Iran and Its Oil Buyers Prepare for Return of U.S. Sanctions

By Benoit Faucon

LONDON -- The Trump administration says it expects Iran's oil buyers to begin winding down their purchases Tuesday in response to sanctions being reimposed by the U.S. Some are seeking alternatives, but countries including China, India and France, are considering creative measures to keep importing Iranian crude.

Starting this week U.S. sanctions against Tehran on sectors like automotive and aircraft are set to return following President Trump's decision in May to pull out of the nuclear agreement with Iran.

Oil companies will have until November 4 to adjust to the returning U.S. ban on buying Iranian oil. "The three-month wind-down period is starting, " Dario Scaffardi, chief executive of Italian refiner Saras SpA -- a buyer of Iranian oil -- told analysts last week. "So, we expect to see the effects sort of now."

The threat of dwindling oil sales is forcing Tehran and its oil buyers to react. The U.S. sanctions come as Iran faces a collapsing currency and protests over living conditions. Petroleum is a main export, accounting for nearly a fifth of Iran's gross domestic product.

But overall oil exports declined in July by 300,000 barrels a day to 2.3 million barrels, according to Paris-based shipping-data tracker Kpler, as European refiners cut purchases ahead of returning sanctions. The country's losses could ultimately amount to 1 million barrels a day, said Richard Nephew, who helped enforce U.S. sanctions five years ago as deputy coordinator for sanctions policy at the State Department.

In recent months, U.S. officials have said they expect Iran's oil exports to either disappear completely or to decline significantly. The Treasury Department has carried roadshows with State Department and other government counterparts over the last 90 days explaining what sanctions will snap back when all the wind-down periods end in November, a U.S. official said.

Italy's Saras already has decided to reduce Iranian oil purchases before November because of the difficulty of finding payment channels, according to executives. The company declined to comment further.

Nations that regularly do business with Iran are in a difficult position. "We have informed our oil customers that we will only buy their commodities if they buy our crude," Asadollah Gharekhani, spokesman for the Iranian parliament's energy commission told Iranian state-media last month. It is unclear how mandatory such practice will be. An Iran oil-ministry spokeswoman didn't return a request for comment.

The European Union, China and India have said they won't enforce sanctions -- unlike their response to restrictions against Iran oil in 2012. But they may still bow to the pressure as their oil companies would risk being blocked from the U.S. financial and oil markets. Banks and shippers already are stopping trade with Iran because their businesses are exposed to the U.S. Oil companies in those nations are considering follow suit because they have assets in the U.S. or are exposed to the U.S. financial system.

Last month, Iran's vice president Eshaq Jahangiri said the country would privatize the sale of its crude, a workaround that could be effective by putting the onus on private businessmen to sell the commodity. Iran employed the method to market its oil products and petrochemicals during previous sanctions with the help of small Chinese and Russia banks and intermediaries, according to Iranian traders and transaction documents reviewed by The Wall Street Journal in 2015.

Tehran also has begun to increase reliance on the privately-owned National Iranian Tanker Co., to replace foreign tankers in deliveries to India, according to data from shipping website Fleetmon.com, which gives access to data on tanker movements.

Most importantly, Iran plans to use a barter system -- which avoids sanctionable transfers to the nation -- through which oil payments are deposited into accounts in oil-importing countries and used by Tehran to buy goods.

Some European Union's nations may consider the process, according to a European official involved in the contingency planning. Countries like China, India and, more recently, Russia have used it successfully to buy Iran's crude.

In a joint statement Monday, the EU, France, the U.K. and Germany said they are committed to work on the continuation of Iran's export of oil and gas.

Tehran also has started shipping to small buyers in Latin America, including a delivery to Chile over this past weekend, according to a European sanctions official and tracking data.

French, German and British governments are considering the use of their national banks to activate accounts for the Iranian central bank, which could receive oil payments, according to European officials. However, "the United States could still sanction the oil companies if they pay the central banks for the oil," said Mr. Nephew, who is now an adjunct professor at Columbia University's Center on Global Energy Policy.

Among other options, the French government is considering taking charge of the shipping and storage required to import Iran oil to replace private companies, the European official said. France could also buy Iranian oil from countries like China, India or Russia -- possibility refined for the latter -- if they have obtained exemptions, the official said.

The French finance ministry didn't return a request for comment.

Meanwhile, Total SA, the main importer of Iranian oil to France, has cut its purchases from Tehran and largely filled the gap with Russia's Urals crude grade, according to European traders.

Total didn't reply to a request for comment.

Shipping data from Kpler shows France hasn't imported Iranian oil since June 18, a loss largely offset by a 63% rise in Russian oil imports to France over the same period.

The impact of upcoming sanctions has been more mixed in Asia, where many refiners are state-owned and banks are often exposed to the U.S. financial system. South Korea didn't purchase oil from Iran last month for the first time in three years, according to Kpler. Meanwhile, Indian imports rose by 118,000 barrels a day.

Still, an Indian refinery owned by Reliance Industries Ltd. began buying crude from faraway countries such as Colombia and the U.S., a rarity. "They seem to be testing alternatives as they prepare to reduce Iranian oil imports," said Kpler's economic analyst Reid I'Anson.

Reliance didn't return a request for comment.

China, generally the largest buyer of Iranian oil, is gearing up to take more, said a senior U.S. official said. The Asian powerhouse is engaged in a dispute over trade tariffs with the U.S. and uses a state-run bank with no American connection, giving it leverage in fighting the sanctions.

Sarah McFarlane and Ian Talley contributed to this article.

Write to Benoit Faucon at benoit.faucon@wsj.com

(END) Dow Jones Newswires

August 06, 2018 10:04 ET (14:04 GMT)

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