Shayan Ghajar

The European Union approved the most hard-hitting sanctions against Iran to date July 26, in an attempt to compel Iran to accede to Western demands to halt its nuclear enrichment. The sanctions, more damaging than those passed by the United States as a result of Europe’s greater economic involvement with Iran, specifically target Iran’s two sectors most vulnerable to European nations: banking, and oil.

Of the two, measures against Iran’s oil industry will prove to be the most damaging for the Iranian government, as it derives over half its revenue from oil exports. Until recent months, during which the mere mention of future European sanctions drove many companies to seek their business elsewhere, much of Iran’s foreign direct investment, especially in energy projects such as refinement facilities and oil drilling projects, came from European companies such as Dutch Royal Shell and OMV.

What makes Iran’s oil industry a particularly inviting target for European sanctions is Iran’s lack of refinement equipment—ironically, though Iran has some of the largest oil and natural gas reserves on earth, it is unable to refine enough for its own domestic supply and relies on imported refined gasoline to meet the nation’s needs.

How will the newest European sanctions affect Iran, how will they fall short, and what strategies will Iran pursue to circumvent sanctions or minimize their impact?

What the E.U. Sanctions Will Accomplish

The European Union’s sanctions will undoubtedly have an immediate impact on Iran’s oil industry.

The language in the E.U. resolutions forbids European involvement in almost any sector of Iran’s oil industry, banning investment, shareholding, joint ventures, equipment sales, and loans, as well as merely the use of equipment owned by individuals or corporations subject to European Union authority.

A great deal of Iran’s foreign investments aimed at expanding current oil fields, such as the major South Pars projects currently underway, come from European corporations. However, European sanctions discussions slowed investments in expanding oil field capabilities, and now, such investments are halted altogether. This, in turn, has halted or slowed development in many of Iran’s nascent expansion programs, such as several phases of the South Pars, Iran’s largest oil and natural gas field.

Iran’s oil industry has, until now, relied on the use of European equipment for a wide range of projects aimed at increasing oil output and refining capabilities. Drilling rigs, for example, have often been purchased or contracted out from European companies. Refining technologies for the processing of unrefined petroleum will also fall under these restrictions, a significant blow to Iran’s hopes to reduce its gasoline imports from their current level at 40%.

Sanctions pose an additional obstacle to Iran’s gasoline imports, as maritime insurance companies such as Lloyds of London refuse to insure any ships heading to Iran. Reuters reports that only three gasoline shipments have arrived in Iran in July, enough to supplement only 7 or 8 days of domestic consumption. China’s Sinopec and Turkey’s Tüpraş continue to send shipments, though insurance issues have interfered with Turkish shipments. Venezuela, too, ships gasoline to Iran, but the costs for Iran are significantly higher due to the distance.

How the E.U. Sanctions May be Ineffectual

As InsideIRAN reported last week, many of the voids left by European pullouts are being filled by Chinese and Russian firms, as well as an increasing number of Turkish companies.

Russia denounced the European Union’s new sanctions July 27, saying they devalue the United Nations and go too far in restricting trade with Iran. Russia recently announced its intent to greatly expand contracts in exploiting hydrocarbon projects with Iran, and indicated it may ignore American and European sanctions when convenient or profitable. Gazprom and a number of other Russian companies have signed or renewed multi-billion dollar contracts with Iran in recent months. Russian Energy Minister Sergei Shmatko declared, “No sanctions will hinder our cooperation in hydrocarbons. It does not contradict either the U.N. Security Council sanctions or international law.”

China, too, has much to gain by ignoring European sanctions—though, as many Chinese energy corporations do not do business in Europe, they would not be subject to E.U. sanctions to begin with. Iran has typically been China’s third largest source of energy imports, though aforementioned difficulties for Iran in expanding and maintaining production due to sanctions have decreased its export to China. China, too, is a major source of energy for Iran, comprising the bulk of its gasoline imports. Sinopec, China’s largest oil company, is also increasingly involved in investments and contracts abandoned by European companies in Iran, as is Malaysia’s SKS, which already has several multi-billion dollar contracts in Iran.

Turkey continues to support continued negotiations and opposes sanctions, attempting to pick up the pieces of its hard-won Tehran Declaration. Turkish Finance Minister Mehmet Şimşek declared Turkey will not abide by European sanctions: “We will fully implement U.N. resolutions, but when it comes to individual countries’ demands for extra sanctions, we do not have to [follow suit].” Turkey’s Tüpraş, second only to China’s Sinopec in supplying Iran’s gasoline imports, stepped in after pullouts by European companies.

Iran’s Adjustments to Circumvent Sanctions

Meanwhile, Iran continues to utilize a number of tactics honed over decades of American sanctions to evade the more stringent measures taken by the European Union. These range from smuggling gasoline through Iraqi Kurdistan to meet domestic needs, to considering using a different currency for oil-related transactions, such as the Chinese Yuan or Emirati Dirham.

In the meantime, however, as more European companies pull out of Iran’s energy sector, Iran’s most significant stopgap measure has been to shore up its own industries with the government’s own oil money, investing over $46 billion in refining facilities to jumpstart the nation’s bid for energy independence. PressTV quotes a report from the Energy Market Consultants firm saying that Iran will, if its planned upgrades are successful, be a net exporter of refined gasoline by 2015. While this leaves a five year gap in which Iran will need to scramble to keep its gasoline supply steady, Iran appears to be already compensating—as mentioned above—by importing additional Chinese, Turkish, and Venezuelan gasoline.

The Wall Street Journal opines that pressure on gasoline imports, and greater demand than supply, “could raise the domestic political pressure on the Tehran government.” However, InsideIRAN’s analysis indicates otherwise, with a significant number of Iranians blaming the sanctions only on foreign governments rather than their own. Hardships caused by pressures on basic necessities are very unlikely to lead to a popular uprising, as even prominent Green Movement figures such as Mir Hossein Moussavi decry sanctions of any kind as needlessly harmful to the average Iranian.

Iran has also begun engaging in a drive to get more investors, shareholders, and bond buyers involved in the oil program. As the Washington Post story linked earlier mentions, an Islamic Revolutionary Guard Corps company previously involved in critical phases of the South Pars field pulled out amidst fears its military affiliation could scare away investors, due to sanctions on Iran’s military. Despite this, Iran claims that investment has risen 120% since the Iranian New Year (which started March 21) and the government has also issued $3 billion in participation bonds to help make up the shortfall left by European and IRGC pullouts.

Sanctions, it seems, will have an immediate effect on Iran’s oil production capabilities, though time will tell if the gaps left by European flight are to be filled by superpowers such as Russia and China, and it is impossible to tell if Iran’s adaptations to sanctions will successfully minimize the damage.