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

Q+A: How do the new anti-Iran sanctions affect oil?

DUBAI (Reuters) - Decades of sanctions against Iran have stunted its economic development and the growth of its all-important oil sector.

The international community, led by the United States, has made sanctions more and more stringent as Iran has refused to abandon its nuclear program.

Iran says it is seeking only to provide enough energy for civilian use, but the international community suspects it of trying to develop atomic weapons.

HOW DO THE NEW SANCTIONS DIFFER FROM PREVIOUS ROUNDS?

In the latest wave of sanctions, Europe was on Monday expected to approve its first measures specifically targeting the strategic oil and gas industry, starving it of technical assistance and investment.

The U.S. has also toughened its sanctions against Iran’s oil and gas sector and is now restricting not just its own companies, but also the U.S. operations of international firms that supply fuel to Iran.

The U.S. and EU sanctions go further than a fourth round of United Nations sanctions in June, which imposed measures against new Iranian banks abroad if a connection to the nuclear or missiles program is suspected, as well as vigilance over transactions with any Iranian bank, including the central bank.

ARE THE LATEST EU/US SANCTIONS LIKELY TO HAVE MORE IMPACT ON

THE OIL/GAS INDUSTRY THAN PREVIOUS MEASURES?

Hossein Askari, Iran Professor of International Business and International Affairs at the George Washington University, Washington DC, cited three reasons:

1. It’s relative. “The latest U.N. sanctions were not really that biting.”

2. The new sanctions follow punitive action that underlines the risks companies run if they breach them.

Credit Suisse agreed to pay a more than $500 million fine after it violated U.S. sanctions against Iran.

3. Ships will be inspected. “You’re going to be much more cautious in doing anything with Iran,” said Askari.

HOW DO THE SANCTIONS AFFECT ENERGY SUPPLIES TO IRAN?

Lawyers say the new sanctions are a matter of interpretation. Under strict readings, Iranian aircraft were denied refueling in Hamburg, Germany, and BPL confirmed it had ended its contract with Iran Air at Hamburg airport.

BP did not give a reason and declined to comment on whether BP had ended all contracts with the Iranian flag carrier.

Analysts have said BP would be particularly keen to avoid any further conflict with the United States following its huge oil spill in the U.S. Gulf.

WHO WILL SUPPLY FUEL AND TECHNOLOGY?

Although the fifth-largest exporter of oil, Iran does not have enough refining capacity to meet domestic demand and has to import up to 40 percent of its gasoline needs.

Powers friendly toward Iran, such as China, could continue to sell fuel to it. Fuel is also smuggled into Iran.

Russia earlier this month drew up plans for lasting cooperation on energy and said sanctions would not stand in the way. However, Russian President Dmitry Medvedev also urged Iran to explain the “military components” of its nuclear program.

Iran’s oil minister Massoud Mirkazemi told Iran’s IRIBnews website in Moscow: “The sanctions will have no impact on our energy sector, which is essential for all countries. Our ties with Russia are based on previous commitments and both countries are determined to continue this trend.”

Iran has said it would blacklist foreign companies that avoided doing business with it because of the sanctions.

But analysts said that now Europe, as well as the United States had got tougher, Russian companies might be more wary of doing any business with Iran as they would not want to jeopardize relations with European trading partners.

“The question is will Russian companies actually want to do business given that they are big actors in the European market,” said Samuel Ciszuk of IHS consultancy.

WILL THE SANCTIONS AFFECT INTERNATIONAL OIL PRICES?

No-one expects Iran to hold back supplies to the international community in the near future, especially as the oil market is well-supplied and can absorb some disruption.

However, the new sanctions could make its own fuel supplies more expensive as it is forced to pay a premium to a smaller pool of suppliers, while any surplus Iranian crude, struggling to find a buyer could add to volatility.

“If Iran builds up storage and then sells a large chunk, supply will come in waves. This could add price volatility,” said Lawrence Eagles of J.P. Morgan.

The accumulation of Iranian crude in vessels floating at sea periodically builds up in part because of seasonal factors (it tends to be the kind of heavy crude that is favored for winter heating fuel).

An increase in Iranian barrels at sea can widen a contango structure in the oil market, whereby the crude for near-term delivery is relatively cheap, and increase the cost of shipping if it commandeers many vessels.

“The contango is related to the cost of storage. Iranian sanctions could affect the contango if they lead to inventory build up that causes shipping rates to go higher,” said Eagles.

For oil prices, there is also a long-term impact as the new sanctions compound the effect of years of restricted development, punishing not just for Iran, but for an international community that ultimately could face higher oil prices.

“The Iranian oil and gas industry has systemic problems, which has an impact for the long term,” said Ciszuk.

SWITCH TO ALTERNATIVE CURRENCIES?

Iran could also elect to carry out oil transactions in currencies other than the U.S. dollar and the euro, as the currencies of those most implicated in sanctions.

U.S. foes Iran, Iraq under Saddam Hussein, and Venezuela have all previously raised the issue of non-dollar pricing, but until the latest European sanctions against Iran, the euro was viewed as a natural alternative.

Following the latest sanctions, Iranian officials have said they fear transactions in euros as well as dollars could be blocked.

Together with industry sources, they have said Iran is considering selling its oil in other currencies, such as the Chinese yuan.

Although international oil futures are denominated in dollars, parties involved in a physical oil sale can carry out the transaction in whichever currency they can both agree on.

Additional reporting by Cynthia Johnston in Dubai; Editing by Alison Birrane

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