Iran looks to Asia for sanction relief
European firms will be wary of doing business with Iran under US sanctions, but China and India are among states which won’t back off
The unilateral US decision in May to impose stringent new sanctions on Iran and withdraw from the international Joint Comprehensive Plan of Action (JCPOA) has prompted widespread discussion that more than 1m barrels a day of oil output will be lost. But oil industry and shipping officials suggest that the near-term shortfall, if any, may be less than many fear; although the longer-term effects on Iran's oil and gas sector are likely to be very negative.
The JCPOA was agreed in 2015, and the following year Iranian oil production reached its highest level since just before the 1979 Iranian Revolution, at 4.6m b/d including condensates and natural gas liquids, according to the BP Statistical Review of World Energy. That represented a 27% increase from a low of 3.6m b/d in 2013 as US-led, but internationally supported, sanctions imposed on Iran in 2012 to curb its nuclear programme bit into its oil exports. By end-2013, most of Iran's major customers had significantly reduced their imports of Iranian oil. Crude and condensate output fell 17%, or about 740,00 b/d, in 2013 from its 2011 pre-sanctions level, according to the BP report.
Oil industry officials believe the new round of US sanctions, fully in place by November, may not have as drastic a short-term effect on Iranian oil production as the previous round. They predict that oil output could drop by anywhere from 200,000 b/d to 1m b/d. The US garnered broad international support for the earlier sanctions round because it acted in concert with the four other permanent UN Security Council members, plus Germany and the EU. This time, none back the Trump administration because they feel Iran hasn't violated the JCPOA.
Some big buyers of Iranian oil, such as India, say they won't be reducing their Iranian oil imports. "India follows only UN sanctions, and not unilateral sanctions by any country," Reuters reported foreign minister Sushma Swaraj as saying on 28 May. India imports about 470,000 b/d of Iranian crude and condensates, or about 19% of its oil exports. China, Vietnam, and other countries may take similar views.
EU participation in the sanctions would be key to any significant reduction in Iranian oil sales. European Commission statistics show EU imports of Iranian oil fell to 9,000 b/d in 2014 from 590,000 b/d in 2011—Iran's peak pre-sanctions production year. Europe's disciplined application of the first round of sanctions was instrumental to their success. Industry officials believe similar compliance will be necessary for the Trump administration sanctions to be effective. Such compliance may reluctantly be forthcoming from the EU, as many companies have interests in the US and won't risk being affected by secondary sanctions or hobbled by credit limitations placed by banks reluctant to risk their dollar-based transactions. By early June, France's Total, Italy's Eni and Saras, Spain's Repsol, and Greece's Hellenic Petroleum had all indicated that they were phasing out purchases of Iranian oil.
Shipping analysts aren't certain how the new US sanctions will affect tanker markets. "On the one hand, the more Iranian exports decline, the bigger the reduction in crude tanker demand. However, other producers are likely to compensate for any lost Iranian barrels," says tanker broker EA Gibson Shipbrokers. Gibson points out that the National Iranian Tanker Company owns 38 very large crude carriers, suggesting Iran is unlikely to lack oil transport; although ships may spend more time idling or in storage functions, which would benefit other tanker owners.
But Iranian imports of all goods may suffer from international shipping companies' decisions to avoid Iran. Leading shipping firm AP-Moeller-Maersk has indicated it's likely to stop serving Iranian ports for the duration of the US sanctions, as doing so may cause it to fall afoul of US secondary sanctions and damage its considerable interests in the US. Other leading shipping companies are likely to follow suit.
IOCs stayed away
International oil companies won't be the most likely sufferers from the new Iranian sanctions regime, as leading IOCs have mostly steered clear of Iran. An April study by the Oxford Institute for Energy Studies suggests that most Iranian upstream projects involving foreign investors are at the MOU stage, suggesting their sponsors can easily suspend development.
The main exception is Total, which last year signed a contract with the National Iranian Oil Company to develop Phase 11 of the enormous South Pars gasfield. Total is seeking a waiver from the US government which would allow it stick with the South Pars project. Iranian Oil Minister Bijan Zanganeh has said that if a waiver isn't forthcoming by mid-July, Total's interest will be transferred to the China National Petroleum Corporation (CNPC). Other major oil companies have steered clear of Iranian projects. With many companies rebalancing their portfolios to address the longer-term risk of stranded assets and political risk, securing their return may be difficult, regardless of when sanctions are lifted.
In the oil service sector, leading international market participants have stayed away from Iran since the previous sanctions were lifted in 2015, and the pattern will continue. "Who'll go to Iran now, given the American sanctions?" said one industry official. He added that, while the service arms of leading Chinese companies such as CNPC may increase their activity in Iran, the lack of leading Western concerns and IOCs will slow the development of major projects like South Pars 11. Chinese companies "just don't have the processes" internally to develop a project requiring the delicate balance of commitments that South Pars does, he said.
Oil industry officials note, however, that the Chinese oil sector has considerable experience in enhanced oil recovery (EOR), so CNPC and its counterparts Sinochem and Cnooc may well be able to contribute to maintaining production in older Iranian oilfields.
Power sector hit
Away from the upstream, Iran's power sector may suffer from the new sanctions. Germany's Siemens in 2016 agreed to deliver at least 20 gas turbines for power generation by 2021, as well as signing a licensing agreement. Siemens has said that it expects to be able to effect orders already placed, but future activity in Iran is in doubt. Siemens' large interests in the US, where it manufactures many of its gas turbines, played a large part in that decision.
Iran also has a significant renewable energy programme. By late-2017, 124 companies, mostly European, had reportedly signed agreements to develop up to 2.38 gigawatts of renewables, although financing of large-scale ventures was difficult even then. Iran's renewable energy programme forecast the installation of up to 5GW of renewables, including solar photovoltaic, wind, hydropower and biomass. With China now the world's dominant solar panel producer and a significant wind turbine producer, much of that renewable business may well be placed with Chinese contractors.