EU's Iran sanctions avoid oil, credit doubts linger

BRUSSELS Fri Oct 29, 2010 11:03am EDT

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BRUSSELS (Reuters) - European sanctions on Iran are not intended to restrict Iranian imports or exports of oil, officials say, but oil companies said they remained cautious about doing business with Tehran.

The EU sanctions have reduced trade since they were adopted in July. They officially became law on Wednesday, putting extra pressure on Tehran to return to negotiations over its uranium enrichment program.

"It is clear that the new rules are likely to mean more administrative burden for businesses as well as the authorities," said Georg Berrisch, a partner at the international law firm Covington & Burling in Brussels.

The rules block oil and gas investment in Iran and curtail Tehran's refining and natural gas capability, but they have been crafted in a way that reduces the impact on ordinary Iranians.

"The restrictive measures should not affect the import or export of oil or gas to and from Iran, including the fulfillment of payment obligations in connection with such import or export," reads the legal document.

But financial transfers of as little as 40,000 euros ($55,520) or more require authorization, and it remains unclear whether the bureaucracy involved and other wide-ranging financial restrictions will continue to deter banks from extending credit for oil deals.

"In particular the obligations to notify payments, but also the possibility to apply for exemptions from certain export prohibitions, will put a heavy burden on the national export control authorities," said Berrisch.

European energy companies say they are reassessing their trade with Tehran. Even though the EU allows oil and gas trade with Iran, companies might still fall foul of U.S. sanctions covering financial deals with the Islamic Republic.

"At the moment we are reviewing the situation, trying to get our heads round it. We need to take a view on how it affects banking," said an industry source trading with Iran.

AZERI GAS FIELD EXCLUDED

Given that the crude market is over-supplied, the added difficulties of trading with Iran may mean companies are more likely to look elsewhere first, analysts say.

The United States has not bought Iranian crude since 1995.

Neither U.S. nor EU sanctions bar major Asian customers Japan or China from buying Iranian crude, but oil trade with both has slowed, Iran's OPEC governor said.

Top Chinese energy firms, which had stepped into Iranian energy projects to fill the gap left by Western companies, have meanwhile slowed work on billions of dollars of deals in Iran as their ties grow with U.S. energy companies.

The EU measures have also been crafted to exclude Azerbaijan's Shah Deniz gas project, in which Iranian state energy firm NIOC has a stake.

Europe views the gas field as a big potential source of supply that could reduce its reliance on Russia, and any sanctions might damage its future energy security.

Shah Deniz is not mentioned by name in the text of the sanctions, but EU lawyers have carefully constructed an exemption with the gas field in mind.

"Any body, entity or holder of rights derived from an original award before the entry into force of this regulation by a sovereign government other than Iran, of a production-sharing agreement shall not be considered an Iranian person, entity or body," reads the complex legal text, which EU sources say refers to Shah Deniz.

(Additional reporting by Juliane von Reppert-Bismarck in Brussels, and Dmitry Zhdannikov and Jon Hemming in London; Editing by Jane Baird)

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