Insight: Catch me if you can - oil sanctions against Iran

LONDON Wed Mar 7, 2012 4:01am EST

1 of 2. Malta-flagged Iranian crude oil supertanker Delvar is seen anchored off Singapore March 1, 2012. While it works to secure new supply routes, traders say Iran is steaming vessels laden with crude and condensates into Asia, where they can drain the contents into smaller ships and sell the cargoes into China and parts of Southeast Asia. One of Iran's supertankers, the Delvar, was involved in such an operation last week. The ship was first parked off Indonesia's Karimun island, an offshore storage point near Singapore that is often used for ship-to-ship transfers. A smaller, China-bound tanker, Xuan Wu Hu, pulled up beside the Delvar and loaded a cargo of condensate for Huizhou, where China National Offshore Oil Corp (CNOOC) and Royal Dutch Shell operate a petrochemical complex. The Delvar then moved to Bukom island, home to Shell's Singapore refinery, where it offloaded crude oil, traders said.

Credit: Reuters/Tim Chong/Files

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LONDON (Reuters) - International sanctions have a patchy history, and Iran's oil elite have been dodging them for decades.

As Washington and its allies tighten the screws on Tehran over its nuclear program, Iran is coming up with new ways to sell its oil - offering special deals to allies China and India, delivering oil to clients and swapping it for gold and grain.

Tehran may also be devising ways to make its oil more saleable on international markets, switching it between tankers and blending crudes to disguise the origin, oil trading and shipping sources have told Reuters. They spoke on condition of anonymity because of the sensitivity to business relationships.

Washington, London and Brussels are doing their best to put up obstacles, but Iran is market savvy, these traders said, describing a number of ways Iran can avoid sanctions and continue to get its oil to market.

Such routes mean selling oil at a discount - which will hurt Tehran's income but could also prove highly profitable for customers and the middlemen involved.

"The Iranians are very enterprising and can probably out-smart all of us," said an executive at a major oil company.

Tehran has been maneuvering for years.

Iran's senior oil executives were reworking the oil books back in 1995, when Washington banned 600,000 barrels per day (bpd) of Iranian crude liftings in an attempt to curb Tehran's drive to acquire nuclear weapons.

"It took us about three months to re-direct all the oil we were selling to U.S. customers," recalled an Iranian oil source. "But we eventually found new buyers elsewhere."

Oil was then around $18 a barrel. It is now above $120.

Seventeen years on, Iran's oil elite - their every move under scrutiny from the West - face a far tougher test as they aim to keep up shipments of 2.3 million bpd. They are scrambling to find new homes for 500,000 bpd of oil sales as rigorous U.S. financial measures and a European Union oil ban, effective July 1, make it ever more difficult to pay for and ship oil from Iran.

BLOW DEALT

But Leonid Fedun, a key shareholder in Russia's Lukoil which halted work in Iran 10 years ago because of U.S. sanctions, said it was hard to envision measures that would keep Iranian oil from reaching markets.

"It is difficult to achieve something with sanctions if you have a system of different oil buyers. For example, if China doesn't join sanctions, they won't work," he said. Keeping Iran's vast supplies off the market would cause supply problems, which would be difficult in a U.S. presidential election year when energy prices are an issue, he added.

Washington dealt a blow to Tehran's financial network when it shut down a major channel for oil sales, the Dubai-based Noor Islamic Bank, at the end of last year. But traders say there are still small European and Russian banks with no U.S. exposure that are willing to handle payments.

For its part, Tehran has switched into other currencies such as yen and rupees, and carried out barter deals to swap oil or gold directly for food imports, as U.S. pressure makes dollar and euro transfers harder.

Such unconventional deals are already in evidence in Iran's grains trade with the likes of Russia and India. Fearing sanctions will cause food shortages, Iran is ordering huge amounts of wheat to feed its population of 77 million.

"Russian banks seem to be ready to finance some of the deals and some payments could be made in roubles or even in the Indonesian currency," a trader said. Tehran may also offer to pay in steel or crude oil.

While the West's sanctions net is closing in on countries within its own sphere of influence, it is causing few problems for top buyer China, which can self-finance, ship and insure oil supplies from Iran which are being sold on extended credit.

An executive from a major oil company told Reuters: "We are hearing the Iranians have started offering a discount as big as $20 per barrel. Do you really believe China will be able to resist?"

It is widely assumed Tehran will discount and sell much of the oil that is displaced from Europe to Beijing. But Iranian oil officials admit the market in China, though strategic, is finite and there is as yet scant evidence of extra oil flowing into the country's stockpiles.

China has meanwhile helped Iran dodge tightening sanctions by selling it much-needed gasoline. Although a major oil producer, Iran's aging refineries struggle to produce enough fuel and imports are vital to fill the shortfall.

"NO RISK"

Iran is also bending over backwards to sell more oil into India, its second biggest client, on flexible commercial terms. "Iran is saying: 'We will deliver our crude for you on our ships on extended credit. There is no risk'," said a market source with knowledge of Iran's sales tactics.

Three of Iran's supertankers - the Hormoz, the Harsin and the Damavand - have already delivered crude to India's west coast refiners, say market sources with knowledge of the ships' movements, as Indian buyers struggle to find tankers willing to dock in Iran for fear they might lose EU-linked insurance cover.

The tankers, owned by Iran's privately-held NITC, have insurance cover from Kish Protection & Indemnity Club - another privately owned Iranian outfit.

India has said it will abide by UN sanctions on Iran, but has refused to go along with the new financial measures imposed by the United States and the EU.

Even so, the sanctions have left Indian companies struggling to pay for their Iranian crude. They had been paying in euros via Turkey's Halkbank, but that route looks vulnerable to new sanctions. Halbank's general manager Suleyman Aslan said on January 26 Halkbank would continue to handle customers' oil payments to Iran as long as they comply with international regulations.

As an alternative, New Delhi and Tehran have set up a payment method using the rupee, which is not freely traded on international markets, to pay for 45 percent of oil imports. India owes Tehran about $11 billion a year for imports.

Iran has already started paying Indian exporters in rupees, but refiners are waiting to hear whether they will have to pay hefty taxes before using rupees to pay for oil.

Payments to Indian exporters, owed about $3 billion, are being remitted through Iran's Bank Parsian which has opened an account with India's UCO bank, said M. Rafeeque Ahmed, president of the Federation of Indian Export Organizations. Bank Parsian is among private Iranian banks that are free from sanctions against Iran's state-owned banks.

BARTER

In its search for new outlets, Tehran is also courting smaller Asian countries that may have been neglected. For example, Iran is offering to supply Pakistan with 80,000 bpd on a three-month deferred payment plan.

The offer came just after Pakistani officials revealed Iran had asked to import a million tons of wheat in a barter deal.

Iran has also held talks with South Africa about the possibility of salting barrels away in storage tanks at Saldanha Bay, say industry sources with knowledge of the talks.

Tehran first proposed storing excess fuel in the facility on the west coast, north of Cape Town, in 1995, but talks broke down partly due to public concern that increased tanker traffic would be harmful to the environment.

While it works to secure new supply routes, traders say Iran is steaming vessels laden with crude and condensates into Asia, where they can drain the contents into smaller ships and sell the cargoes into China and parts of Southeast Asia.

Another of Iran's supertankers, the Delvar, was involved in such an operation last week. The ship was first parked off Indonesia's Karimun island, an offshore storage point near Singapore that is often used for ship-to-ship transfers.

A smaller, China-bound tanker, Xuan Wu Hu, pulled up beside the Delvar and loaded a cargo of condensate for Huizhou, where China National Offshore Oil Corp (CNOOC) and Royal Dutch Shell operate a petrochemical complex.

The Delvar then moved to Bukom island, home to Shell's Singapore refinery, where it offloaded crude oil, traders said.

Blending Iranian crude and re-labeling the barrels is another option and one which could present an opportunity for trading houses, say industry sources.

Possibilities for such operations exist all over the world, from the transshipment hub of Fujairah in the United Arab Emirates, to the Indonesian archipelago, South Africa and even in parts of South America.

"Oil traders can buy Iranian crude, rebrand it and sell to someone else," said an Iranian oil industry source. "They like these sanctions."

(Additional reporting by Dmitry Zhdannikov and Christopher Johnson in London, Francis Kan in Singapore, Michael Hogan in Hamburg, Ratnajyoti Dutta in New Delhi and Nidhi Verma in Sydney; Editing by Peter Graff and Janet McBride)

This story update clarifies that the U.S. 1995 ban was on U.S. firms lifting Iranian crude oil

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