Iran Pulse

Resumption of Iranian oil shipping off to slow start

Article Summary
While many are hailing Iran's first oil tanker reaching European shores as an important development, the country's energy sector must still overcome several more hurdles.

In mid-January, an Iranian oil tanker leased to a Spanish oil company reached Europe. It called at the Port of Algeciras in Spain two days after the one-year anniversary of the implementation of the Joint Comprehensive Plan of Action and shortly before US President Donald Trump took office on Jan. 20. The managing director of the National Iranian Tanker Company (NITC), Sirus Kianersi, hailed the development: "Today, after resolution of insurance, classing, flagging and international certification issues for Iranian vessels, we have witnessed another JCPOA achievement for the country's marine transportation."

Before the nuclear deal was reached, it would have been impossible for an Iranian tanker to unload Iranian crude oil at a European port due to the EU sanctions against Iran. Among other things, these restrictions banned European imports of Iranian crude, prevented European energy companies from entering Iran’s energy industry, cut Iran off from international banking and insurance systems and since 2012, denied the NITC access to European ports.

In several respects, the NITC’s resumption of oil deliveries to Europe is a big step forward for Tehran and a sign that the nuclear deal is working toward ending Iran’s isolation.

For instance, Iran can now finally utilize its own tankers. The country’s fleet is among the world’s largest, though rather old and thus only partially operational. Apart from the cost dimension — using its own tankers will likely be cheaper for Iran than needing to hire probably reluctant foreign services — there is also a political dimension. Wary of engaging with Tehran even as the nuclear-related sanctions are lifted, international shipping lines as well as their insurers might take an even more cautious stance toward the country in light of potential new US sanctions targeting international firms engaged with Iran. It should be noted that in 2010, the US Treasury Department fined Danish shipping giant Maersk more than $3 million in relation to its engagements with Iran. Tehran is certainly more flexible and secure in terms of ensuring steady deliveries using its own ships.

By and large, however, the step does little to change the outlook for Iran’s energy industry. In the year since the January 2016 implementation of the nuclear deal, Iran has already achieved the maximum of what was possible in the short term. The country has steadily moved back to its pre-sanctions position in terms of crude oil production and exports, with output reaching 3.7 million barrels per day (mbpd) by the end of 2016 and exports of crude and condensate peaking at 2.6 mbpd in September — though some sources put it as high as 2.8 mbpd.

All this happened before the first Iranian oil tanker reached Europe. Actually, Iranian oil exports to Europe began rising long before the NITC’s resumption of deliveries to the EU.

Iran’s ability to increase oil production and exports beyond current levels does not hinge on the use of its own tankers. A series of other obstacles will need to be overcome. Iran will need to increase its production capacity beyond the current ceiling of around 4 mbpd. To this end, Tehran needs to attract investment and technology from abroad. According to Oil Minister Bijan Zangeneh, the Iranian energy industry needs some $100 billion in foreign capital. At this point, however, it is uncertain whether and how the administration of President Hassan Rouhani will succeed in luring international energy companies to the country.

Domestically, in order to move forward with the long-delayed new petroleum law aimed at attracting foreign investment and technology — the Iran Petroleum Contract — the Rouhani administration will need to strike a balance. During the sanctions years, companies affiliated with the Islamic Revolutionary Guard Corps and other entities linked to the conservative camp moved into Iran’s energy industry. Considering their political influence within the Islamic Republic, their consent and participation in the development of the Iranian energy industry will be necessary for the law to proceed. Tellingly, the first and thus far only such contract has been awarded to an entity overseen by Supreme Leader Ayatollah Ali Khamenei.

Internationally, Iran must convince foreign companies to engage in its energy sector by concluding binding contracts rather than what has largely been offered thus far: non-binding memoranda of understanding. This change has become more difficult as the Trump administration has increased harsh rhetoric toward Iran and, within weeks of taking office, already imposed new sanctions — though in response to an Iranian missile test. As such, uncertainty over the future of the nuclear deal has increased. Trump’s continued statements during his campaign that his “No. 1 priority is to dismantle the disastrous deal” have already had repercussions. On Feb. 9, French energy giant Total announced that its final decision on engaging in Iran depends on whether the United States will continue implementing the nuclear deal by renewing sanctions waivers this summer. If the Trump administration is going to “decide to tear up the Iran nuclear agreement,” Total’s CEO Patrick Pouyanne noted, “We'll not be able to work in Iran.”

This position has been met with harsh criticism in some circles in Tehran, with one member of the Iranian Parliament even declaring in response, “The new model of oil contracts has been shelved.” However, it should be borne in mind that statements like these are arguably intended more to show strength in the domestic political debate, given that there has been no decision by the parliament or the government in this regard. Rather, Zangeneh has sought to temper expectations, remarking on the challenges after the lifting of sanctions, “Two-meter-thick ice does not melt in one night.” At any rate, the episode highlights the difficult circumstances under which the Rouhani administration is seeking to realize international cooperation in the Iranian energy sector.

Europe’s welcoming of an Iranian oil tanker, coinciding with the Trump administration assuming office, is a positive step forward and a symbol of the progress made possible by the nuclear deal. But from the point of view of Brussels and Tehran, both of which have publicly committed themselves to continue implementing the nuclear deal, it also draws attention to the challenges ahead in safeguarding the nuclear deal.

Found in: oil contracts, european union, eu sanctions, donald trump, jcpoa, iran nuclear deal, iran sanctions

David Ramin Jalilvand works in the Middle East and North Africa department of the Friedrich Ebert Foundation in Berlin. He specializes in energy and international politics. On Twitter: @davidrjalilvand


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