This weekend the world witnessed what has been hailed as the most significant diplomatic breakthrough since the collapse of the Soviet Union: the lifting of nuclear sanctions against Iran.
The lifting of sanctions, which came late Saturday, followed confirmation from the UN’s International Atomic Energy Agency that Tehran had fulfilled its obligations under an agreement last summer to limit its nuclear program.
The IAEA report triggered Implementation Day, which will give Iran access to billions of petrodollars frozen in foreign banks and remove the constraints that have capped the country’s crude exports at just 1 million b/d over the past four years.
Iran on Sunday activated plans to lift oil production by 500,000 b/d.
Below Platts highlights details of the sanctions that have been lifted, Iran’s plans to raise oil production and exports, and what this means for an already oversupplied global oil market.
- The European Council lifted its nuclear-related sanctions January 16.
- Sanctions lifted by the US include a ban on commodities trade for non-US citizens, who will now be permitted to trade with Iranian government institutions and sell goods and services.
- Companies from outside the US will be able to start doing business with Iran immediately, without sanction from the US.
- Sanctions will no longer apply to non-US persons providing underwriting services, insurance, or re-insurance for the Iranian energy sector, including vessels for the transport of crude oil, gas, oil and petrochemical products to or from Iran. The insurance ban had made it hard for many of Iran’s remaining crude customers in Asia to arrange transport of their oil purchases.
- Companies will no longer be sanctioned for investments in Iran’s oil, gas and petrochemicals sectors, or buying and transporting Iranian crude, oil products and petrochemicals. The sale of refined products and petrochemicals to Iran will also no longer come under US sanctions, nor will transactions with Iran’s energy sector.
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Some US sanctions remain
- A number of older US sanctions against Iran remain in force, including those imposed for Iran’s alleged support of terrorism and human rights violations, which experts say might be tricky for companies to navigate.
- Still in force is a US trade embargo preventing US entities from conducting business with Iran and which bans the import of Iranian oil into the US. It also effectively prohibits any US dollar transactions with Iran since those typically transit through US banks.
- Restrictions on exports of US upstream and downstream technology to Iran, unless granted a license by the Obama administration, will also remain in force.
- However, the US Treasury Department has said it will permit foreign subsidiaries of US companies to operate in Iran, provided there is no involvement of US citizens, technology or financing.
Iran’s oil plans
- Iran’s oil ministry activated its planned 500,000 b/d oil output increase Sunday, issuing an order to its state-owned companies to increase production and placing the National Iranian Oil Terminals Company on standby.
- If achieved, this volume would take Iranian output to around 3.39 million b/d and exports to 1.5 million b/d.
- Top Iranian officials including Mehdi Assali, oil ministry head of OPEC affairs, and Amir Hossein Zamaninia, deputy oil minister for international and commercial affairs, said Iran plans to regain its lost market share but in a manner that would have the least impact on oil prices.
- Iran has based its next budget for March 2016-March 2017 on an oil price of $40/b and exports of 2.25 million b/d, Gholamreza Kateb, a government spokesman said Sunday.
- Iran hopes to attract top international oil companies to its upstream sector to help it develop its vast reserves of oil (estimated at 157 billion barrels) and gas (about 1,200 Tcf). It has designed a new upstream contract model that it will present in London in February.
- Iran is currently pumping less than 3 million b/d. A Platts survey estimated that the country produced 2.89 million b/d in December.
- The International Energy Agency has said it expects Iran to be able to achieve crude output of 3.6 million b/d — similar to the 2011 level — within six months of the lifting of sanctions.
Immediate impact on supply
- The immediate impact on exports is expected to come from Iran’s considerable floating storage. According to latest data from cFlow, Platts trade flow software, between 47 million and 49 million barrels of Iranian crude oil and condensate is stored on a combination of vessel classes on ships of the state-owned National Iranian Tanker Co. and other ship operators.
- Market sources have estimated 65% of this volume to be condensate and expect some of this to trickle into the spot market in Asia. They have, however, said that Iranian condensate has limited outlets in Asia due to its high sulfur content.
- Only six oil importers are currently allowed to buy crude from Iran — China, India, Japan, South Korea, Turkey and Taiwan — down from around 20 before sanctions were tightened in mid-2012.
- Zamaninia said Sunday that China, which imported an average 539,509 b/d of Iranian crude over the first 11 months of 2015, would remain Iran’s top buyer.
- All Asian buyers have said they will be interested in Iranian oil as long as the pricing is competitive.
- The EU had imported nearly 600,000 b/d of Iranian crude and condensate before the tightening of sanctions in 2012. Most of this volume went to Spain, Italy and Greece. Spanish and Italian refiners have said they are interested in resuming Iranian crude imports once sanctions are lifted.
- Increased supply from Iran could affect demand for West African, Russian, Caspian, North Sea and Iraqi crudes, among others, which have replaced Iranian volumes.