INSIGHT: US expects quick results for sanctions on Iran petchems

24 November 2011 16:19  [Source: ICIS news]

By Joe Kamalick

US Treasury chief Geithner announces new Iran sanctionsWASHINGTON (ICIS)--US officials expect that new sanctions targeting Iran’s petrochemical and financial sectors soon will have a broad impact, accelerating the decline of Tehran’s oil and gas production and further reducing the nation’s export revenues.

The new sanctions announced on Monday by the White House, State Department and Treasury Department are aimed at non-US companies that do business with Iran and are meant to further squeeze Tehran in hopes of dissuading that government from pursuit of what the US and others suspect is a nuclear weapons programme.

Under the additional sanctions, non-US firms that do even minimal business with the Iranian petrochemical sector would be barred from doing business with the US. So too would foreign banks be locked out of any transactions or other links with US financial institutions if they violate the new prohibitions.

The new sanctions come in the wake of findings issued earlier this month by the International Atomic Energy Agency (IAEA) that Tehran has been advancing measures to build nuclear weapons.

In a statement from the White House, President Barack Obama said that the US was taking additional steps, in cooperation with Canada and the UK, “to further isolate and penalise Iran for its refusal to live up to its international obligations regarding its nuclear programme”.

“New sanctions target for the first time Iran’s petrochemical sector,” Obama said, “prohibiting the provision of goods, services and technology to this sector.”

Obama said that the US would impose penalties “against any person or entity that engages in such activity” with the Iranian petrochemical industry.

The sanctions announced on Monday also expand earlier provisions designed to impede and perhaps cripple Iran’s oil and natural gas sectors.

In a background briefing conducted by three senior State Department officials, the focus was on how earlier US sanctions and the new restrictions of this week are designed to further retard Iran’s energy sector.

Under terms of the briefing, the three officials could not be named.

Referring to longstanding US sanctions against Iran’s upstream oil and natural gas industries, one senior department official noted that because of those earlier actions, “What’s happened is the major oil companies have all left Iran”.

“They’re desperately in need of capital and technology because their oil production is declining,” the official said. “And what this [new] measure will do is impede their efforts to reverse this decline.”

“This is critical because oil production is critical to the Iranian economy, it’s the main source of revenue for Iran,” the official noted.

He said that because of those earlier restrictions on non-US firms doing business with Iranian oil and gas sectors, Tehran has relied increasingly on the country’s domestic petrochemical firms and smaller foreign companies to provide technology, equipment and engineering services to advance not only Iran’s petrochemical industry but also its oil and gas production side as well.

“This is the first time we have targeted Iran’s petrochemical industry,” the official said. 

“It’s a very important sector of the Iranian economy,” he added. “After crude oil, it’s the biggest export earner for Iran. Indeed, about 50% of Iran’s non-oil exports come from the sale of petrochemicals.”

According to the State Department, “the sale, lease or provision of goods, services, technology or support to Iran that could directly and significantly facilitate the maintenance or expansion of its domestic production of petrochemical products could trigger sanctions if a single transaction has a fair market value of $250,000 [€185,000] or more, or if a series of transactions from the same entity have a fair market value of $1m or more in a 12-month period”.

That’s a pretty low dollar threshold, considering the cost of refining and petrochemical equipment, supplies and technology.

If those thresholds are met by any foreign entity, the US would impose any or all of the following penalties: a prohibition on foreign exchange and banking transactions, a ban on property transactions in the US, denial of US Export-Import Bank financing, denial of US export licences and a bar on imports into the US, plus a prohibition on loans of more than $10m from any US financial institutions, and/or a bar on participation in an US government procurement contracts.

If the offending entity is a bank, it would be blacklisted as a primary dealer or repository of US government funds.

A second State Department official emphasised that the US would be proactive in pursuing non-US firms and their host countries in the effort to enforce the petchem sanctions – and they expect the petrochemical sanctions to be more effective and have more immediate results than the earlier oil and gas sector sanctions.

“So what we’re doing is making it very difficult for Iran to maintain and expand its petrochemicals industry,” the official said.  But beyond the sanctions themselves, “we are beginning today to launch a worldwide diplomatic campaign to encourage governments and companies that purchase petrochemicals from Iran to switch to alternative sources of supply”.

In other words, Obama administration officials are not going to sit by and wait to see if anyone runs afoul of the new petchem sanctions; they will try to dissuade foreign entities from getting even close to those threshold tripwires.

“Now, this is not like crude oil, where there are difficulties in companies simply agreeing to forego imports of Iranian crude oil,” the official said, noting that the number of crude oil providers is relatively limited.

“But there are lots of good producers of petrochemical products, and they [companies that now buy petchems from Iran] can switch easily,” he said.

As foreign buyers shift away from Iranian petchems producers, “this would dramatically reduce Iran’s export earnings, so we think this is a very significant step”.

The new sanctions’ banking and financial aspects may have even broader impact, the officials said.

Under the provisions announced on Monday and through new financial rulemaking that is soon to follow, the US Treasury Department has designated the entire Iranian banking sector as “a jurisdiction of primary money laundering”.

A Treasury official said it simply requires that US banks and other US financial institutions take additional steps to ensure that “none of their relationships with foreign financial institutions are used to provide direct or indirect access of any Iranian entity to the US financial system”.

“What I think is important to underscore is that an additional impact – and I think a very significant impact – is the fact that the international financial community pays very, very careful attention to when the US Treasury Department identifies a threat to the US financial system of this size,” the Treasury official said, referring to the sanction on all Iranian banks.

“The Treasury Department does it very rarely,” he added. “It’s only done it a handful of times ever, and it’s been eight years since the department has done it with respect to an entire jurisdiction, and certainly never [to] a financial jurisdiction with the financial importance of Iran.”

“What this is, really, is a wake-up call to all banks anywhere in the world that are still doing business with Iran, letting them know that it is certainly the view of the US Treasury Department that any of this business is highly risky business that’s fraught with grave risks,” the official said.

“What this has done in the past is create a chilling effect, and I think it will in the future create a chilling effect on the willingness of any bank anywhere in the world to continue with this business” in Iran, he added.

The new US sanctions may already have had effect.

ICIS has reported that as many as 16 Iranian petrochemical projects may now be delayed, and some of them may be cancelled, as a consequence of the new US sanctions.

In addition, Chinese importers of Iranian polyethylene (PE) are scouting for alternative suppliers, citing the likely impact of the new US sanctions.

The issue is not likely to fade in the months ahead.

Members of Congress in both the House and Senate are pressing for even more harsh US sanctions against Iran.

And with the US national elections campaign moving into high gear with the new year, the issue of who is tough on Iran likely will be a recurring question for presidential and congressional candidates in the run-up to the 6 November 2012 vote.

The Obama administration may well feel compelled to impose significant penalties on foreign petrochemical companies and banks to demonstrate that it is not “going soft” on Tehran.

 ($1 = €0.74)

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By: Joe Kamalick
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