An international market for Iranian oil


Iran’s petrochemical and steel sectors have grown rapidly over the past two decades, but that growth has been nearly halted by sanctions.

While crude oil exports (Iran’s most important foreign exchange industry) have sharply reduced with no hope of recovery, other resources such as petrochemicals, mines and metals could have been a way out for the Islamic Republic, however, these sectors were also sanctioned in Spring 2019.

There are currently more than 50 petrochemical plants are operating in Iran. The annual production capacity of these units under normal conditions is over 60 million tons. Petrochemical exports, for example, peaked from under $3 billion by 2005 to $15 billion by 2011. Due to the large variety of petrochemical products, the sanction on these petrochemical products will have its own challenges. Another issue is the market diversification of these products, which has expanded from neighboring countries to the EU and Latin American markets. Iran can maintain its share of the petrochemical market by selling petrochemicals on the gray market, but it must sell them at a lower price. How to get money for products they sell will be another problem.

Having the world’s second largest gas reserves, Iran has the potential to increase production of petrochemicals. The petrochemical industry’s needs are reasonably priced and available in Iran, allowing petrochemical products to be marketed at a lower price than other major petrochemicals. Given that Iran’s main export is oil and oil derivatives under normal circumstances, the Iranian government developed a comprehensive plan to increase petrochemical products and intend to increase both the quality and variety of petrochemical products by increasing new petrochemical plants and rebuilding the old ones. With this plan, the country would have been able to increase the share of these products in its exports by increasing non-oil exports while reducing reliance on oil exports.

In 2015, after the nuclear agreement was agreed upon and sanctions were on the way to being lifted, Iran openly declared that it was seeking $200 billion in investment to develop its oil industry. Of this, $130 billion, it was posited, ought to be spent on the upstream of the oil and gas industry. Many of Iran’s oil wells are in the latter half of their lives, and their production capacity is rapidly decreasing. Energy, mainly from oil exports, is one the main foundations on which Sino-Iranian relations have been founded in recent decades. China’s growing economy needs energy from a variety of reliable sources, and Iran’s huge oil and natural gas reserves go a long way toward covering surpluses in demand. By 2017, the bilateral volume of trade amounted to around $37.2 billion – massively in China’s favor. China is Iran’s foremost trading partner.

The Iranian government is also trying to negotiate with other investors in China and Russia to find new customers to sell oil and deal with oil and financial constraints, using past experiences. Forming tenders, selling to the private sector, using digital currencies, using domestic means to explore, rehabilitating and renovating facilities, reducing domestic consumption, tackling fuel smuggling and increasing the efficiency of energy carriers, form the bulk of Iran’s efforts to reduce the effects of sanctions.

The fact remains that the potential realization of the U.S.’ aims for Iranian oil sales to hit zero depends on various factors coming into play. The world is facing increasing demand for energy and compensation for reducing the supply of 2.5 million barrels of Iranian oil on the market by other producers will not be an easy task and requires time. Venezuelan exports have also fallen due to such conditions, and both have contributed to the rise in global oil prices.

The U.S.’ latest sanctions target various ends of the industry, including consumers, producers and investors who are willing to cooperate with Iran, which increases the risk of a large dent in Iran’s economy to a degree which will only become clear in the next five years or so.

China’s oil imports from Iran amounted to 874,000 barrels per day on the eve of U.S. sanctions being re-declared in August 2018. The last record available showing China’s oil purchases from Iran were 803,000 barrels per day. Comparatively, the amount of oil purchased from China in January 2018 amounted to 304.5 million barrels per day, up 32.2 percent from the 229.9 million barrels purchased in the whole of the 2017 period, thus growth in trade was on a steady course.

Despite sanctions, China is expected to remain Iran’s largest oil customer, as Beijing has consistently said that trade ties between the two countries will continue despite sanctions, China being one of the few countries with the clout to remain unaffected by U.S. sanctions against cooperation.

Iran is likely to step up its efforts to maintain its economic and political ties with China and will strive against China to safeguard its multiple interests against the looming crisis. Beijing will likely continue its economic engagement with Tehran to pursue well-needed oil supplies. This will likely be coupled with political engagement with Tehran aimed at mitigating Washington’s desire to punish Chinese firms.

Of course, it is possible for Iran to sell as much as 100,000 to 200,000 barrels per day through smaller operators that do not interact with the United States and thereby would not be directly affected by sanctions. During the last round of sanctions, this was provided by many Malaysian companies active in Iran, taking shipments from hidden storehouses. Iran is likely to sell 500,000-600,000 barrels this way but may not be able to have a regular customer who can regularly redeem these supplies. Part of this regard payment, if Iran exports oil to China, it cannot take its money.

However, it may take money from smugglers. Iran’s problem is the export and receipt of money. India still owes much debt to Iran on this very basis. The Chinese account has just been settled for three months. Korea also still owes Iran from the previous boycott. It is likely that the latest round of sanctions will thus squeeze Iran’s purse even more effectively.

Iran can increase exports and production in spite of these limitations, but its main problem will be attracting foreign investors, which is rooted in U.S. sanctions: sanctions that prevent large multinational corporations from investing in Iran.

The repeated threats of U.S. officials to apply secondary sanctions against any country that continues their trade relations with Iran, such as the words of the head of the Iran’s Action Group, which was recently raised in response to China’s emphasis on maintaining economic relations with Tehran, has forced Washington to look further into maintaining its power to enforce the regime.

As one of the eight countries that Washington has given a six-month exemption clause to, China has been allowed to purchase 360,000 barrels of crude oil per day from Iran beyond the implementation of general sanctions. According to U.S. sources, the terms of the purchase and payment method have also been specified.

China purchased an average of 655,000 barrels of oil from Iran between January and September 2018. The United States has given eight countries, China, Greece, India, Japan, Italy, South Korea, Taiwan and Turkey, exemptions from import sanctions for six months. One of the reasons for this exemption was that these countries had significant amounts of Iranian oil in their energy baskets. China is set to continue oil imports after this time, however, and U.S. officials in August said they could not persuade China to stop importing Iranian oil, yet the Chinese have agreed not to increase their purchase from beyond the limits set by the six-month waiver.

The geopolitical importance of producing and exporting petrochemical products is that the industry generates added value because of gas processing and the creation of diverse products in different categories. In this way, it hampers the crude sale of energy resources and with the activity of production units, the cycle of petrochemical industries becomes more active, leading to economic growth and employment creation.


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