the second-largest market for Iranian oil after China, may also face difficulties from tighter constraints on transactions with Iran. “Europe has been importing crude oil from Iran, and it certainly hasn’t lowered amounts recently,” Jakob of Petromatrix said by telephone Nov 22. “Greece is importing most of its crude oil from Iran.” A potential EU ban on Iran’s oil would have a smaller financial impact on European companies than the recent Libyan crisis because state-run entities control oil output, Fitch Ratings said in a note today. Still, European companies “would feel the impact of a ban through their refining operations as they would have to replace Iranian crude,” it said.

Greek Refiners
Motor Oil Hellas SA Chief Executive Officer Petros Tzannetakis said on a conference call yesterday that a potential ban would not affect it because the Greek refiner sources crude from other nations such as Saudi Arabia and Russia. Hellenic Petroleum SA (ELPE), Greece’s biggest refiner, declined to comment on Nov 25 on its exposure to Iran. Oil prices rose this year as political turmoil in the Middle East stoked concern about the reliability of supply. The price of European benchmark Brent crude rose to more than $125 barrels a day in April as exports from Libya dwindled because of the rebellion in that country. Brent has risen 18 per cent this year and traded at $111.63 a barrel at 1:59 p.m. in London. Iran’s three biggest national customers — China, Japan and India — together buy more than half its exported oil, according to US Energy Department data. This concentration of customers and Iran’s reliance on oil sales for income make the country vulnerable to disruptions, Jakob said.

China Wins
An unintended consequence is that China, a critic of the latest US sanctions, may benefit from any price discounts, said Mills, the Dubai-based consultant. “It will favor non-US allies who will be able to get oil somewhat more cheaply.” China accounted for 22 per cent of Iran’s export volumes in the first half of this year and increased its purchases by 27 per cent over the same period of 2010, US data show. The EU, Japan and India bought 18 per cent, 14 per cent and 13 per cent of Iran’s oil, respectively.