October 9, 2012 | Quote

New Sanctions to Further Challenge Iranian Oil Sales

Iran's oil-export decline may have bottomed out for now, but the trouble isn't over for the country's crude sales.

Recently enacted sanctions and further proposed restrictions are set to tighten the noose at both ends, by hindering the Islamic republic's ability to ship the commodity and to be paid for it.

Mohammad-Reza Bahonar, Iran's deputy speaker of parliament, recently said that oil exports stood at one million barrels a day in September, a slight rebound from 800,000 barrels in the summer.

The numbers are confirmed by independent shipping trackers and are set to further stabilize this month after South Korea resumed importing Iranian crude oil after a three-month interruption.

But this is little relief for Iran, whose currency slumped 25% last week before recovering, but only after the government imposed fixed-currency rates. This came after an escalation of sanctions from a European Union embargo on its crude that were put in place July 1. Separately, the U.S. introduced restrictions in June on dealings with the Central Bank of Iran that sharply hit oil revenue.

Yet, with no end in sight in the deadlock over Iran's nuclear program, the EU and the U.S. are preparing new measures that could dent its oil sales again. The West suspects Tehran is attempting to build an atomic bomb, which it denies.

Two weeks ago, the U.S. Treasury Department said it had concluded that National Iranian Oil Co.—the state owned company tasked with marketing its oil—was linked to the country's Revolutionary Guards.

That assertion could force all foreign financial institutions to sever their dealings with National Iranian Oil or risk cutting off their access to the U.S. banking system. Until now, only U.S. institutions were banned from transactions with the Iranian company, which denies any military link.

The move “will increase pressure on NIOC to rely on nontraditional payment methods,” such as bartering or using private brokers and banks not dependent on the U.S. market, says Michael Burton, a Washington-based sanctions lawyer at Arent Fox. Such methods generally come with a price. Intermediaries and institutions outside the mainstream of global finance charge between 5% and 20%, instead of 2% normally, to conduct transactions for Iranian entities, traders in Tehran say.

The U.S. and the EU are also considering separate, tighter legislation that could block transactions with Iran's Central Bank, making it even more difficult to collect foreign currency from its oil sales.

Pressure is also increasingly directed at Iran's ability to ship its crude.

Because the EU sanctions impose insurance restrictions on tankers, many oil buyers are forced to rely on Tehran's ships to carry its oil. But because of U.S. pressure, Iran's main oil-vessels operator, the National Iranian Tanker Co., is struggling to find new flags under which to operate or get independent companies to inspect its ships for safety. Without those requirements, its ships may not be allowed to dock at international ports.

Iran tankers have been forced to repeatedly change the countries they used for their flags, most lately after Washington asked Tuvalu and Tanzania to drop newly registered ships from the Islamic Republic. The constant changes can make the cost of transporting Iranian oil higher.

There could be more challenges in the offing for Iran's oil shipping—its only avenue to bring its crude to buyers in the absence of export pipelines.

The U.S. is still examining whether National Iranian Tanker should also be designated as an agent of Iran's Revolutionary Guard, which would ban foreign banks from dealing with it.

Already, U.S. institutions are no longer authorized to work with the company after it was designated as an Iranian government entity in July. The tanker operator denies any military connection and says it was privatized 12 years ago.

But even if it isn't targeted by new specific sanctions, it could become subject to a blanket ban on dealing with Iran oil.

Also, legislation proposed in the U.S. House of Representatives would effectively blacklist Iran's entire energy sector as a “zone of primary proliferation concern,” and prohibit most energy-related trade with Iran.

Mark Dubowitz, an executive director at the Foundation for Defense of Democracies, which campaigns for sanctions against Iran's nuclear program, estimates that sanctions on National Iranian Tanker would lead to a new reduction of 20% to 25%, or 100,000 to 150,000 barrels, per day. That is because Japan, South Korea and India would further cut their imports from Iran, he said.

But Trevor Houser, a director at New York research firm Rhodium Group, said such move could hit Iran's trades with its largest remaining customer, China.

Also, if the tanker company was “designated as an entity supporting terrorism or proliferation, that would put Chinese companies buying Iranian oil at significant risk” of sanctions because of their U.S. investments, said Trevor Houser, a director at New York research firm Rhodium Group.

China could use its own tankers “but they would still need to find a way through the shipping insurance problems created by EU sanctions,” Mr Houser added.

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Issues:

Iran Iran Sanctions