In keeping with the Geneva deal, the EU ban on insurance (and reinsurance) of Iranian crude oil will be lifted for six months beginning on January 20. As a result, some customers may import more Iranian oil. China could also surprise the U.S. and buy more Iranian crude if talks between Iran and the P5+1 go well. How much more is anyone’s guess but Iran will view any improvement as significant.
The EU ban helped slash Iran’s oil exports from about 2.3 million b/d to an average of 1.1 million b/d over the last 18 months. It exacted the most pain in the summer of 2012, when it first went into effect. Many of Iran’s customers were caught unprepared and had to scramble for alternatives. Iranian oil exports collapsed in July of that year, falling to a shocking low of about 850,000 b/d.
So what does the suspension of the EU ban mean for Iran’s customers? That depends. Japan is currently the only country providing a “sovereign guarantee” in case of disaster. Tokyo is on the hook for up to $7.6 billion in the event an Iranian tanker is damaged or blamed for an environmental disaster. It will be happy to see EU insurers step in soon. Import volumes will not be affected, according to recent reports.
India stands to be the biggest winner because it never found an alternative to the EU. Some refiners could not accept Iranian-based insurance and a sovereign guarantee never materialized. As recently as December, Indian imports from Iran were in doubt.
Indian imports from Iran fell 40 percent in the first nine months of last year after EU firms refused to insure facilities processing Iranian oil—not just tankers carrying it. Deadly fires at two different facilities, one in May and another in August, forced Hindustan Petroleum to play it safe and cut off Iran. MRPL didn’t accept Iranian insurance until late summer. Essar Oil Ltd., another major Indian refiner, accepted Iranian insurance earlier but Iran still lost about 150,000 b/d in sales last year compared to 2012.
India’s steep drop-off of crude imports from Iran may be used as an excuse to ratchet up imports this year. Though India received a new sanctions waiver from the U.S. in November, the argument can and will be made that reductions were so severe in 2013 that the U.S. should be more understanding in 2014. Total imports may be lower than previous periods but the suspension of the EU ban will allow Indian refiners to achieve more “normal” volumes, at least for six months while the Geneva deal is observed.
Chinese officials were tight-lipped throughout 2012 but supposedly accepted Iranian insurance. This was a gamble given that Iranian-based insurers like Kish P&I were unproven. The risk was easier for Beijing to shoulder because it could presumably pay for any disaster if Iran failed to do so, thus creating a backstop sovereign guarantee for oil imports. For China—Iran’s number one customer—replacing all or most Iranian oil was not an option. Imports averaged about 420,000 b/d in 2012-2013. Volumes so large are not easily replaced.
Like China, South Korea accepted Iranian insurance in October 2012. Turkey, which has averaged about 105,000 b/d going back more than a year, never officially acknowledged how it is insuring Iranian imports. Japan took a different route with its sovereign guarantee of $7.6 billion. Those that took Iranian insurance accepted much smaller offers of $1 billion per tanker, per disaster. Iran’s national tanker fleet has a good record of safe carriage, however, allowing some to settle for less without fearing the worst.
The EIA says Iran’s oil exports are “not expected to increase significantly.” That’s fair. But how would Iran define “significantly”? Turkish Energy Minister Taner Yildiz said his country might take 35,000 b/d more now that EU insurance is an option; Indian officials say refiners could import an extra 50,000 b/d through March, maybe more if Iran is ready to agree to better terms. Privately-owned companies could still push the envelope.
While Japan and South Korea have slashed imports hard and fast, China could play chicken with the U.S. Treasury if Beijing believes P5+1 talks with Iran will succeed. China received a new waiver in November although imports from Iran were stable compared to the previous 180-day review period. Knowing there is a one-month delay between imports and the release of customs data, China cut imports from Iran to just 250,000 b/d in October. The sharp decline was reported just before the U.S. extended waivers in late November. The following month, China revealed November imports from Iran had jumped to 538,000 b/d.
The White House has played nice with China so far. Will China return the favor or go after cheap Iranian barrels? The possibility can’t be dismissed. Zhuhai Zhenrong, a Chinese state-owned trader, was sanctioned in 2012 for its relationship with Iran. But it remains less vulnerable because it has little or no exposure to the U.S. financial system. Last month, a former trader from the company asked Reuters, “More pressure? Do you think they [Zhuhai Zhenrong] really care?”
Combined, China’s Unipec and Zhuhai Zhenrong are contracted to purchase 505,000 b/d from Iran this year—about 85,000 b/d more than the imported average over the past two years. What they actually lift is up to their discretion but it could be influenced by ongoing talks.
The Geneva deal holds that Iran’s customers will be allowed to import “current average amounts” of 1 million b/d total. But that depends on enforcement. Some, like Turkey and India, may try to recover lost crude and satisfy existing contracts. China could use the Geneva deal and its seat at the P5+1 talks to as a guide for imports as well. It might even bet on a breakthrough and buy more oil.
Iran, for its part, should be expected to pursue any and all angles to increase exports, even if that means serious discounts or extended credit terms to begin retaking its market share.
For Iran, every barrel is significant.