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Oil firms reap benefit of Iran’s build-up of crude stocks home

Sanctions fail to discourage all trade with nation under west’s scrutiny for nuclear potential

28 September 2010

??Iran’s president, Mahmoud Ahmadinejad, likened a recent UN resolution on sanctions to ‘a used hanky’. Photograph: Behrouz Mehri/AFP/Getty Images

In March Barack Obama’s argument for tougher international trade sanctions against Iran and its lucrative oil industry was brutally simple. “The long-term consequences of a nuclear-armed Iran are unacceptable,” he said.

The UN, EU and US Congress seemed to agree, passing into law fresh restrictions in June and July aimed at frustrating Iran’s economic development and inhibiting its crude oil exports of 2.2bn barrels-a-day, representing 80% of all its trade abroad.

In response, the rhetoric from Iran’s president, Mahmoud Ahmadinejad, was colourful; he belittled this summer’s UN resolution on sanctions as “a used hanky that should be thrown in the dustbin”.

Nevertheless, the latest moves seemed to be working for Obama and other leaders worried about the intent of Iran’s uranium enrichment and possible wish to build a nuclear bomb. Exports of crude, which fill the coffers of the Iranian government and so are important for a nuclear programme, have reportedly dropped as big firms, including BP and Reliance Industries of India, have ceased buying altogether.

So why, according to sensitive trading records seen by the Guardian, did other European oil giants, including Shell, Total and API, increase their purchases?

The answers illustrate the tendency of the increasingly complex measures being taken against Iran to throw up unintended consequences, and the apparent willingness of some oil firms to place profits ahead of the west’s political strategy.

Oil traders say Ain Soukhna is where the effect of the latest sanctions has been most visible. This Red Sea port is where the Suez-Mediterranean pipeline starts and where many Iranian oil tankers deposit their loads for sale to western markets.

Although the latest sanctions have not prohibited the purchase of Iranian crude, they have clamped down on finance, shipping and insurance, which has caused buyers to pull out amid the complications. Insurers are reluctant to cover cargoes, and banks have stopped issuing credit letters. Analysts believe a backlog of more than a dozen tankers laden with Iranian crude, at anchor in the Gulf of Suez this summer, was partly caused by the sanctions.

Buying Iranian crude remains legal for all but US companies (long banned from buying), so the fall in demand has provided an opportunity for some oil firms.

“Iran had a lot of oil being stored in the Red Sea and at Sidi Kerir, in Egypt [the other end of the pipe],” said an oil industry source. “They didn’t know what to do with it. Everyone was afraid to buy because of the sanctions. So these three oil companies said, we’ll take it.”

In the two months before the UN voted through its fourth set of sanctions, on 9  June, affecting finance, insurance and shipping sectors, Shell’s trading company, Satsco, spent at least $778m on Iranian crude, according to documents seen by the Guardian. In the two months after the sanctions Satsco spent $1.38bn and at a better discount from the index price than in the previous period. API Oil, from Italy, spent more too, and, again, on better terms. Shell, Total and API all stressed they bought the oil at the market price and that no additional discount was received.

“The financial restrictions are causing a major hindrance for the export of crude and Iran needs its oil income for government spending,” said Manouchehr Takin, a petroleum analyst at the Centre for Global Energy Studies in London. “Some companies are aggressive and when there is less competition they can get good deals. There is a political risk but they assess that the danger of the US putting pressure on them is not worth [their] withdrawing.”

Another oil industry analyst said: “You can argue it was the sanctions that ended up causing the surplus. It was proportionately more difficult for Iran to sell its crude. The way the sanctions are working is through the banking system, so it is not surprising the bigger, more financially stable companies [do] more business.”

The British government has a clear line on trade with Tehran. The UK trade and investment website states that the government “does not encourage trade with, or investment in, Iran”.

But the oil firms argue forcefully that buying crude oil from Iran does not breach sanctions, and observers such as Sir Richard Dalton, Britain’s former ambassador to Iran, say that the world economy could not cope without Iran’s huge crude exports.

“Sanctions are not being used as a coercive instrument,” Dalton said. “They’re intended to send a clear signal that Iran’s economic future is going to be worse than it might be if they don’t reach an accommodation on their nuclear system. Any attempt to ban major items of trade such as oil exports won’t work. The worst-hit victims of that would be ordinary people.”

Last week the International Energy Agency was quoted as saying that the decline in buyers for Iranian crude oil was “the unintended consequence” of the new sanctions. Others said it was an effect Washington would welcome.

“If denying Iran access to the financial market has an impact on sales, that is not seen as a problem,” said David Kirsch, director of market intelligence at PFC Energy, the US energy consultants.

Some in the industry point out it is standard practice to try to benefit from improved trading terms, but this was not perhaps what the UN security council had in mind when it decided it wanted to tighten its grip on Iran’s finances, to persuade it to address its international atomic energy obligations peacefully.


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