Iran Barters and Bargains to Help Oil Sales

WSJ

After being hit by European and U.S. sanctions, Iran's oil sales are stabilizing as the country entices buyers with attractive prices and a form of barter. But proposed new U.S. restrictions could further bite into its crude exports later this year.

South Korea, historically the fourth-largest buyer of Iranian crude at 239,000 barrels a day, represents the potential limits of Western pressure on Iranian exports.

The Asian nation stopped buying Iranian oil, which had accounted for about 10% of its needs, when a ban on insurance coverage from European companies left private refiners SK Energy and Hyundai Oilbank Co. unable to load Tehran's crude. The move was part of a pullout by Iranian oil buyers that halved the country's exports after the European Union imposed an oil embargo and the U.S. put pressure on Asian buyers to cut purchases in exchange for waiving sanctions against their own banks. Iranian crude production has fallen to below three million barrels a day, a level not seen since 1990, the aftermath of Iran's war with Iraq.

Yet, South Korea in recent days has signaled it was likely to resume crude purchases from Iran, possibly as early as September.

A form of barter set up by Iran provides an incentive to keep—or in the case of Seoul, to resume—its crude purchases. Faced with banking sanctions that impede its ability to receive crude proceeds and settle its bills for imported goods, the Islamic Republic increasingly gets paid into accounts based in the Asian countries where it sells the oil and in their local currency. Iranian traders then draw on the reserves to purchase goods exported to Iran.

South Korean products are ubiquitous in Tehran—from smartphones made by Samsung Electronics Co. Ltd. 005930.SE -0.31% to LG Electronics Inc. 066570.SE -0.30% televisions and even costume dramas on local televisions; Iranian imports from the country amounted to $6 billion last year. An unnamed official at Hyundai Oilbank said last week it was in the final stages of talks with Iran to resume crude oil imports from the Middle Eastern country beginning next month.

"South Korea is obviously interested in maintaining its non-oil business with Iran," says Michael Dei-Michei, an analyst at Vienna-based oil consultancy JBC Energy GmbH.

Bartering with India and China is already cushioning Iran exports against further decline. Flows of Indian rice, medicine and steel to Iran have surged in recent weeks after Tehran's private banks were able to use the rupees gained from oil sales and were even allowed to pay for the goods 100% upfront, one Iran trade professional said.

However, locking both sides in a captive trade relationship isn't the only reason why buyers are still interested in buying Iranian oil. South Korea is negotiating the use of Iranian tankers—insured by the Islamic Republic—and the loss of Tehran crude is economically costly.

Seoul's "refining sector would simply have a very hard time finding replacements for Iranian oil" at competitive prices in the long run, Mr. Dei-Michei says.

Global oil prices, including the Saudi crude that Korea is using as a substitute for Iranian oil, have rebounded in recent weeks amid positive news over the global economic recovery.

By contrast, Iran has is showing more flexibility when it comes to negotiating prices—a move China has taken advantage of. After a pricing dispute that ended with Beijing getting the upper hand, the country, long Tehran's largest oil buyer, has reversed a cut in Iranian imports, boosting them by 17% in June.

As a result, Iran's oil exports have stabilized in the past two months at about 1.1 million barrels a day and the rate of decline of its production has slowed, according to analysts.

To offset the decline in output, Iran is replacing Western technologies with domestic ones. According to a study published in Iran's oil ministry in-house magazine, Iran is now self-sufficient in technologies such as seismic-exploration software and most drilling cement and wellhead equipment.

Yet, Iran is unlikely to achieve better than stagnant production. It has tried to sell its oil to new customers such as Egypt, where millions of barrels of its oil are stored, and Russia, but has failed to reach a final agreement with buyers in either country, according to people familiar with the efforts. An Iranian oil marketing official declined to comment.

Attempts in Iran to boost refining to increase the exports of oil products are also facing challenges. One manager at one of Iran's largest refiners, Pars Oil Co., says the firm is struggling to import some chemical additives for its refineries because of the falling value of the Iranian currency, the rial.

An official at Pars Oil & Gas Co., a different company and which oversees the development of the country's largest natural-gas field, said the company won't rely on local manufacturers for the majority of its pipes because "they don't have enough experience…there is a problem with standards."

By the end of the year, new sanctions in the U.S. could dent both oil exports and production. Lawmakers approved penalties last week on firms insuring the National Iranian Oil Co. or the National Iranian Tanker Co. or provide tankers to Iran, though the measure has yet to be signed into law.

But when it does, Nigel Kushner, a sanctions expert on London law firm W Legal, says he expect this new legislation "will slice further Iran's crude oil exports" because of "the fear it brings" in dealing with Iran.

Write to Benoît Faucon at [email protected]