Iran wastes no time in recapturing lost oil market share

Focus article by Kawai Wong

LONDON (ICIS)–Economic sanctions against Iran have been lifted for a little over three months and the country has not wasted anytime in recapturing its lost market share.

However, despite adhering to the requirements of the Joint Comprehensive Plan of Action (JCPOA) Iran continues to face tremendous barriers in its return from isolation.

The largest barrier that still prevents Iran from freely trading with the world is, insurance. Although world powers signed the JCPOA in January this year, the agreement does not cover US primary sanctions against Iran, which remain in place.

Those sanctions continue to ban US domiciled insurance companies from providing reinsurance for Iranian crude oil vessels.

As a result, Protection and Indemnity (P&I) Clubs are currently filling this void by providing a temporary “fall back” reinsurance, which provides an additional $500m of coverage for Iranian oil exports to $580m P&I cover per vessel.

Although this figure seems sizeable, the typical amount of P&I insurance coverage for a crude oil vessel is just under $8bn per vessel, which is not a huge sum considering the potential costs of a spill.

Cash rich nations such as China, South Korea and India are satisfied with this amount of coverage, although Japanese companies have arranged for help from their government to provide full P&I coverage.

P&I Clubs continue to advise the US government to grant licences to US domiciled reinsurers to participate in providing reinsurance but the still in place primary sanctions against Iran prohibit the provision of such cover.

Debts, Banking and finance

Under economic sanctions, Iran lost its access to the international SWIFT payment system, which prevented numerous oil companies from paying Iran for crude oil received.

However, access has now returned and Iran is diplomatically collecting debts and striking banking agreements with countries it exports oil to.

India, which is said to owe Iran approximately $8bn has struck a deal to repay the debt. Iran has requested that Iranian and Indian Banks open branches in each other’s countries and the debt to be repaid in euros as part of the deal, according to the Central Bank of Iran.

Shell, which is in the process of striking a supply deal with the National Iranian Oil Corporation (NIOC), is able to do so after it returned $2.3bn in outstanding debts.

Shell is not the only one in debt to Iran, Greece’s Hellenic Petroleum is understood to have arranged a repayment scheme to clear the $755m debt in a repayment plan before oil flows resumed.

Once debt repayment plans have been arranged oil can flow and supply contracts can be set and Iran has been quick in signing deals.

Speedy work

In just three months Iran managed to boost its oil production from 2.90m to 3.20m bbl/day and it added 100,000 bbl/day in March alone.

Its aim is to boost oil production by 1m bbl/day and the NIOC forecast oil production to rise to 4.00m bbl/day by March 2017.

In Europe, the NIOC struck a deal with Total supplying 160,000 bbl/day, with ENI the NIOC will supply 100,000 bbl/day, with Cepsa the NIOC will supply 35,000 bbl/day and Saras will be taking around 65,000 bbl/day.

Hellenic Petroleum’s deal with the NIOC will see it import between 60,000-150,000 bbl/day.

South Korea, which purchased limited volumes of Iranian crude oil when it was under sanctions has boosted its imports in February by over 90%. Iranian and South Korean banks are also deepening ties and expanding credit lines and the two countries are eager to develop further economically, according to a press release issued by the Central Bank of Iran.

It’s is no surprise that Japanese refiners are keen to boost Iranian crude imports, given the passing of full insurance coverage by the country’s parliament. Iranian crude imports have increased and by February, Japan had already sent a representative to initiate deeper economic ties.

In late March, Japanese refiners were renewing their supply contracts with Iran, where most refiners are believed to have rolled over their import volumes or increased them.

China’s support to Iran continues to be unabated with Chinese President, Xi Jinping visiting Tehran in January, just days after economic sanctions were lifted against Iran.

Moreover, Iran’s cooperation with China over the new Silk Road – One Belt, One Road (OBOR) – practically ensures China will continue to support Iran.

On 15 February, a freight train arrived in Tehran from China which took just 14 days, 30 days shorter than a sea voyage to Bandar Abbas. The new railway network will eventually be extended to Europe reviving the ancient Silk Road.

India is another big backer of Iran, India’s Reliance has resumed Iranian crude oil imports after a five-year freeze boosting Iran’s exports to India by 500,000 bbl/day in March alone.

And in early April, Indian Oil Minister Dharmendra Pradhan met with his counterpart in Tehran and signed an agreement over crude oil and petrochemicals where both sides hope India’s term imports of Iranian crude will rise above the 350,000 bbl/day level during the years when Iran was under sanctions.