Of all the things that could throttle Iranian oil exports--from geopolitics and high-level diplomatic game-playing to bloody conflict--at the end of the day, it’s seemingly innocuous insurance that threatens the plans of both buyers and sellers.
The U.S. and European nations may have lifted oil and financial sanctions against Iran last month, but the insurance companies covering the tankers that would have to transport Iranian oil pose entirely new challenges in the form of red tape.
According to insurance companies, there remains a lack of clarity surrounding the remaining U.S. sanctions. More specifically, even though Washington has lifted sanctions against Iran, there are still some legal obstructions to trading with Iran. And before insurance companies can move forward and commit to covering these cargoes, they have to be sure they are covering themselves.
This is where the confusion sets in: When the U.S. lifted sanctions against Iran in January, it lifted the general sanctions that kept non-U.S. companies from doing business with Iran. But sanctions on U.S. companies and entities remain in place. U.S. banks still can neither directly nor indirectly deal with Iran.
What most miss is that U.S. sanctions were removed over the nuclear program, but many layers remain over human rights issues and other sticklers such as terrorism.
These layers make it difficult for insurers to offer coverage. It means that the use of the U.S. dollar in an insurance pool that underwrites Iranian crude cargoes would violate the sanctions that remain. The situation gets a bit tricky when the American Steamship Owners Mutual Protection and Indemnity Association, Inc. (American Club) is part of the claims-sharing pool of the international group, according to the Wall Street Journal.
It’s difficult, but apparently not impossible, if you can navigate the layers to the right parts of the world. Trading giant Vitol says it’s already buying Iranian oil, several European oil companies have already chartered tankers for Iranian crude. Total SA has reportedly signed an agreement with Iran to buy 160,000 barrels per day effective from the 16th of February.
Spanish refiner Compania Espanola de Petroleos has booked some provisional Iranian crude cargoes to land in European ports, according to Bloomberg, and Glencore Plc trading house bought a cargo earlier this month.
But Lukoil’s trading arm, Swiss-based Litasco, has cancelled its booking of an Iranian cargo to Italy over insurance complications, according to Reuters.
Japan is a step ahead of other prospective importers of Iranian oil. In 2012, Japan’s Parliament approved government guarantees on insurance for Iranian crude oil cargoes, circumventing European Union sanctions and allowing for the provision of up to $7.6 billion in coverage for each Iranian crude oil tanker bound for Japan. But that law expires on 31 March, so it may have to go back to parliament for approval if the West hasn’t sorted things out by then.
The London-based International Group of Protection & Indemnity Clubs, which covers some 90 percent of global tonnage through reinsurance, is reportedly in talks with Washington to figure a way out of the insurance quagmire quickly, according to the Wall Street Journal.
As oil companies and traders line up to take advantage of new product fresh from the confines of sanctions, most will hit a temporary wall in the search for tankers to transport their Iranian crude. There are still a lot of logistics to sort out, and it’s not likely to happen overnight, but the underwriters are working furiously to make it happen. Not least because right now, according to shipping representatives cited by Nasdaq, some 8 billion barrels are trying to make their way to the European Union.
For now, a solution that doesn’t violate sanctions remains elusive.
By Julianne Geiger
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