One Month In, Iran Oil Sanctions Start to Bite

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"Crucial protection and indemnity insurance, much of which is provided by E.U.-based insurers, is no longer available for ships carrying Iranian oil. This has made shipowners reluctant to send vessels to Iran."

Landmark European Union and American sanctions directly targeting Iran's oil export revenues have now been in place for more than a month and appear to be having a big impact on the country's ability to sell its oil, even to big customers in Asia that are not directly subject to the EU embargo on imports of Iranian oil.

Tehran's customers in the EU have had months to arrange alternative supplies ahead of the ban on imports of Iranian oil which came into force on July 1.

But Iran has been hit by a double whammy in Asia.

Because of the EU sanctions, crucial protection and indemnity insurance, much of which is provided by EU-based insurers, is no longer available for ships carrying Iranian oil, even to non-EU destinations. This has made shipowners reluctant to send vessels to Iran.

The U.S. sanctions which came into effect on June 28 have not yet been applied. These would bar the banks of countries processing financial transactions with Iran from the U.S. financial system, but Washington has been dispensing waivers to countries deemed to have made "significant" reductions in their imports of Iranian oil. These countries include Japan, South Korea, India and, despite having repeatedly refused to recognize sanctions imposed by any body or country other than the United Nations, China.

It is true that Chinese imports of Iranian crude did drop earlier in the year, but this was linked to a pricing dispute between state trader Unipec and the National Iranian Oil Company rather than to any directive from Beijing.

In fact, the latest official Chinese data shows that imports of Iranian crude increased to around 635,000 b/d in June from around 541,000 b/d in May, although volumes for the first six months of this year were, at an average of around 431,000 b/d, 114,000 b/d lower than the roughly 545,000 b/d imported during the first half of 2011.

It wasn't just China that reported higher month-on-month crude imports from Iran in June, ahead of the imposition of the EU and U.S. sanctions. Japan imported some 208,000 b/d of Iranian crude in June, up from around 128,000 b/d in May, while South Korea's June crude imports from Iran averaged 176,000 b/d compared with 128,000 b/d in May.

It may be well into September before the impact of the loss of EU-based insurance cover on Asia is more clearly seen in official import statistics, but there is already plenty of anecdotal evidence to suggest that liftings from Iran have dropped sharply in July.

The International Energy Agency said on August 10 in its latest monthly oil market report that preliminary data suggested major consuming countries had reduced their imports of Iranian oil to 1 million b/d in July from 1.74 million b/d in June, although it added that these data were "highly provisional" and subject to revision as more comprehensive customs and shipping data became available.

The IEA said imports by major consumers could pick up again from September "if importers are satisfied that government-backed or Iranian insurance is adequate," a reference to initiatives by Japan and India to compensate for some of the shipping insurance no longer available and to Iran's own ffer to insure vessels.

Also suggesting that some extra oil might be on its way to customers for delivery in August and September is a decline of 14 million barrels in Iranian floating storage in July, the agency added.

The Japanese government on June 27 brought in new legislation to compensate Japanese buyers of Iranian oil for the loss of P&I cover but this did not come in time for refiners to arrange loadings for the early part of July. Japanese firms have also been able to increase their cover for cargo and hull damage from local insurers to Yen 39 billion, or $490 million, which raises the previous cap by 30%.

Japanese refiners loaded between 3 and 4 million barrels of Iranian crude in late July, an average of somewhere between 96,000 b/d and 129,000 b/d. But these barrels won't show up in Japan's import statistics for the month as the voyage from Iran takes 19 days. Japanese imports of Iranian crude could, therefore, be negligible in July.

August loadings for Japan are set to be higher at 5.6 million barrels, or an average of around 180,000 b/d, and are expected to rise toward more normal levels with the clearing of concerns about the loss of EU-linked cover. In July last year, Japan imported roughly 302,000 b/d of Iranian oil.

South Korean refiners have resolved their insurance worries by accepting an offer from Iran to deliver crude on Iranian tankers. SK Innovation and Hyundai Oilbank, the country's only buyers of Iranian oil, are set to resume crude purchases from Iran in September when, according to a source, at least two Iranian tankers will load crude for delivery to South Korea.

Dates and volumes are uncertain, but if fully laden the two refiners would be taking a total 130,000 b/d of Iranian crude between them in September after a gap in July and August.

Officials from the two companies have declined to comment.

A South Korean government official told Platts, however, that the refiners were in the "final stage" of negotiations with NIOC "over price, shipping costs, insurance and loading schedules and other details."

Indian refiners will take 40% less crude from Iran during the current fiscal year which began in April than during fiscal 2011-2012. They now plan to import just 10.5 million mt, around 210,000 b/d, during the current year -- 7 million mt or around 140,000 b/d less than last year and 5 million mt lower than the volume that junior oil minister R.P.N. Singh said in May would be imported this year.

But the 2012-2013 volumes were set before the U.S. and EU sanctions came into force and, as pointed out earlier by an oil ministry official, difficulty in finding tankers to lift from Iran or in processing payments for Iranian crude could see these schedules adjusted in the future.

Indeed, the state-owned Shipping Corporation of India, the country's biggest ship owner, will not ship Iranian crude for Indian refiners as it considers the insurance cover provided by the state for loading from the sanctions-hit nation inadequate, SCI chairman and managing director Sabyasachi Hajara said earlier this week.

India's Insurance Regulatory and Development Authority (IRDA) recently approved protection and indemnity cover to a maximum $50 million per voyage for tankers carrying Iranian crude to India with, according to an IRDA official, a minimum premium payable varying from $15,000 for an Aframax to $25,000 for a VLCC.

But Hajara said $50 million was not enough to protect shipowners in the event of a potential spill and that the two sides were still in negotiations on the insurance issue.

SCI plays a big role in shipping Iranian crude to India, having Contract of Affreightment deals with several refiners, including state-controlled HPCL and IOC. Under a COA arrangement, a shipowner agrees to move a specified quantity of oil at a specified rate between designated loading and discharge ports over a given period of time.

Iran is increasingly using tankers owned by the National Iranian Tanker Company to deliver crude to India as Indian buyers struggle to find shipowners willing to send vessels to the Islamic Republic.

China, meanwhile, is furious with the U.S. over sanctions announced late last month on the Bank of Kunlun, which is owned 82% by China National Petroleum Corporation, for doing business with Iranian banks. Beijing has urged the U.S. to revoke the sanctions immediately, a foreign ministry spokesman saying that the move "will negatively impact U.S.-China bilateral cooperation.

U.S. President Barack Obama on July 31 imposed new U.S. sanctions on Iran designed to deter the Islamic Republic and other countries from establishing payment mechanisms for the purchase of Iranian crude that circumvent already existing sanctions.

Obama's executive order also expands existing sanctions on Iran's petrochemical sector.

The Treasury Department also imposed sanctions on Elaf Islamic Bank in Iraq "for knowingly facilitating significant transactions or providing significant financial services to Iranian banks designated for their connection to Iran's support for terrorism or proliferation."

"Sanctions are also authorized for those who may seek to avoid the impact of these sanctions, including against individuals and entities that provide material support to the National Iranian Oil Company, Naftiran Intertrade Company, or the Central Bank of Iran, or for the purchase or acquisition of U.S. bank notes or precious metals by the government of Iran," Obama said in a statement.

The new sanctions broaden the categories of sanctionable entities and transactions involved in Iran's energy sector and are designed to combat efforts to circumvent current sanctions, which have focused on specific transactions, U.S. officials said.

They include any payment mechanism used for the purchase of crude or products from Iran, including barter aimed at moving U.S. gold or other precious metals to Iran.

Margaret McQuaile
Platts

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