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Iran sanctions force rethink of crude supplies

February 5, 2012 11:28 am

By Peter Ward

When a country is forced to change crude supply, the impact on its industry can be severe. Worst case scenario is significant down time for its manufacturing and downstream facilities, while at the same time being forced into heavy spending to replace its crude supply.

Both Greece and Japan have expressed concerns over how an embargo would affect their economies. With the financial situation poor globally and particularly bad in the Euro zone, this could be even more problematic for Greece.

“It could be quite significant, it could require down time basically,” says Sam Ciszuk, Middle East and North African analyst at KBC Energy Economics. “On the other hand you might be able to source relatively similar qualities if you had time to do the leg work. It might cost a little extra, particular now when there’s going to be a rush for the door. Given how pressured the factors are in Europe, it may prove problematic for some.”

Russia and Saudi could make up shortfall

Where these countries could look to make up the supply is an interesting question. Ciszuk believes the shortfall could be made up from Russia, an ally of Iran which has condemned the sanctions. Saudi Arabia is another country which may profit from the sanctions, as it has the spare capacity to quickly supply new countries. The UAE has also been mentioned as a possible alternative for Japan.

The impact on these countries which rely on Iranian oil will vary depending on how quickly the ban is implemented.

“It depends on the time frame, how quickly they are going to implement sanctions. We know the EU is to implement a very big delay – 6 months or so,” explains Ciszuk. “If Iran were to implement a counter embargo with an immediate time frame then I guess there are some European countries which could prove awkward. But by now these things have started being discussed so one has to assume that everybody’s started making preparations. So I think we’ve gone past the stage where any action would leave someone unable to operate.”

The impact on the European markets may be minimal, as long as Iran doesn’t impose a counter embargo at very short notice. The possibility of Iran pre empting the EU is a strong one.

Chris Tedder, Research Analyst at Forex.com recently said: “It is unclear whether any attempts by it to limit the supply of oil would have the intended impact. Firstly, global oil markets are currently well supplied and being bolstered by increased distribution from Libya, following the fall of Gaddafi’s regime. Furthermore, European nations could turn to numerous other oil producers, including Russia, Libya and Saudi Arabia.”

But the impact on the Iranian energy sector if sanctions do go ahead could be extreme.

“The embargo will make a difference. It will force the Iranian’s hand. They are exporting to the EU about a quarter of their exports, and there will be fewer buyers buying larger quantities. This will force Iran to be more reliant on a small number of clients which of course weakens its position in pricing terms. That is what the EU has wanted to achieve with these sanctions. It really complicates in the long term its marketing operation,” comments Ciszuk.

Iranian oil sector in deteriorating state

Iran’s oil sector is already said to be struggling. Sanctions over a number of years have led to deterioration of equipment and facilities in the sector and this has led to a number of explosions and shut downs over recent years.

“Some recent explosions may have been sabotage, including the pipeline accidents. But indeed much of Iran’s oil infrastructure is old and badly maintained. This is partly due to sanctions but, again, more caused by underinvestment,” Robin Mills, head of consulting at Manaar Energy Consulting, tells AMEinfo.com.

Despite sanctions, it has become very clear that the Iranian energy sector is in need of investment. “The fact that they have been able to hold up their export levels in the way that they have given the maturity of most of their largest producers, it’s been quite impressive. But there is a deep technology need and it’s becoming clearer and clearer that they are short on these things for quite some time,” says Ciszuk.

Sanctions on the Iranian oil sector will pose serious questions for the countries which currently rely on its oil. But the fact remains that there are other options available on the market and there is no shortage of supply in sight. Therefore either a sanction by the EU and other countries or a counter embargo by Iran can only damage the country itself. Until the world is convinced by Tehran’s plans for nuclear power, it seems its crumbling energy sector is doomed to fail, and possibly take its economy with it.