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EU hopes against hope on Iran

President Emmanuel Macron of France has offered himself as a broker in the US-Iran Gulf standoff, but the chances of an agreement are small

Macron has launched his initiative aiming to keep alive the Iran nuclear deal, signed in 2015, which the EU continues to support. The EU has also set up an alternative payment system to help European companies trade with Iran outside the US banking apparatus—the Instrument in Support of Trade Exchanged (Instex)—but there are few takers.

Many European companies fear penalties against their US subsidiaries if they trade with Iran, along with denial of trade to the US market. Iranian exports to the EU are down 93pc. China, the biggest importer of Iranian oil, is better placed to shrug off US sanctions, yet has cut hydrocarbons imports by at least half, with many exporters having the same concerns as EU firms about the consequences of doing business with Tehran.

US sanctions have seen Iranian oil output plunge, although estimates of lost production vary greatly. Iran exported 2.5mn bl/d in April. While there is uncertainty about how much it exports now—with many cargoes shipped clandestinely—data firms tracking tanker movements estimate sales to China at between 142,000bl/d and 360,000bl/d, accounting for between half and two-thirds of total Iran exports.

Macron invited Iranian foreign minister Mohammed Javad Zarif to attend the recent G7 in Biarritz but hopes that President Donald Trump would agree to an impromptu meeting went unrealised. And the US leader is cool about Macron's call for him to hold face-to-face talks with Iranian president Hassan Rouhani. But EU states are not totally abandoning efforts to find a diplomatic solution to the crisis.

Right conditions

Trump says he would meet Rouhani if circumstances were correct, but those circumstances include major changes to the Iran nuclear deal. The US president, who imposed sanctions on Iran in May, was blunt about the consequences of any Iranian military action in the Gulf, saying "they are going to be met with really very violent force".

2.5mn bl/d — Iranian oil exports in April

In turn, Rouhani upped the tension with an implied threat to shipping in the Gulf's choke point, the Strait of Hormuz. "In the case that oil is completely sanctioned and Iran's oil exports are brought down to zero, international waterways cannot have the same security as before," Rouhani is quoted as saying on the website of Iranian leader Ayatollah Ali Khamenei.

The war of words is matched by an increasing military build-up, with Australia sending a warship to join US, UK and Bahraini units escorting merchant vessels through the strait. Iran is dispatching two warships to the Gulf of Aden, close to the entrance to the Red Sea, a move seen by many as a threat to Saudi commerce. Saudi Arabia, a staunch opponent of Iranian policies, is diverting some oil exports from Gulf ports to those on the Red Sea.

Sanctions strait jacket

Iranian officials talk of wanting exports to climb quickly to 700,000bl/d, indicating they are now below that figure. And Tehran's problem is that Trump is in no hurry to resolve the crisis. His one fear was that sanctions would see oil prices spike, but the opposite has happened—prices have fallen by 20pc since April amid concern the US-China trade war is speeding a global economic slowdown. The White House is content to maintain sanctions, at least through next year's US election cycle.

Iran, by contrast, needs a quick resolution. Its economy was in a parlous state even before sanctions, and oil and gas receipts accounted for 80pc of government revenues. Some in Tehran may conclude that its only remaining leverage is through military action in the Strait.

Source: Petroleum Economist
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