Is The Iran Conflict Really Cooling Down?

A couple of weeks ago we have run a special report, breaking down Iran’s actions against the background of the Trump Administration ending all waivers and levying a full-on sanctions regime on Teheran. A discriminating reader might have even foreseen the ongoing tanker wars – after all, amongst all the clandestinity and forged loading documents, murky ship-to-ship transfers in the Persian Gulf and GPS transponders switched off, Iran’s access to currency is waning by the day, amplifying the Rouhani government’s fragility vis-à-vis the hardliner conservative circles. The UK’s recent seizure of NIOC’s Grace I oil tanker, in floating storage for several months only to start off towards Syria in early June, stirs up the hornets’ nest without any real sense of where things would go from here.

The legal complexity of the “Grace I case” is quite astounding. Gibraltar’s territorial waters, in which the detention took place, are claimed by three different nations, namely the United Kingdom, Spain and Morocco. When Spain ratified UNCLOS in the 1980s, it did so by declaring that the territory of Gibraltar is not entitled to a territorial sea and in the absence of a comprehensive claim resolution, Madrid has kept its stance ever since, despite its seeming untenability in court. In practice, however, the United Kingdom is asserting a 3 nautical mile territorial sea zone around Gibraltar. So where does this leave the Syria-bound cargo? Under the United Nations Convention on the Law of the Sea (UNCLOS) vessels are allowed to effectuate transit passage through the Gibraltar Strait.

Roughly put, if the UK authorities will not be able to prove that the vessel was heading to an EU member country, its seizure was illegal under current international norms. According to the transit passage regime as stipulated by UNCLOS, vessels in transit passage shall refrain from any threats or use of force against the sovereignty and territorial integrity of States bordering the Strait, refrain from activities which might be deemed abnormal (except when force majeure conditions are not allowing the ship to stick with business as usual) and generally comply with international regulations, procedures and practices for safety at sea, e.g.: collision prevention etc. It will be quite a stretch to assert that the passage of Grace I endangered free movement in the Strait of Gibraltar.

Source: Neptune P2P.

The EU sanctions vis-à-vis Syria bar EU member states from importing crude oil and products from Syria directly or indirectly, purchasing and transporting crude or products located or originating from Syria, providing financial assistance or insurance to entities that are implicated in any of the cases above, as well as to participate in any Syrian attempt to circumvent the above. In this specific case, a Panamanian-flagged vessel under Iranian control with no crew belonging to EU countries was supplying Iranian crude to Syria without the involvement of any European financial entity. Thus, any attempt to extend the spirit of the EU sanctions to include Iran, too, directly contradict the basic tenets of international law, putting time pressure on the UK authorities not to let the vessel seizure protract itself.

Interestingly, the Spanish foreign minister Josep Borrell (soon to become the EU’s High Representative for Foreign Affairs and Security Policy) stated that the UK decided to storm the VLCC tanker following a request from the United States. Spain has obviously been sidelined by the UK’s late-hour Royal Marine raid to take over a vessel which was passing through an international transit zone, suffering yet another reputational blow. Yet there is a grain of truth in saying that the United Kingdom had zero benefits to be reaped from escalating the situation like this, especially considering the Basrah and KEB trade exposure of BP and Shell. Attesting to this is the UK government’s recent attempts to get out of the imbroglio, with Foreign Secretary Hunt vowing to release the vessel as soon as guarantees were received that Grace I would not be going to Syria.

Iranian Exports

Iran’s course of action remains somewhat perplexing. Despite claiming that the crude onboard the vessel is indeed Iranian, the Iranian Foreign Ministry issued a statement saying that the intended destination could not have been Syria as the Baniyas refinery cannot handle VLCC ships, without further specifying where exactly was it heading then. All the more perplexing as Grace I had the Eastern Mediterranean as its destination point throughout the lengthy route around Africa. The reversed Vasco da Gama across the African coast might seem somewhat contradictory, passing through the Suez could have been a wiser solution, albeit requiring the usage of less capacious vessels. Away from international flashlights, NIOC’s Silvia I vessel has successfully moved through the Suez and is now underway towards an unspecified location in the East Med.

Iran effectively shot back a couple of days later when three vessels from its maritime fleet reportedly harassed a BP-owned and chartered oil tanker, British Heritage, that was carrying Basrah crude from Iraq. The vessel is currently heading to the UK, having changed hands as BP decided to transfer the cargo to Royal Dutch Shell – despite being a Suezmax the vessel will be circumnavigating Africa. The standard Worldscale rate difference between the Suez Canal Route and the one around the Cape of Good Hope is 12.6 USD/mt – given the current freight rate Shell will pay an additional $0.8 million in shipping expenses, just to be on the safe side of not having to pass through waterways where the vessel it chartered is not harassed.

Iran’s exports overall have faltered to 0.22mbpd in July 2019 so far, exactly one-tenth of what it was a year ago. The main adverse development that NIOC has to contend with is the narrowing of its market outlets to Asia Pacific. The overwhelming majority of the several vessels which are currently sailing, laden with Iranian crude, is moving towards China – MT Sonia will reach Jinzhou in a couple of days, MT Snow is traversing the South China Sea as we speak, MT Daniel and MT Sevin seems to be en route to China, having passed through the Strait of Malacca. That amounts to roughly 7 million barrels of Iranian crude currently moving to China. To this one must add the couple of vessels ballasting outside of the UAE port of Fujairah and two Suezmaxes moving along the Red Sea.

On the back of faltering Iranian crude exports, the Joint Comprehensive Plan of Action (JCPOA) seems to be going down spectacularly. Be it France or Germany, European nations only stand by as Iran enriches uranium beyond the 3.67 percent threshold stipulated in JCPOA, whilst flimsily reiterating their commitment to keeping the deal. The long-mooted EU response to unilateral US withdrawal from JCPOA, a special purpose vehicle labelled INSTEX, is restricted to trade in humanitarian goods but so far only hypothetically as it became operational only two weeks ago. The EU flaunted the idea of including crude in INSTEX-run transactions last week, however even if it were to risk the ire of the Trump Administration (very unlikely), it would take months or even years until the solution is squared away.

One can say fairly confidently that the US-imposed unilateral Iran sanctions are working. They are working with the proviso that they are antagonizing long-time US allies by putting them on the back foot and making them look weak-handed, they are working despite ridding non-US refining businesses of profits and yes, they are working despite the non-feasibility of the Trump Administration’s aim of cutting off Iran’s exports. They might not work forever though as dissatisfaction grows. Hence, when Iran’s foreign affairs minister Mohammad Javad Zarif raised the issue of revisiting Iran’s defensive missile program, provided the US drop the crude embargo, perhaps it would be politic to find a negotiated solution to the one geopolitical conflict that embitters oil trade the most.