Today, Monday, June 21, 2010, Senate Banking Committee Chairman Chris Dodd (D-CT) and House Foreign Affairs Committee Chairman Howard Berman (D-CA), conference chairs for the bill to strengthen Iran sanctions, announced that they had agreed on a draft joint text to reconcile the House and Senate bills imposing additional sanctions on Iran for its illicit nuclear program and support of terrorism. A press release from the House Committee stated that H.R. 2194, the Comprehensive Iran Sanctions, Accountability, and Divestment Act of 2010 would impose an array of tough new economic penalties aimed at persuading Iran to change its conduct, including targeting business entities involved in petroleum product sales to Iran.
The United Nations Security Council imposed its fourth round of sanctions against Iran’s nuclear program on June 9. While U.S. President Obama praised the UN resolution as “the toughest sanctions ever faced by the Iranian government,” the U.S. and its allies had taken months to negotiate sanctions that many felt were watered down to avoid vetoes by Russia or China, permanent members of the Security Council. China insisted that economic targets such as banks and energy companies not be singled out, but the U.S. succeeded in obtaining oblique language in the sanctions’ preamble noting “potential connection between Iran’s revenues derived from its energy sector” and possible financing for its nuclear program.
As other nations have increased sanctions on Iran, China and its companies have moved in to fill the void. According to a Financial Times analysis, China has overtaken the European Union to become Iran’s largest trading partner. Iran imports consumer goods and machinery from China, while China imports oil and petrochemicals and plans to import liquefied natural gas. A senior Iranian official reported has complained publicly about the quality of Chinese-made equipment.
The U.S. and Europe conceded that the sanctions fell far short of what they would have wanted by immediately announcing that they would enact more stringent sanctions on their own, once the resolution passed, giving them the UN imprimatur for harsher measures. The sanctions are intended to insure that Iran’s nuclear program is used only for domestic energy and not to fuel a nuclear weapons program. Iran claims that it needs nuclear power for domestic energy. Ironically, it is the international sanctions caused by Iran’s intransigence regarding inspection of its nuclear program that are crippling development of the country’s conventional oil and gas sources.
Iran’s Gasoline Imports
Iran’s proved oil reserves of 137.6 billion barrels (BP Statistical Review of World Energy 2010) accounted for more than 10 percent of the world total, ranking it number three behind Saudi Arabia and Venezuela. But its 2009 oil production of 4.3 million barrels per day represented only 5.3 percent of global output. Sanctions, among other factors, have prevented Iran from expanding its refining capacity, with the result that Iran still has to import more than a third of its gasoline requirements. This makes Iran’s gasoline imports a tempting target. As far back as June 2008, then British Prime Minister Gordon Brown called for oil and gas sanctions on Iran during a visit by then U.S. President Bush. In the meantime, both the U.S. House of Representatives and Senate have passed bills aimed at Iran’s gasoline imports and the text announced today by Sen. Dodd and Rep. Berman will form the basis for discussion by the Conference Committee. A reconciled bill could be passed by both chambers this summer, but whether President Obama would sign the bill into law may hinge on the Congress giving the President more leeway to relax the sanctions on countries or firms that are providing other support to constrain Iran’s nuclear program.
All of the U.S. and European rhetoric has had an effect. Companies who sold gasoline to Iran as recently as last year, but now have halted sales, reportedly include BP, Royal Dutch Shell, India’s Reliance Industries, Swiss firms Vitol and Glencore, Russia’s Lukoil and the Dutch company Trafigura. France’s Total and Malaysia’s Petronas remain Iran’s principal gasoline suppliers.
Several Chinese firms are believed to supply Iran, but this is difficult to trace as shipments often are reportedly routed via Singapore or other third parties or consist of spot purchases routed to Iran. JP Morgan commodities head Lawrence Eagles estimated that last autumn 30,000-40,000 barrels per day (b/d) of Chinese gasoline were moving from the Asian spot market to Iran via third parties. This suggests that even if Europe and the US impose sanctions on selling gasoline to Iran, various “black market” routes will continue to channel supplies, especially if the sanctions succeed in raising the gasoline price in Iran significantly higher than global trading prices.
According to Iran-China Chamber of deputy head Majid-Rez Hariri, China—the world’s second largest consumer and importer of oil after the U.S.—relies on Iran for 11 percent of its energy needs. Iran is China’s third-largest oil supplier, supplying some 460,000 b/d in 2009. China’s Zhuhai Zhenrong Corp., the largest single lifter of Iranian crude, extended its 240,000 b/d contract this year. China cut back purchases of Iranian petroleum products in 2009 due to uncompetitive pricing by Tehran. China National Petroleum Corp., the state-owned onshore giant, signed a $2 billion, 12-year MOU in July 2009 to develop Iran’s North Azadegan oilfied following withdrawl by a Japanese firm. China’s Sinopec, previously the state-owned refiner and marketer, but now a fully integrated state oil company, finalized a $2 billion deal in 2007 to develop Iran’s huge Yadavaran field.
With the U.S. and Europe increasing the pressure on Iran’s gasoline imports, supplies are likely to be constrained and price pressures greater. This might actually help the Iranian government to finally increase gasoline prices and reduce the huge impact of gasoline subsidies on the government budget. The higher gasoline prices also are likely to fuel a much larger black market. Whether these sanctions bring Iran to the bargaining table over its nuclear program remains to be seen.
