Crunch time for Iran

By Eric Watkins

LOS ANGELES, May 14 – International sanctions against sales of Iran’s oil are being felt in the Islamic Republic, a factor which many Western officials attribute to Tehran’s push for renewed talks over the country’s nuclear energy program.

The primary factor in Iran’s desire for talks is the reduction in its exports of crude, which the International Energy Agency sees falling off significantly from levels achieved a year ago – and for very significant reasons.

“1Q12 imports from Iran seem to be around 0.3 million barrels per day (b/d) below 4Q11 levels, and that imports in April look to have fallen more sharply, with much of the drop apparently being funneled into the 0.5-0.8 million b/d that Iran seems to have placed in floating storage,” IEA said.

“Although sources acknowledge that Iranian floating storage has risen over April, total volumes vary between 23 and 35 million barrels (bbl), with up to half of the Iranian fleet possibly engaged in storage,” IEA said.


The agency said that the difficulty in knowing precisely how much of Iran’s oil is being stored comes from the fact that crude oil tankers controlled by the National Iranian Tanker Co (NITC) have reportedly been ordered to routinely deactivate their Automatic Identification System (AIS) transponders.

“Switching off the transponders, even for only a limited period of one or two days, can hamper that tracking of a vessel’s movements,” IEA said, adding that deactivation of transponders permits vessels to obscure destination ports and ship-to-ship transfers in mid-ocean.”

Very clearly, deactivation of the transponders can be used to protect the guilty when it comes to determining just who is buying Iran’s oil as well as how much they are buying. But the more important point is that the obscurity also masks how much oil is going into storage.

The significance of this has not been lost on Nigel Kushner of the UK-based Whale Rock Legal Ltd, who wrote in a recent article for the Mondaq Report, that Iran potentially faces a complete shutdown of its oil industry as it runs out of space to store its produced but unsold crude.


“It is said that 14 of NITC’s fleet of 25 very large crude carriers, each loaded with about 2 million bbl of oil, are now at anchor acting as floating storage, with a further five of Iran’s nine Suezmax tankers, with capacity of one million bbl, also parked offshore with oil aboard,” Kushner said.

“This suggests Iran’s difficulties in selling its oil are getting more acute,” he said, adding that with more than half the NITC fleet at anchorage, Iran’s capacity to export oil is severely curtailed.

“The Iranian shipping sources said that storage tanks on land at Kharg Island, with capacity of some 23 million bbl, are now full,” said Kushner, who drew the ominous conclusion that, “If it cannot find new buyers for its crude Iran’s only option other than floating storage would be to curtail oilfield production.”


In its assessment of the situation, the IEA reported that Iran is due to take delivery of the first of eight new very large crude carriers that are due to be completed in 2012.

IEA did not report when the new VLCC’s are due, but it doesn’t take much of a mathematician to determine that Iran is running out of storage exactly as fast as it is producing oil that does not sell – exactly as fast.

If Iran has to shut down production for lack of space to store that oil, then it surely will face even further problems down the line. Oilfields may or may not respond quickly to efforts at restarting them, if they respond at all.

Little wonder then that Iranian officials are heading to the negotiating tables twice this month, first with the International Atomic Energy Agency on May 14-15, and then with the Group of Five plus One around May 24.


The sanctions against Iran are working. With oil prices relatively high, Iran is not suffering too terribly much at the moment. But if its entire industry faces shutdown, then the Islamic Republic will simply have no oil to sell. Worse, its fields might even become permanently or completely damaged.

That is a steep price to pay for nuclear weapons – something that Iran professes not to want. If so, then the Islamic Republic needs to do just one thing: allow international inspectors to determine that its nuclear program is aimed at nothing more than atoms for peace.

That’s a small price to pay, especially when measured against the loss of the country’s entire oil industry. What responsible leader would wish to be known as inflicting such a catastrophe on his own country and on his own people, not just for now, but forever?

© Glamma Productions Inc. 2012


About Eric Watkins

Eric Watkins is a consultant specializing in oil diplomacy. A former journalist, Mr. Watkins's work has appeared in numerous leading publications including The Wall Street Journal, The Economist, The Financial Times, and specialist media such as Oil & Gas Journal, Middle East Economic Survey (MEES), and Lloyd's List.
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