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Oil industry sees China winning, West losing from Iran sanctions

Public Policy

As the European Union prepares to ban Iranian oil and the United States turns the screw on payments, oil executives and policymakers say China and Russia stand to gain the most and Western oil firms and consumers may emerge the biggest losers.

Iran will continue to sell much the same volume of oil – 2.6 million barrels per day or around 3 percent of world supply – but almost all of it will flow to China, they reason. And being pretty much Iran’s only remaining customer, Beijing will be able to negotiate a much reduced price.

The EU will ban Iranian oil from July. The United States plans sanctions on Iran’s central bank and possibly its shipping firm. European headquartered oil firms such as France’s Total and Royal Dutch Shell have already abandoned Iranian oil purchases or are in the process of doing so.

Japan and South Korea have signalled they may reduce purchases of Iranian oil to comply with U.S. sanctions designed to put pressure on Tehran over its nuclear programme.

That leaves a growing number of buyers competing for alternative supplies. Inevitably attention has turned to Saudi Arabia, the world’s biggest exporter and the only country that can quickly increase oil output and help the West avoid a price spike that would deal a severe economic blow.

The IMF said this week that crude oil prices could rise 20 to 30 percent if Iran were to retaliate by halting its oil exports altogether. Oil industry executives meeting in Davos said energy markets can afford to lose half of Iran’s 2.6 million barrels per day. That would be roughly equivalent to supplies lost during Libya’s civil war in 2011. They are confident Saudi Arabia will fill the gap.

“What we say is that oil is fungible. Iranian oil will still find its way into the market, to Asian markets, China and possibly at a lower price,” a top Saudi source told Reuters, speaking on condition of anonymity because of the sensitivity of the matter.

“But if let’s say 50 percent of Iranian oil is lost, we have spare capacity, we have the capacity to replace it as Libya has shown,” he added.

The chief of Saudi state oil monopoly Saudi Aramco, Khalid al-Falih, moved from one bilateral meeting to the next during the World Economic Forum this week. Over the past month or so the kingdom has received requests for additional oil from the European Union, Japan and South Korea. The European Union and Turkey buy almost a third of Iranian oil exports with the rest going to China, Japan, South Korea, India and South Africa.

“As a regular conversation we talked about increased supplies. Saudi Aramco is always positive,” Jun Arai, the head of Japan’s Showa Shell, told Reuters.

Russia too stands to gain from Western sanctions on Iran. The world’s biggest oil producer is well positioned to raise its market share in Europe, despite misgivings among some Europeans about relying too heavily on Russia for oil and gas. Payment disputes between Russia and neighbouring Ukraine have in the past threatened transit gas supplies to Europe.

“I’m sure Moscow is watching the situation with big interest,” said José Sergio Gabrielli, chief executive of Brazil’s Petrobras. Arkady Dvorkovich, the Kremlin’s top economic aide, concurred that Russia stood to benefit from sanctions that were guaranteed to keep oil prices at least at current levels around $100 a barrel by his reckoning.

Showa Shell buys 100,000 barrels per day from Iran under a deal that expires in March and like other firms would be exposed to U.S. sanctions if not given a waiver under the latest ban on dealing with Iran’s central bank. “We are waiting for guidance from the government,” said Arai.

For Total the guidance has been clearer. French President Nicolas Sarkozy has been one of the main advocates of tough sanctions. “We have already stopped (buying from Iran),” said Total’s chief Christopher de Margerie. The firm was previously lifting 80,000-100,000 barrels per day (bpd) from Iran.

Peter Voser, chief executive at Royal Dutch Shell, said his company might take some time before suspending purchases, which market sources estimate at 100,000 barrels per day.

“We are a European company and therefore we are affected by the sanctions and we will obviously oblige and implement the sanctions. I need to study all the details in order to see how it goes forward,” he said.

Apart from Total and Shell, Europe’s biggest buyers of Iranian oil are Italian, Spanish and Greek companies.


China has so far refrained from buying more Iranian crude but the perception in the industry and among diplomats is that the world’s No.2 oil consumer will find it hard to resist buying unsold Iranian oil at a knockdown price.

“I think (the Iranian) oil will go somewhere else … Iran may give a discount to make it easier and quicker but nothing will change,” said De Margerie.

Robert Hormats, U.S. under secretary for economy, energy and agriculture, could not say with certainty that sanctions would reduce Iran’s oil exports but he predicted more pain for the Iranian economy.

“You cannot predict what they (Iran) will do and how much they will discount their oil. But it will certainly cause more and more discomfort to the Iranian economy,” he said, adding that China too had an interest in a ‘constructive outcome’.

“No one has an interest in Iran continuing its non-peaceful nuclear programme,” he said. Iran says its nuclear programme is for peaceful purposes – electricity generation and medical equipment.

To maximise the impact of the sanctions, the U.S. will apply waivers very “selectively” and “responsibly”, Hormats said. In addition, the U.S. administration is talking to Congress about extending sanctions to Iran’s shipping fleet although the discussion is at an early stage, he added.


4 Comments on "Oil industry sees China winning, West losing from Iran sanctions"

  1. DC on Fri, 27th Jan 2012 3:30 pm 

    Western oil firms never ‘lose’. But if consumers,(thats everyone not one of the elites), pays higher prices, well thats ok too, the TPTB will just point the finger at Iran(again), and shift the blame on them. Thats how the much the game is rigged against the few independant oil-exporting countries. If China benefits, that can be useful too, for those that are pushing the yellow-peril trope. Iran does not seek war, if anything, they probably just want to be left alone, and for the amerikans to go away. A not uncommon feeling on this planet.

  2. Plantagenet on Fri, 27th Jan 2012 7:26 pm 

    Obama’s sanctions on Iran, like many other misguided policies from the Obama administration, actually wind up damaging the USA. The last thing the US economy needs is higher gas prices, which is the inevitable result of Obama’s policies.

  3. DC on Fri, 27th Jan 2012 9:51 pm 

    There is no ‘Obama’s’ policy, there is just the policies of the amerikan oil-war-coal-wall st-corpoate state. He is simply the actor that follows the script they have written for him. If mother terrsa were alive and US president, ‘she’ would have carrier battle groups threatening Iran just the same. Hell, if the US president were an in-animate carbon rod, the inert motion-less rod would be giveing speeches in congress about the grave threat Iran and its ahhh….WoMD are to the world.

  4. BillT on Sat, 28th Jan 2012 1:54 am 

    DC, you and I know that the puppets in DC are not running the show. It appears that the political religions still have followers believing that there are two different plans and if they only vote for the right guy/gal, everything will be OK. Of course, that is bull crap. Both parties are on the same game plan using only enough differences to make the illusion seem real. Obama is just another Bush, maybe worse, but the other characters vying for the position of head puppet are no better and maybe even worse.

    The US is F’d and the rest of the world knows it. They are just hoping we collapse before they do or before we attack them and ruin their country.

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