Iran's oil exports: sanctions tighten

Peter Kiernan
Economist Intelligence Unit

Since late June, the US and EU have implemented an array of sanctions on Iran's oil export sector, aimed at pressuring the Islamic Republic of Iran over its nuclear program. These measures represent the most far-reaching action taken against Iran's energy sector since the Islamic Revolution in 1979, reflecting the dire relations between Iran and Western powers.

Unilateral US sanctions against Iran have been in place since the 1990s. Presidential executive orders ban the import of Iranian oil to the US and prohibit US investment in Iran's energy sector. US legislation identifies penalties for non-US energy firms investing in Iranian oil and gas. Up until 2012, only the US had targeted Iran's energy sector with sanctions, although European energy firms over the years have left Iran under pressure from their own governments.

This year there have been two key developments in sanctions against Iranian energy: the involvement of the EU and the targeting of oil exports. In March Iranian banks blacklisted by the EU were precluded from the Brussels-based SWIFT electronic payments system, following up on a decision by the EU in January to ban European refiners from buying Iranian oil. This measure that did not take effect until July 1 to allow refiners time to secure alternative supplies. As of July 1, the EU has also banned European insurance companies from offering protection and indemnity (P&I) ship insurance for tankers carrying Iranian oil. This action is far-reaching as London-based insurers reportedly cover more than 90% of the worldwide tanker market.

These measures were introduced as the US tightened financial sanctions directed at the Iranian oil trade. As of June 28, financial institutions making transactions with the Iranian Central Bank, including payment for Iranian oil, will face US penalties. On July 12, the US Treasury identified the National Iranian Tanker Company (NITC), its tanker fleet and front companies, as Government of Iran entities, making them covered by US sanctions.

Clearly Iran, which depends on oil for 80% of its export revenue, is under unprecedented economic pressure. It is increasingly difficult for Iran to sell its oil using the international financial system and to be paid for it in hard currencies. India and China are reportedly paying for Iranian oil in their own currencies, and in India's case exchanging goods with Iran as payment in kind.

In 2012, Iran's oil production and exports will be significantly less than in 2011. The Economist Intelligence Unit (EIU) estimates that Iran produced around 3.58 million barrels per day (b/d) and exported 2.33 million b/d last year. Production is estimated to have dropped to 3.2 million b/d in June 2012, and the EIU estimates that exports will fall by about 1 million b/d this year, to just over 1.3 million b/d.

EU states, which accounted for about one-quarter of Iran's oil exports last year, or between 550,000-600,000 b/d, already began phasing out Iranian oil buys before the July 1 ban took effect, so Iran has been suffering export volume losses since the second quarter of 2012. Asian buyers (China, India, Japan, and South Korea), Turkey, and South Africa also received a six-month exemption from US financial sanctions, which took effect in June, in return for agreeing to buy less Iranian oil.

About 75% of Iran's oil exports went to countries other than EU states, but the EU's insurance ban has had a significant impact on Iran's ability to sell oil to those buyers. South Korea and Japan, for example, announced that they would buy no Iranian oil in July at all. Japan's parliament has passed a bill to provide sovereign guarantees for insurance cover up to US$7.6 billion for tankers shipping Iranian oil to Japan, but other buyers of Iranian oil, apart from China, may not have the financial resources to take these measures, thus making the purchase of Iranian oil increasingly problematic. Throughout the year these cumulative losses will mount. Iran's oil export revenue will be curtailed, but from a high base. According to the US Energy Information Administration, Iran's oil export revenue reached $95 billion (in nominal terms) in 2011.

The purchase of Iranian oil does not violate any international law, but the trade in Iranian crude oil is becoming increasingly complex because of combined US and EU sanctions. Iran will undoubtedly take a hit as the export level of the world's third-largest oil exporter will be nearly halved. But whether this will change Iran's tune on its nuclear program, the stated purpose of tighter oil sanctions, remains to be seen.

About the author

Peter Kiernan is lead energy analyst at the Economist Intelligence Unit. He has an MA degree in international political economy and development from Fordham University in New York and has worked in energy journalism and in consulting in Washington, DC and in London. He has experience in the analysis of the politics and oil and gas, Middle East political economy, and in analyzing the fundamentals of energy markets.