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Trump Battles To Avoid War With Iran

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Simon Watkins

Simon Watkins

Simon Watkins is a former senior FX trader and salesman, financial journalist, and best-selling author. He was Head of Forex Institutional Sales and Trading for…

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Iran’s Best Bet To Avoid U.S. Sanctions

Iran’s parliament last week passed a draft bill allowing for a massive increase in the number of oil and gas condensates refineries in the country, to be funded from investment from private sector companies and regional banks. Although the U.S. recently extended sanctions to Iran’s largest petrochemical group, Persian Gulf Petrochemical Industries Company, citing its ties to the Islamic Revolutionary Guards Corps (IRGC), together with a further 39 subsidiary companies and foreign-based sales agents, Tehran still believes that the petchems sector is its best bet to avoid the full focus of the U.S.’s renewed sanctions impetus.

It also believes that this is particularly the case if there is no direct link between these new refineries and the IRGC. By building out the number of its refineries from the current 16 – although four of these have a refining capacity of 10,000 barrels per day (bpd) of oil or equivalent or less – Iran also believes that in addition to the boost in its petchems export revenues (it also operates 55 petchems plants), it can move dramatically increase foreign earnings from liquefied petroleum gas (LPG) sales and safeguard its hard-won gasoline independence as well.

According to a comment last week from Iran’s spokesperson for the energy committee, Sakineh Almasi, only around 40 of the world’s total 650 refineries meet the technical specifications to process Iranian oil, whilst each of the new plants in Iran would be designed to process more than 50 types of petchems and other fuel products. It would also significantly boost Iran’s current refining capacity refining capacity from 2.1 million bpd, including the relatively small share of this that comes from gas condensates (just 0.4 million bpd).

Most of the new refineries will be in the middle of the capacity range of Iran’s current refinery line-up, which ranges from around 400,000 bpd for Abadan and Isfahan to about 5,000 bpd for Aras 1 and Yazd. This is the sweet spot as far as Iran is concerned from the perspective of avoiding intense U.S. scrutiny. Only last week, in fact, Iran’s Petroleum Minister, Bijan Zanganeh, said: “Building refining centres with a maximum 100,000 barrels per day capacity near the borders can help the country expand economic ties to neighbours and also circumvent the unilateral U.S. sanctions.” At the same time, he acknowledged that because Iran’s oil industry is largely state-owned it is “usually tangled with political issues and that is why sanctions can easily undermine this key sector.” Related: Is This The Beginning Of The End For OPEC?

Specifically, as reported by Oilprice.com recently, the IRGC has extensive links with all major sectors of Iran’s economy, including oil, gas, petrochemical, banking, automotive, telecommunications, construction, metals and mining. In 2016, just before sanctions were officially removed from Iran, testimony to a sub-committee of the U.S. House Committee on Foreign Affairs highlighted that the IRGC had significant ownership shares in 27 companies that were publicly traded on the TSE. In just the first year after the nuclear deal was agreed in principle in 2015, Oilprice.com understands that nearly 110 agreements worth at least US$80 billion were made with companies owned or controlled by IRGC-related entities. As it stands, a senior oil and gas industry source who works closely with Iran’s Petroleum Ministry told Oilprice.com, the IRGC has close connections with at least 200 Iranian businesses.

Consequently, finding any domestic Iranian oil and gas firm, including technology and engineering firms, which do not have at least some link to the IRGC will be an extremely challenging task. But the alternative flagged by Iran’s parliament – investment from regional Iranian banks – is as challenging. According to Iran’s own Central Bank of Iran’s (CBI) vice governor, Akbar Komijani, even before the latest U.S. sanctions were fully implemented, around 60% of the Iranian banking system’s non-performing loans (NPLs) are ‘category three’ by international debt repayment standards. This category comprises loans that have yet to be repaid after eight months, meaning that there is little hope of their recovery.

Moreover, an internal audit last year by the Finance Ministry showed that at least 70% of the country’s entire NPL burden is related to businesses directly run by – or closely associated with – the IRGC. “Obviously, if you are running a bank in Iran, you can’t put pressure on the IRGC to pay down its debt,” the Iran source told OilPrice.com last week. “By extension, therefore, a large majority of all Iran’s private banks are actually bankrupt, so the chance of them bankrolling anything on their own right now, let alone new refineries, is zero,” he added. About the same chance can be assigned to new foreign investment in the Tehran Stock Exchange allowing it to act in the usual way as a capital-raising mechanism for Iran’s oil and gas sectors. Related: US Oil And Gas M&A Remains Lackluster

Instead, a solution lies in new money being channelled into Iranian companies with no immediately obvious connection to the IRGC, and the two money channels will originate in Iran’s long-running ally, China, and its recent fair-weather friend, Russia. Although China has been doing its best whilst the trade war with the U.S. has been ongoing to maintain a relatively low-profile on its dealings with Iran, the signs are that this is changing. As exclusively reported by OilPrice.com recently, Zanganeh has just made an offer to Beijing that would mean that in exchange for China re-engaging with the development plan for South Pars Phase 11 originally agreed between the Petroleum Ministry and France’s Total, China will get a 17.25% discount for nine years on the value of all gas it recovers. In return, China would also have to agree to increase the production from its oil fields in the West Karoun area – including North Azadegan and Yadavaran - by an additional 500,000 bpd by the end of 2020. China as well, of course, has remained a buyer of Iranian oil through various methods – buying Iranian oil rebranded as Iraqi oil, tuning off ship transponders, and using mid-sea ship-to-ship transfers, among others - and news emerged last week that it is also still buying Iranian LPG. According to reports last week from Kpler SAS based on ship-tracking data, at least five supertankers loaded Iranian LPG in May and June that was destined for China, equating to around US$100 million of the gas.

The recent history of Russo-Iranian relations is much less straightforward, suffice it to say that there were signs last week that Russia’s inaction in implementing the lifeline deal that it threw Iran when the U.S. withdrew from the nuclear deal might be about to change to Iran’s favour. Specifically, according to comments last week from Central Bank of Iran Governor, Abdolnasser Hemmati, Iran has welcomes Moscow’s proposal for ‘trade co-operation’. This Oilprice.com understands from Iranian and Russian sources, will build upon an existing in-principle deal whereby Iran sells 100,000 bpd of crude oil to Russia and receives 50% of the value in cash and 50% in equipment.

According to Russia’s Deputy Foreign Minister, Sergei Ryabkov, last week, Moscow is willing to step in and help Iran with its blocked oil sales due to U.S. sanctions. “This is nowhere near the scale of the previous agreement in which Russia was to have given US$50 billion per year for at least five years to Iran in exchange for basically unfettered access and influence over its oil and gas reserves - and this will turn out to be a blessing for Iran that it avoided that – but it does mean that there will be technical and financial support for Iran, which, for example, can be used in building out this refinery plan,” the Iran source concluded.

By Simon Watkins for Oilprice.com

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  • Mamdouh Salameh on July 05 2019 said:
    The obvious way for Iran to avoid US sanctions is for the United States to see sense and re-join the Iran nuclear deal, withdraw the sanctions and then renegotiate with Iran over what the Trump administration refers to as Iran’s policies in the Middle East and also its continued development of long-range ballistic missiles.

    However, this is too much to hope for from a Trump administration manipulated by the hawks in Washington and Israel. As long as Israel and John Bolton the US National Security Adviser to President Trump continue to call the shots, this will never happen. Israel will never accept that Iran or any other Middle Eastern State acquires the technology to eventually produce nuclear weapons despite the fact that Israel itself is nuclear-armed to the teeth. The war on the late Saddam Hussein is a case in point.

    Despite the sanctions, I ran is managing very well to export large volumes of its crude oil with China, India, Turkey and to some extent the European Union continuing to import Iranian crude. Iran uses many ways of exporting its oil including barter trade, tuning off ship transponders and using mid-sea ship-to-ship transfers, supplying refined products to its neighbours and also selling directly to countries like China, India Turkey and and even Russia.

    Furthermore, Iran is proposing very enticing deals to buyers of its oil. In exchange for China
    re-engaging with the development plan for South Pars Phase II originally agreed between Iran’s Oil Ministry and France’s Total, China will get a 17.25% discount for nine years on the value of all gas it recovers. In return, China would also have to agree to increase the production from its oil fields in the West Karoun area – including North Azadegan and Yadavaran - by an additional 500,000 barrels a day (b/d) by the end of 2020.

    Moreover, Russia is reported to be refining a proposal for trade cooperation whereby Iran sells 100,000 b/d of crude oil to Russia and receives 50% of the value in cash and 50% in equipment.

    It is worth noting that since US sanctions against Iran were introduced, China has never stopped even for one minute buying Iranian crude. The same applies to India and Turkey. The three countries don’t recognize US sanctions and therefore they need no permission from the US to buy Iranian and Venezuelan crude.

    And while the US Special Representative for Iran Brian Hook is free to sanction what he describes as “illicit purchases of Iranian crude oil”, China and for that matter India and Turkey will not lose a minute’s sleep over his sanctioning.

    Dr Mamdouh G Salameh
    International Oil Economist
    Visiting Professor of Energy Economics at ESCP Europe Business School, London
  • Nima Farid on July 05 2019 said:
    I don't think the plan would be so much so removing IRGC's influence as it is replacing the resource that's being sold abroad. Oil sanctions are easy to enforce because they're easy to track. Because sales are in bulks and usually from iran to specific destinations (ie the 40 refinaries abroad), and in big tanker ships. However, refined products of oil are harder to trace, and are usually shipped with tanker trailers or pipes across the border, and are harder to trace and block. And, the profit from it, will be higher

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