July 26, 2010 / 9:19 AM / 10 years ago

Analysis: Iran oil sanctions will leak

DUBAI (Reuters) - Sanctions on Iran tighten their grip Monday with European measures to make business with the OPEC member even harder, but no-one expects its oil trade to cease as high profits and energy needs inspire ingenuity.

Gas flares from an oil production platform at the Soroush oil fields with an Iranian flag in the foreground in the Persian Gulf, 1,250 km (776 miles) south of the capital Tehran, July 25, 2005. REUTERS/Raheb Homavandi

Following U.S. sanctions and in anticipation of the EU action, oil markets have been awash with talk of reduced gasoline imports to Iran, higher costs and doubts its crude exports can be paid for in the euro and the U.S. dollar under the new regime.

Iran — the world’s fifth largest oil exporter — is used to finding a way.

“The point is the sanctions are not new. The shape is different. We can carry on,” Iran’s OPEC governor Mohammad Ali Khatibi said in a telephone interview.

EU foreign ministers were meeting Monday to approve formally new measures, adding to U.S. rules that also target Iran’s energy industry.

“We have a comprehensive set of sanctions,” EU foreign affairs chief Catherine Ashton told reporters.

Short-term imports of refined products, which make up for Iran’s lack of domestic refining capacity, will be disrupted as Iran navigates the new sanctions and the rest of the world grapples with the complexities of interpretation, analysts say.

Looking to the long term, even the new sanctions are unlikely to be airtight. Analysts also note Iran’s oil industry has strengths, but would benefit from international help.

“Without a shadow of doubt, they’re having an impact, but are sanctions a disaster? No,” said Colin Lothian of Wood Mackenzie consultancy.

“The Iranian oil industry is a very capable sector. However, it may never reach its aspirational goals without the assistance and investment of the international upstream community.”

For many companies, Iran has long been just too testing an environment for little reward. The nation is struggling to halt decline rates of around 8-10 percent at mature fields and almost every project has suffered delays.

For years, there has been uncertainty about the long term and that is only aggravated by the latest measures.

Gas, as well as oil production, and domestic refining capacity need to increase to meet domestic demand and free up crude oil for export.

Oil markets have been well-supplied since the world tipped into recession stifling demand, meaning everyone can be relaxed about any disruption of Iranian crude, but only for now.

CHINA, RUSSIA, TURKEY

With an eye to its huge future energy needs, China has a reputation for involvement in oil-producing territory other nations avoid. A major customer of Iran’s crude, a supplier to Iran of refined products and a project partner, it is expected to carry on doing business whatever the difficulties.

“They will still try to keep a presence and keep operating within the confines of the sanctions,” said Lothian.

Other friendly powers also have an interest in continued involvement, although even they have adopted a cautious tone.

Russia, which together with China, held the U.N. back from the kind of tougher, energy-targeted sanctions being implemented by the E.U. and United States, soothed Iran with talk of energy cooperation. At the same time, it urged it to explain the “military components” of its nuclear program.

Russia could be particularly nervous of risking ties with its European customers. But the holder of the world’s largest gas reserves also has an interest in maintaining a connection to Iran, which holds the second largest gas reserves and has the potential to supply the Nabucco pipeline — Europe’s big project to reduce its dependency on Russian gas supplies.

Turkey too has a strong gas relationship with Iran as its only gas export market.

Turkish firm Som Petrol last week said it signed a deal with Iran for a 1 billion euro ($1.29 billion) gas pipeline, but the energy minister of Turkey — mindful perhaps of the country’s EU candidacy — said the Turkish government was not involved.

SANCTIONS ADD TO OTHER FACTORS

At every turn, the sanctions are one of many considerations.

The problems in Iran’s oil industry have also been traced to the involvement of President Ahmadinejad’s Revolutionary Guards, who, analysts say, lack the relevant expertise.

“Iran watchers are obsessed with viewing all developments through the prism of international sanctions. A lot of these problems run much deeper,” said Bill Farren-Price of consultancy Petroleum Policy Intelligence.

In some cases, the sanctions might be a useful excuse as in the withdrawal this month of Khatam al-Anbia, the engineering arm of Iran’s Revolutionary Guards from South Pars.

One former senior official in Iran said the guards had originally been drafted in to show those most loyal to the regime would carry out projects if no-one else would.

“But in practice, there were delays in projects, a huge fuss was made over the Guards’ involvement in financial issues, and so on. All these, pushed the authorities to review the issue,” he said on condition of anonymity.

Khatibi did not comment on South Pars, but said the sanctions could be a spur to necessary action, including developing new refining capacity and reducing domestic fuel subsidies in order to improve efficiency.

He said Iranians would understand the need, although analysts said curbing the subsidies could stoke social unrest.

“They may serve to increase internal dissent,” said Robert Jordan, a former U.S. ambassador to Saudi Arabia, now a Dubai-based partner at Baker Botts international law firm.

The one thing they probably won’t achieve is their prime aim of halting Iran’s nuclear enrichment program, which the West suspects is aimed at developing weapons.

“They may slow down Iran’s nuclear program but they won’t stop it,” said Jordan. The same is true of its oil industry.

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