Iran’s Top Customers Will Get New Waivers After Cutting Imports

It’s that time of year again. Next month President Obama will decide whether or not Iran’s top customers deserve new 180-day sanction waivers as a reward for reducing imports of Iranian crude. The punishment, under U.S. law, is severe for many companies: those that refuse to cut imports will be blacklisted by the U.S. financial system. Iran’s top customers include China, India, Japan, South Korea and Turkey. Together these five countries imported nearly all of Iran’s 1.3 million b/d in crude exports last month.

There is no magic number for reductions. 15-18 percent seems like a reasonable estimate, however, judging by the last round of waivers which were issued in June. Also keep in mind that the sanctions are flexible. The President, if he so chooses, can extend waivers based on the undefined pretext of “national interest,” instead of hard reductions. The White House might still want to see some reductions but the bar is lowered by this option. Think of it as the “escape hatch” clause that allows the White House to avoid a confrontation with a heavyweight like China.

This post breaks down what each country should expect to hear from the White House in December. It seems likely that most if not all of Iran’s customers will be granted extensions.

China. This may surprise some but Iran’s number one customer has a good chance of getting a new waiver. Why? Because it has reduced imports even though Beijing rejects U.S. sanctions in principle and is contracted to purchase over 500,000 b/d from Iran through March. Customs data shows China imported only 454,500 b/d in July and less than 400,000 b/d in August and September. In October, imports of Iranian crude fell short again but climbed to 458,000 b/d. Earlier this year, Beijing and Washington cited reductions in China’s first quarter purchases as just cause for the June waiver. This was due to a contract dispute—not a deliberate cutback—and it’s worth restating that China would have bought more oil from Iran if given the chance.

Imports are down again in the second half of this year for two reasons. First, Sinopec—China and Asia’s largest refiner—suspended some imports from Iran for two months because of a refinery overhaul. Second, and most importantly, Iran has failed to satisfy its contract in recent months because its national shipping company is under terrible stress. It is now solely responsible for shipping crude to China. Other companies have abandoned Iranian ports because sanctions prevented them from securing insurance or payment. This means China has to rely on a much smaller and less reliable fleet than before. If this problem persists, Beijing might ultimately extend sovereign insurance guarantees to tankers that carry Iranian crude, meaning the government would insure vessels. But there is no chance that imports will recover before the White House makes its final decision on December 25.

India. In the month leading up to sanctions, India imported about 346,600 b/d. Since then, imports have hovered around 200,000 b/d. Industry sources say refiners expect imports to remain low through March. The Indian government has asked state-owned refiners to cut imports by about 15 percent and it seems likely that privately-owned refiners will exercise caution as 2012 comes to a close. India’s HPCL-Mittal Energy Ltd. (HMEL) imported 180,000 b/d in October alone but is not planning to buy from Iran again until after India receives a second waiver.

South Korea. South Korea will probably get a U.S. waiver because EU sanctions forced it to completely halt imports from Iran in August and September. Imports rebounded last month to 186,500 b/d after Korean refiners accepted insurance from Iranian sources (although they were expected to jump as high as 260,000 b/d in order to make up for the two previous months). Overall, imports are on pace to fall by about one-third compared to last year and will be down significantly compared to the first half of 2012.

One anonymous South Korean source recently told Reuters: “The cut in our Iranian crude oil imports this year is expected to be much larger than the 20-percent level targeted to ensure we received a U.S. sanction waiver earlier this year.” Seoul and Washington have cooperated closely on sanctions since the beginning. Given this closeness and the dramatic reduction in South Korea’s imports, a second waiver is virtually guaranteed.

Turkey. Turkish imports from Iran have been wildly inconsistent this year. Some months the Turks flirted with record highs and at other times imports dropped off almost entirely, surging to 250,000 b/d in April and falling below 50,000 b/d in July. Target volumes are said to stand at about 182,000 b/d but imports in the second half of 2012 are closer to 150,000 b/d. This should be good enough for a waiver—but Tupras, Turkey’s sole refiner, has not yet made October data available. Officials remain committed to reductions although they seem to be walking a fine line with only a few weeks to go. Last month, Turkish Energy Minister Taner Yildiz told reporters he expected Turkey will get a second waiver.

Japan. Tokyo’s waiver was renewed in September meaning the White House will not have to decide what to do about Japan until March. As of today, a March 2013 waiver seems very likely. One of America’s closest allies began this year by importing almost 350,000 b/d from Iran. It has since cut back significantly. In July, imports were halted totally, while Japan’s parliament negotiated a sovereign reinsurance scheme that would allow non-Iranian shippers to transport crude with sufficient coverage. Imports returned in August but remained below the 200,000 b/d mark through September. Cuts could come easier in the future by conservation efforts and the use of crude alternatives like natural gas or coal.

Cuts alone could probably secure a waiver for Japan. But a case can also be made that the U.S. should be sympathetic to Tokyo because of exceptional circumstances. Last year, the Fukushima disaster forced Japan to reconsider nuclear energy and rely instead on imported oil and natural gas for electricity generation. That should be reason enough to invoke the “escape hatch” clause.

I am under the impression that 180-day waivers are extended based on reductions made during the previous 180-day period. Next month, President Obama will make what looks like an easy decision: he will almost certainly extend waivers for China, India, South Korea and Turkey because each country has cut back since July for a variety of reasons. In March, Japan should receive another extension. But beyond that, it will become increasingly difficult for the White House to demand cuts again and again and again.


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One response to “Iran’s Top Customers Will Get New Waivers After Cutting Imports

  1. Pingback: U.S. Treasury–not the Pentagon–Takes Lead Against Iran | The Foreigner – الأجنبي

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