Iran's oil exports suffer as US sanctions bite

By Margaret McQuaile

December 6, 2012 - Iran is considering basing its budget for the year beginning in March 2013 on a crude export volume of just 1 million b/d.

This may turn out to be a prudent move in view of the likelihood that the market for its oil will shrink further next year as top Asian consuming countries reduce further their crude imports from the Islamic Republic in exchange for continued access to the US financial system.

The United States on June 28 this year brought into force financial sanctions barring the banks of countries continuing to deal with Iran's central bank from the US financial system.

But by the time the measures came into effect, Washington had given exemptions to all of Iran's top oil customers outside the European Union, which had banned the import of Iranian oil from July 1, in exchange for what it called "significant" cuts in their crude purchases from Tehran.

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The exemptions, granted for 180 days, run out on December 7-8 for seven of those countries -- India, Malaysia, South Africa, South Korea, Sri Lanka, Turkey and Taiwan.

Japan, the first Asian country to win an exemption, in September won an extension for a further 180 days. China's exemption expires in late December. The combined EU and US sanctions have had a devastating effect not only on Iran's oil exports but also on its economy, which has seen the value of the riyal nosedive against the US dollar and other leading international currencies.

As well as banning the import of Iranian oil and more recently natural gas, the EU has also banned the provision of crucial EU-linked insurance cover for any ship carrying Iranian oil, regardless of destination, a move which had a dramatic initial impact in Asia and continues to overshadow the region's oil trade with Tehran.

Japan, for example, did not import a single barrel of Iranian crude in July when, according to the International Energy, Iran found homes for just 930,000 b/d of its crude.

Before the US and EU sanctions came into effect, Iran had been exporting around 2.2 million b/d of crude.

Of this volume, some 600,000 b/d had been moving to Europe and the remaining 1.6 million b/d to Asia, including Turkey.

Platts estimates that imports of Iranian crude by China, India, Japan, South Korea, Taiwan and Turkey fell to around 1.27 million b/d in the first months of this year from around 1.61 million b/d in the same period of 2011, a drop of some 340,000 b/d year on year.

The US has not defined -- publicly, at least -- baselines for the cuts. This has resulted in some speculation about the time periods against which volume comparisons should be made. It also gives Washington a great deal of flexibility in deciding whether a country should be granted a further exemption from the sanctions.

What US officials have made clear, though, is that a country seeking a further 180-day exemption from financial sanctions must reduce further its purchases of Iranian oil.

US objective

Washington's objective is to obtain a series of progressive cuts in Iran's crude exports with the eventual goal of halting exports altogether in a bid to persuade Tehran to cooperate with the international community on its controversial nuclear program.

The West suspects the program is aimed at building atomic weapons but Iran insists it is aimed solely at generating electricity.

The importers whose exemptions from the US sanctions expire at the end of this week have seemingly complied with Washington's terms.

Turkey's deputy Prime Minister, Ali Babacan, said on December 2 that the country had already cut its imports of Iranian oil by 20% and planned a further 20% reduction in order to roll over its exemption. At times before the sanctions, Turkey had relied on Iran for more than half of its crude imports.

"According to my understanding, meetings have been held and a further 20% reduction will be made. Now Tupras will meet with [the US authorities] and will try to buy crude from other countries," Babacan said, quoted by Turkish daily Yeni Safak. Tupras is Turkey's sole refiner and crude importer.

Turkish crude imports from Iran in October, the latest month for which official figures are available, averaged just 75,280 b/d, 32% lower than the 110,300 b/d imported in September and 66% down from the 221,550 b/d imported in August. The percentage of Turkish crude imports coming from Iran in October fell to 18% from 25.8% in September and 44.7% in August.

South Korean optimism

South Korea is also optimistic about extending its exemption for a further six months, according to officials at the Ministry of Knowledge Economy, which is responsible for the energy, industry and commerce sectors, and the Foreign Ministry.

"It is very positive for South Korea to obtain an extension of the waiver because we have reduced Iranian crude oil imports as requested by the US," Chung Jong-Young, chief of the MKE's American department, said. South Korea will maintain a reduced level of imports from Iran in line with US sanctions on Iran, he said.

"There would be no problem in extending the waiver as South Korea has significantly reduced oil imports from Iran," said Lee Byung-Doo, chief of the North American Department of the Foreign Ministry.

Neither, however, would discuss the issue in any detail, saying the extension was up to Washington.

South Korea's crude imports from Iran over the first 10 months of this year fell by 38.6% year on year to 45.55 million barrels from 74.23 million barrels over the January-October period of 2011.

Chung of the MKE, meanwhile, warned that the US Senate's approval of new sanctions on Iran's energy and shipping sectors could be problematic for South Korea.

"It could deliver a blow to South Korea's industry, but the new package keeps in place the exemptions for countries that have made significant cuts of Iranian crude purchases," Chung said.

Taiwan is also expecting to have its exemption renewed -- not surprising given that the country has imported no Iranian barrels since March. "We have confidence in getting a new waiver," an official with the Bureau of Energy at the Ministry of Economic Affairs said Wednesday.

This official had previously told Platts that refiners CPC Taiwan and Formosa Petrochemical were likely to resume Iranian crude imports before the end of this year, suggesting at the time that Taiwan's total import volume from Iran this year could be in excess of 8 million barrels but that this would still be lower than normal.

The latest official trade data show that between January and September this year Taiwan imported just 4.92 million barrels -- all in the first quarter -- or an average 17,956 b/d over the entire nine-month period. This is almost half the 9.079 million barrels, or 33,256 b/d, imported over the same nine months of 2011. Over the full calendar year 2011, Taipei's total volume of crude from Iran last year totaled 11.04 million barrels, significantly down from the 21.4 million barrels of 2010. CPC accounted for 7.58 million barrels of the 2011 volume.

Indian Imports

India's imports from Iran have fluctuated from month to month, partly because of the shipping cover hurdle, although the Iranian state tanker company NITC is now regularly delivering cargoes to Indian refiners.

Contractually, Indian refiners are scheduled to import just 10.5 million mt of Iranian crude oil in the current fiscal year which began in April and ends in March 2013.

That is 40% less than the 17.5 million mt imported from Iran in the year to end-March 2012.

It's also less than the 15.5 million mt of Iranian oil that junior oil minister R.P.N. Singh said in May would be imported during the current fiscal year.

India is currently receiving average volumes of around 250,000-255,000 b/d of Iranian crude, mainly on NITC vessels. In the early part of the year, volumes from Iran had been around the 300,000 b/d mark.

Sri Lanka, meanwhile, may not have been Iran's biggest crude customer but until the sanctions had relied on the Islamic Republic for more than 90% of its crude supply.

Deputy oil minister T.M. Sirisoma said on Wednesday that Sri Lanka expected to have its exemption renewed, having cut its term volumes from Iran to 10 cargoes of 135,000 mt each in 2012 from 13 the previous year.

In fact, Sirisoma added, the country has even had difficulty importing all of the lower 2012 volumes because of payment issues and has been looking at alternative supply from Qatar, Oman and Saudi Arabia.

South Africa, which had relied on Iranian crude for 25% of its requirements, suspended oil imports in June, and is most likely to qualify for a renewal, industry experts said Thursday.

Monthly statistics from the South African Revenue show that the country now receives the bulk of its oil from Saudi Arabia, with Angola and Nigeria contributing heavily.

Petrochemicals and energy giant Sasol halted oil imports from Iran in February and is sourcing alternative supplies from Saudi Arabia and the spot market, a company spokesman said Wednesday. The group had relied on Iranian oil imports for 20% of its crude requirements, or 12,000 b/d, at its Natref refinery. Engen, which operates the country's second biggest refinery, halted imports of Iranian crude several months ago but has declined to say how it is diversifying its crude oil sourcing. It said this week it was monitoring developments on its application for a further exemption from the US sanctions.

A unit of Malaysian state-owned oil company Petronas, Engen had been buying around 80% of supply for its 135,000 b/d refinery in Durban from Iran. Chinese exemption

China has not publicly sought an exemption from the US sanctions, repeatedly stressing its opposition to unilateral measures, but was declared by Washington just before the sanctions came into effect to have significantly reduced its crude imports from Iran.

Despite its insistence that it does not recognize sanctions outside those imposed by the United Nations, China has reduced its crude imports from the Islamic Republic.

In 2011, China's monthly crude imports exceeded 2 million mt except in February and August when they slipped to 1.92 million mt and 1.96 million mt respectively. In July 2011, China imported 2.75 million mt.

This year, volumes have fluctuated month on month but have been above the 2 million mt level only three times -- in January (2.08 million mt), May (2.22 million mt) and June (2.6 million mt).

Since July, when the sanctions came into full force, volumes have held steadily below the 2 million mt level.

Over the July-October period this year, China imported 7.02 million mt, or an average of around 418,346 b/d, compared with 9.3 million mt or 554,110 b/d during the same four months of 2011.

Over the first six months of this year, China imported a total 8.12 million mt, or 326,913 b/d, of Iranian crude compared with 10.81 million mt, or 437,944 b/d, in the same period of 2012, a drop of more than 111,000 b/d. Latest trade data from China's General Administration of Customs show that over the first 10 months of 2012, Chinese imports of Iranian crude fell to 17.73 million mt, or 426,101 b/d, from 22.77 million mt, or 549,115 b/d, in the same 10 months of last year.

On the basis of these consistently lower comparisons alone, it's highly likely that the State Department will extend China's exemption when it comes up for renewal later this month.

Broader US sanctions

Countries which have their exemptions renewed will be protected from an amendment to the current US legislation that would broaden the sanctions to institute more sweeping bans on dealings with Iran's ports and shipbuilders and would prevent Iran from circumventing sanctions on its central bank by receiving payments for energy sales in precious metals instead of cash.

An amendment to the bill that brought in the current financial sanctions, passed by the Senate on November 30, would designate Iran's energy, ports, shipping and ship-building sectors as "entities of proliferation concern" and ban all dealings with them. The final bill must still go to a conference committee to be reconciled with an earlier version passed by the House of Representatives.

Several groups that have been pushing for more stringent sanctions have said that previous attempts to ban dealings with specific companies operating Iran's ports have been thwarted by Iran simply renaming those companies. The new sanctions would be broader and ban all dealings with the sectors rather than specific companies operating within those sectors.

Under this provision, the US would "block the property" of any third party that engages in transactions with any of the sanctioned sectors.

The amendment would also impose sanctions on persons selling commodities that are essential to Iran's shipbuilding and nuclear sectors, such as graphite, aluminum, steel, metallurgical coal and software for integrating industrial processes.

Next article: New EU sanctions blacklist Iran's NIOC, NITC, NIGC, other firms