Iranian oil industry under siege as international sanctions grow

Mansour Kashfi
Kashex International Petroleum Consulting
Dallas

International sanctions have ravaged the Iranian oil industry, the production of which once exceeded 6 million b/d, more than twice the current level. Rostam Ghasemi, the Islamic regime's oil minister and a veteran not of the industry but of the Islamic Revolutionary Guard Corps, recently said the National Iranian Oil Co. plans to raise oil production to 5.2 million b/d within the next 3 years. Such an increase would require spending of at least $100 billion/year—a level impossible to attain without foreign investment that won't materialize as long as Iran remains under international suspicion for developing nuclear weapons.

With the Iranian oil industry deprived of modern technology and outside investment, the country's mature oil fields are in advanced stages of decline. The rejuvenation they need will remain unlikely to occur while sanctions are in place, a condition likely to persist as long as the Islamic regime insists its nuclear program is peaceful without allowing outsiders to verify the claim.

Sanctions tightening

Understandably doubtful about the Islamic regime's insistence that its nuclear program is peaceful, western powers continue to tighten economic sanctions against the oil and banking industries of Iran. In addition, four sets of United Nations sanctions are gradually imposing a huge economic burden, which has contributed to an unprecedented unemployment rate and painfully high consumer prices in Iran.

The UN's International Atomic Energy Agency (IAEA) reported in its quarterly report in September 2012 that the Islamic regime doubled its capacity to produce highly enriched uranium in the underground, once-secret Fordow facility and did not permit inspectors to visit a military site, Parchin, to verify that it was not used for atomic weapons tests.

The US has banned American firms from investing in the Iranian petroleum industry and from trading with the Islamic regime since 1995. The European Union has been much slower to target Iranian energy. It imposed an embargo on Iranian crude in July 2012. It also prohibited European companies from providing storage or transport vessels for Iranian oil and petrochemical products, effectively preventing European insurers from covering oil tankers transporting Iranian oil.

Another round of EU sanctions against the Islamic regime, approved last October, restricted industry and the Iranian central bank. Among the more than 30 firms and institutions listed in the EU's official journal as targets for asset freezes in Europe were NIOC and the National Iranian Tanker Co. (NITC), as well as NIOC subsidiaries including National Iranian Gas Co. and National Iranian Oil Refining and Distribution.

The October EU sanctions also included a ban on import by EU members of Iranian natural gas, although most current customers of Iranian gas do not belong to the EU. About 90% of Iranian gas exports flow to Turkey and 6% to Armenia. Recently, an unspecified amount of Iranian gas that had been sold to Azerbaijan began to be delivered to Iraq practically free of charge under an agreement in which the Islamic regime pledged to assist Shiite regions of Iraq.

Small amounts of Iranian gas still reach EU members Bulgaria and Greece via Turkey by way of blending with Azerbaijani gas. Because Turkey is an important transit country in European plans to lower dependence on Russian natural gas, however, the EU is unlikely to push the country hard to halt its purchases of Iranian gas and deliveries to southern Europe. Turkey relies heavily on Iranian oil and gas and, in return, exported $8.5 billion worth of goods and gold to Iran in 2012. Under western pressure, however, it is considering importing LNG from Qatar.

A byproduct of the EU gas sanctions is a sharp reduction in Iranian exports of LPG (OGJ Online, Dec. 14, 2012).

One of the most crippling actions against Iran has been a ban by the Society for Worldwide Interbank Financial Transfers (SWIFT) on Iranian transactions. Furthermore, the US Congress has produced legislation imposing the severest penalties on Iran, targeting its energy sector and financial institutions.

Iran's crude exports plunged in 2012 in response to the EU embargo and US restrictions on business by American financial institutions with Iran's central bank, the Islamic republic's primary mechanism for processing oil sales. Iranian oil exports dropped to about 850,000 b/d last September from more than 1.5 million b/d at the beginning of 2012. The lost revenue amounted to about $5 billion/month.

Third round

Aiming for even tougher sanctions last December, the US Senate approved a third round of sanctions targeting loopholes. President Barack Obama initially warned that the new sanctions, proposed as an amendment to the National Defense Authorization Act, were unnecessary and counterproductive but signed them into law in January. The new sanctions prohibit any energy or shipping trade that might benefit the Islamic regime's nuclear program. Financial institutions in countries purchasing oil and petroleum products from Iran could be cut off from the US banking system.

The new law essentially blocks the Islamic regime's access to earnings from its shrinking oil trade. The regime thus must rely on barter trades and local currencies, largely deprived of the foreign exchange it needs for its nuclear program and its support of international terrorism.

David Cohen, undersecretary for terrorism and financial intelligence at the US Treasury Department, explained in early November 2012 to the Foundation for Defense of Democracies (FDD): "Iran's oil revenues will largely be shackled within a given country and only useable to purchase goods from that country, which will lock up a substantial amount of Tehran's funds." Further, the Senate Banking Committee recently announced that unless the Islamic regime ceases suppression of the Iranian people and ends support of terrorist activities, it will face deeper international isolation and greater economic pressure. In the last days of December 2012, 73 senators sent a letter to Obama stating, "There should be no diminution of pressure on the Iranians until the totality of their nuclear problem has been addressed."

Inflation and unemployment

The plunge in oil exports has caused the Iranian rial to lose more than 60% of its value against the US dollar, aggravating inflation and unemployment. A majority of Iranian citizens now cannot afford basic necessities.

Iranian refineries in 2012 produced only about 58 million l./day of gasoline, while consumption exceeds 65 million l./day. Consequently, the Islamic regime must rely on low-quality gasoline produced by converted petrochemical plants, which is highly polluting.

Although the NIOC denies cutting oil prices, Iranian crude usually sells at a discount of several dollars per barrel relative to Brent crude. Refineries in China, South Korea, and India have negotiated high discounts for Iranian crude compared with Middle Eastern grades, pushing the price to its lowest level in more than 6 years relative to other crudes from the region. The price decline indicates NIOC is having trouble selling its oil.

Iranian representatives recently approached authorities in Egypt offering to sell at a discount 2 million bbl of oil from storage at the port of Sidi Kerir. Egypt refused the offer. It stood to lose US aid and be banned from using the US financial system if it bought the oil. Recently, the Islamic regime made another generous offer to deliver oil and petroleum products to Jordan, apparently to help quell unrest over high energy prices. Jordan rejected the offer.

Even before the oil embargo began, the NITC changed the names and reflagged most of its tankers. Twenty-two NITC ships were registered in the small South Pacific island of Tuvalu, and 13 were registered in Tanzania. These were the ideal places to rebrand or blend oil as non-Iranian crude. Under pressure from the US, however, Tuvalu and Tanzania agreed in August 2012 to deregister the Iranian tankers. Fifty-eight Iranian vessels were blacklisted by the US last July for assisting in Iran's oil trade. Rental vessels, if providing storage services for Iranian oil, would breach European sanction laws. The NIOC is still struggling to find ship owners willing to offer vessels for storage and ship-to-ship transfer.

The NIOC has been reluctant to cut oil production, fearing well damage, but needs to store the oil it cannot sell. Unsold oil is being stored in over two thirds of the Iranian tankers, which have been more or less sailing in circles around the Persian Gulf as the Islamic regime is willing to sell its crude at bargain-basement prices. International oil experts believe Iran is warehousing as much as 14 million bbl of crude onshore and over 50 million bbl at sea.

The regime's warnings

Qasemi, the oil minister, announced in October 2012 at the World Energy Forum conference in Dubai that the Islamic regime would halt its oil exports to regular customers if the West's sanctions on Iran were strengthened. To dismiss the negative impact of the West's unilateral sanctions on Iran's energy sector, Qasemi said, "The world is big, and we have our own buyers." Officials in Tehran threatened to close the Strait of Hormuz, reminding the oil market that in 2012, an average of 17 million b/d of crude and a large amount of petroleum products traveled through the strait.

Warnings that embargos on Iranian oil would raise oil prices have proven to be unfounded. Crude prices fell at the end of 2012. As Iranian exports fell over the course of 2012, buyers found other sellers. Iranian officials apparently realize that the world can survive reduced supplies of their country's oil. The oil minister and President Mahmoud Ahmadinejad, in separate addresses to the parliament in January, departed from the usual denials and admitted that the country's oil exports had dropped by 40% in the preceding 9 months and its oil income by 45% because of sanctions. Increased production from elsewhere around the Persian Gulf and North Africa has replaced the lost supply. When sanctions end, Iran might have problems reclaiming the business of its former customers.

The Iranian oil industry is under siege, and its production of oil—the biggest source of revenue by far in a country of 75 million people—is in steep decline. With the Islamic regime still advancing its nuclear program and evading international scrutiny, sanctions cannot be said to have achieved their objectives. But they have certainly taken a toll.

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