Iran embargo impossible to meet as ships need its oil

Bloomberg - Europe’s oil embargo on Iran is having unforeseen consequences in the shipping market, making it almost impossible to determine if vessels are using fuel that violates the sanctions.

Supplies from Iran are a “vital blending component” to make ship fuel, known as bunkers, according to Barclays Capital. The nation accounted for about 8 percent of bunkers exported last year to Asia, the largest market, and about a third of the supply at Fujairah in the United Arab Emirates, the Middle East’s biggest refueling port, Barclays estimates.
Enlarge image Iran Embargo Impossible to Meet as Ships Depend on Blended Fuel

Visitors walk past oil tanks inside Fujairah port in Fujairah. Photographer: Gabriela Maj/Bloomberg

The European Union imposed curbs on Iranian oil because of concern the country’s nuclear program will produce an atomic weapon. The 27-nation bloc is enforcing the ban by extending sanctions to insurers, voiding the cover of ships carrying Iranian crude cargoes or using its fuel. The global fleet will spend more than $145 billion on bunkers this year, according to data compiled by Bloomberg using estimates from JBC Energy GmbH, a Vienna-based research company.

“This is a problem we didn’t foresee,” Peter Sand, an analyst at the Baltic and International Maritime Council, which represents 65 percent of ship owners, said by phone from Bagsvaerd, Denmark. “We don’t know how much Iranian oil is already blended in.”

The EU agreed to a phased-in ban on buying, transporting, financing and insuring Iranian oil on Jan. 23, with full implementation July 1. Ships breaking the sanctions will lose their insurance against risks including spills and collisions, according to the International Group of P&I Clubs, whose 13 members cover 90 percent of merchant vessels. About 90 percent of world trade travels by sea, the Round Table of International Shipping Associations estimates.
‘Uncertain Exposure’

“The sanctions were imposed in quite a hurry, and there are bits that are impossible to comply with or ensure you are definitely clean,” said Ben Knowles, a partner at Clyde & Co., a law firm with offices in 16 countries that specializes in international trade. “It’s an uncertain exposure because the likelihood of being punished for taking Iranian bunkers is perhaps not that high, but you can’t rule out a case being made in order to make an example.”

Iran, the second-biggest member of the Organization of Petroleum Exporting Countries, says its nuclear program is for civilian purposes. The next round of talks between Iran and the five permanent members of the United Nations Security Council and Germany is scheduled to take place in Vienna on May 13-14, Iran’s official IRNA news agency reported April 27.
Crude Production

Sanctions already cut Iran’s crude production by 250,000 barrels a day, or about 7 percent, to 3.3 million a day, and output may fall to 2.6 million by the middle of this year, the International Energy Agency said April 12. Crude traded on ICE Futures Europe in London rose as much as 18 percent to $126.22 a barrel this year.

While crudes from different fields can be identified by their chemical composition and structure, the origins of bunkers, a residue from oil refining, are harder to verify, said Andy Wright, a consultant at FOBAS, a unit of Lloyd’s Register Group that monitors fuel specifications.

“With bunkers there isn’t fingerprinting as with crude oil,” he said by phone from London. “The origin would technically be very difficult to establish, if not impossible.”

Iran is now shipping more fuel oil to Singapore, the world’s largest refueling port, and less to Fujairah, Miswin Mahesh, an analyst at Barclays in London, wrote in an e-mail.
Global Supply

Bunkers rose 6.6 percent this year in Fujairah and reached a 3 1/2 year high of $758.50 a metric ton on Feb. 27, data compiled by Bloomberg show. Fuel in Singapore advanced 4.6 percent this year after rising to the highest since July 2008 in February. Iran shipped a monthly average of 805,000 tons of fuel oil last year, ahead of Saudi Arabia’s 750,000 tons, according to Barclays. Russia accounted for 53 percent of global supply.

World Fuel Services Corp. (INT), the largest independent bunker supplier, has policies and procedures to ensure compliance with sanctions, Chief Financial Officer Ira Birns said in an e-mailed response to questions. The Miami-based company doesn’t comment on specific policies or contractual arrangements, he said.

Companies should verify their suppliers so that they can demonstrate they sought to avoid Iranian bunkers should they then be accused of breaching sanctions, said Sand of BIMCO.

A.P. Moeller-Maersk (MAERSKB) A/S, the world’s largest shipping company by market value, avoids Iranian bunkers by vetting suppliers and monitoring fuel specifications, said Jesper Rosenkrans, a fuel trader at Maersk Oil Trading, which buys more than 10 million tons of bunkers a year.

“We’re doing everything we can to avoid buying something we wouldn’t want to buy,” Rosenkrans said. “If somebody came to me and said, ‘Can you guarantee there isn’t 5 percent of some other product in a bigger pool,’ then the answer would probably be ‘no’.”