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Organization of Petroleum Exporting Countries (OPEC) third biggest producer Iran expects disruption in its oil industry after the reintroduction of U.S. sanctions which would make it hard to stick to its current production goals.
Iran Oil Minister Bijan Zanganeh told EU’s Climate Action and Energy Commissioner Miguel Canete that the country is anticipating a decrease in its production capacity in the coming days.
Iranian state news agency Shana quoted Zanganeh as saying achieving its stated daily production target of 4.2 million barrels of crude would be “difficult but we would not put that aside. It might take more time, but we will not do away with it.”
Iran would rely mostly on its two biggest buyers, China and India, to boost its production closer to this target, but it would also need the help of the European Union, which is also a big buyer of Iranian crude.
“I believe if the EU helps us and honors its statements, the level of Iran’s oil exports will remain intact and this would not be a reason for changing a decision made in the past,” Zanganeh said.
China and India, as well as the EU, have clearly indicated they had no intention of changing their buying habits regarding Iranian crude, with the EU specifically signaling it would make an effort to uphold the Iran nuclear deal and shield companies doing business in the country from U.S. sanctions.
The world biggest consumer of crude oil China has said it remains committed to Iran’s nuclear deal with world powers and assured Tehran that it will continue buying nearly one-third of Iranian oil exports.
China who was also the last world power that signed the 2015 nuclear agreement buys the largest share of Iranian oil while majority of the rest is sold to the other top Asian consumers, Japan and South Korea, who have also indicated that they will continue business with Iran despite the U.S. decision.
“We shouldn’t be surprise by this because China has always have a strong relationship with Iran in the past,” Luqmon Agboola head of energy and Infrastructure at Sofidam Capital.
China had become the world’s largest net importer of total petroleum and other liquid fuels in 2013, however in 2017 China surpassed the U.S. in annual gross crude oil imports by importing 8.4 million barrels per day (bpd) compared with 7.9 million bpd of U.S. crude oil imports.
Still, Tehran is looking for backup plans: China’s CNPC, which partnered with French Total on the Phase 11 development of the South Pars gas field, has already said it was ready to take over the French company’s share of the project should it be forced to leave it if the U.S. Treasury does not grant it a sanction waiver.
As part of EU’s efforts to continue doing business with Iran, the European Commission said last week in a statement that “The commission is encouraging member states to explore the possibility of one-off bank transfers to the Central Bank of Iran. This approach could help the Iranian authorities to receive their oil-related revenues, particularly in case of U.S. sanctions which could target EU entities active in oil transactions with Iran.”
New refinery capacity and strategic inventory stockpiling, combined with declining domestic production, were the major factors contributing to its recent increase in imports.
“Nobody consumes crude oil in its raw form which implies your refining capacity determines the country you buy from so china refining capacity has the power to refine Iran’s oil however we must understand that china cannot buys all of Iran’s oil,” Ademola Adigun, an oil and gas governance consultant said.
Emmanuel Afimia energy analyst at Afimia Consulting said the fact that Iran won’t be paid in US dollars as a result of the sanction means that China can deal directly with Iran under a bilateral exchange rate system.
Chinese Foreign Ministry spokesman Geng Shuang said “China express regret over this decision made by the United States.” He added that China wanted to “ensure the integrity and sanctity” of a pact that Beijing believes was important for curbing nuclear proliferation and promoting stability in the Middle East.
Geng said that China, which has for years been a close economic partner with Iran, will “carry on the normal and transparent pragmatic cooperation with Iran on the basis of not violating our international obligation.”
China’s comments came as oil prices hit their highest levels since November 2014 in world markets as investors reacted to U.S. President Donald Trump’s move to withdraw from the pact.
In 2017, an average 56 percent of China’s crude oil imports came from OPEC producing members. This declined from a peak of 67 percent in 2012, while Russia and Brazil increased their market share of Chinese imports more than any other country, from nine to 14 percent and from two to five percent respectively.
However, Iranian rival Saudi Arabia said that it will support the U.S. withdrawal by making up for any shortfall in Iran’s oil production caused by renewed U.S. sanctions on Iran.
Saudi Arabia, Iran’s fiercest rival in the Arab world and a long-time opponent of the nuclear agreement, stepped forward on May 9 to say it will offset the loss of Iranian crude, saying it “remains committed to supporting the stability of oil markets.”
That commitment by the world’s largest oil producer may help to temper oil-price increases, but analysts said it is certain to be challenged by Iran and other members of the Organization of the Petroleum Exporting Countries as a violation of the cartel’s current limits on oil production.
The renewed U.S. sanctions are expected to hit Iran’s oil sector hard, with experts estimating Iran’s nearly 4 million barrels of daily oil production could be cut by 200,000 barrels to 600,000 barrels a day.
U.S. officials in announcing the renewed sanctions said they expected U.S. allies in the oil-rich Persian Gulf region to make up Iran’s shortfall in production, in a move they said would soften the impact of the sanctions on global oil prices.
Saudi Arabia, a longtime rival of Iran, has struck a production deal with Russia, an Iranian ally that is also being sanctioned by the U.S. The question now is whether Saudi Arabia and OPEC in its “Vienna Alliance” with Russia will keep oil production targets the same or whether they adjust them to meet any loss of Iranian crude, with oil prices already high and rising.
“I think the output cut agreement will remain till the end of 2018, after which they may start considering a possible adjustment,”Afimia told BusinessDay by mail.
It will take about six months for the effect of sanctions on Iran to become more clear, even though the Trump administration sanctions would block new business with the country immediately.
When asked if the buyers of Iran oil can buy Nigeria oil? Adigun concluded, “Iranian oil is not as light as Nigeria’s oil however the good thing about Nigeria’s oil is its very flexible, and anybody can use it.”
