Iran scrambles to lift petrochemical sales as sanctions hammer oil

  • Jun 12, 2019
  • Kitco

LONDON/DUBAI/SAO PAULO (Reuters) - Iran has been racing to step up exportsof petrochemicals and tap new markets to compensate for sliding oil sales,Iranian and international industry sources said, but now risks losing thatcrucial revenue as Washington tightens the screw on sanctions.

Tehran has been selling increased volumes of petrochemical products at belowmarket rates, in countries including Brazil, China and India, since the UnitedStates reimposed sanctions on Iranian oil exports in November, according to thesix sources who include two senior Iranian government officials.

Available ship-tracking data also points to a rise in monthly shipmentssince then.

The scramble to bolster petrochemical sales could be an indication of howsuccessful the U.S. administration of Donald Trump has been in choking offIran’s oil revenues, which have fallen further than under previoussanctions in 2012.

While the November sanctions applied to petrochemicals as well, the fourindustry sources said there was a degree of ambiguity given the multiple typesof products - including urea, ammonia and methanol - which allowed Iran to keepselling.

However on Friday the U.S. Treasury moved to tighten the restrictions byprohibiting companies from doing any business with Iran’s largestpetrochemical group, Persian Gulf Petrochemical Industries Company, citing itsties to Iran’s elite Revolutionary Guards. The measures also apply to 39subsidiary companies and foreign-based sales agents.

The Treasury said it intended to “vigorously enforce” the newpetrochemical sanctions, which could deal another hammer blow to the Iranianeconomy.

It is difficult to put a comprehensive figure on Iran’s income frompetrochemicals, Iran’s second-largest export industry after oil and gas,but officials said in February that non-oil revenues had surpassed the amountearned by oil exports.

This week Iranian media quoted Ahmad Sarami, a member of the Iranian Oil,Gas and Petrochemical Products Exporters’ Union, as saying Tehranreceived $11 billion from petrochemical exports in the year ending in March.

The petrochemicals push comes as Iran’s oil exports fell to around400,000 barrels per day (bpd) in May, less than half of April’s level anddown from at least 2.5 million bpd in April last year, according to tanker dataand industry sources.

Iran’s annual oil revenue has averaged around $50 billion in recentyears. However a senior U.S. official said in March that Tehran had lost $10billion in revenue since sanctions were reimposed in November.

In a sign of the shifting industry landscape, Iran’s Supreme LeaderAyatollah Ali Khamenei said in Tehran in April that Iran should move toward thesale of oil products such as petrochemicals instead of crude.

Iranian authorities, who do not recognize U.S. sanctions, dismissed thelatest restrictions announced on Friday and vowed to press on withpetrochemical exports. Sarami of the exporters’ union described theAmerican measures as “psychological warfare”.

A spokesman for Iran’s National Petroleum Company confirmed theramp-up of petrochemical exports since November, but declined to comment on thedestinations.

In recent weeks Iran has been sending test cargoes to Brazil, a new marketfor Iranian petrochemicals exports, said two separate international tradingsources, who like the other sources declined to be identified due to thesensitivity of the matter.

Carlos Millnetz, a director at chemical company Eleva Química Ltda, based inBrazil’s southern Santa Catarina state, told Reuters they had beenimporting urea from Iran.

“Iran wanted to diversify the destinations, they were looking for aBrazilian partner, and we thought it was a good opportunity,” he said.

Millnetz said the company had checked with the Brazilian government beforestarting the business and established there were no restrictions.

“What they told me was that U.S. sanctions applied to oil-basedproduces, crudes and fuels, etc. Ammonia by-products such as urea are notincluded, they can be traded,” he added. “I had all the paperwork,all the permits from the government, I would never do something that had anyrestrictions.”

He said the latest sanctions announcement did not affect the purchases.

Two Iranian vessels, Bavand and Termeh, made deliveries to Imbituba port insouthern Brazil between March and April bound for Eleva Química, publiclyavailable ship-tracking data shows.

At least 230,000 tonnes of urea had already been booked for Brazil in recentweeks, which included the two shipments for Eleva Química, the trading sourcessaid.

Ship-tracking data showed at least 10 vessels carrying petrochemicals eachmade at least two voyages from Iran in November, whereas in October fourvessels each made one trip. However, the data may not give the full picturebecause ships can turn off their tracking transponders and there can be limitedport reception, including in Iran.

Two industry sources, who are based in the Middle East and Asia and arefamiliar with Iran’s petrochemicals activity, said the country had beenselling cargoes into China and India, which are established markets, and hadmade some overland deliveries to neighboring Pakistan.

Iran has been offering discounts in the region of $40 per tonne cheaper thanmarket rates of about $260 to $280 a tonne, saving buyers millions of dollarsin equivalent currency, the sources added.

Ship-tracking data showed at least 10 cargoes of methanol had been shippedto China from Iran since the start of the year. It was not clear who bought thecargoes.

There were separately multiple shipments to India this year to unknownbuyers. One vessel made at least six voyages to India from Iran and transportedcargoes of ammonia, according to ship-tracking data and sources with knowledgeof the matter.

The country of origin of petrochemicals is much easier to conceal than thatof grades of oil.

The U.S. sanctions imposed in November banned purchases of Iranianpetrochemical products which include “any aromatic, olefin, and synthesisgas, and any of their derivatives, including ethylene, propylene, butadiene,benzene, toluene, xylene, ammonia, methanol, and urea”.

However a separate document by the Treasury’s enforcement divisionOFAC says “in keeping with the EIA’s (U.S. Energy InformationAdministration) standard definition, petroleum products do not include naturalgas, liquefied natural gas, biofuels, methanol, and other non-petroleumfuels”.

This could suggest a discrepancy in the types of petrochemical products thatwere banned, such as methanol and fertilisers, the industry sources said.

Behzad Mohammadi, Iran’s deputy petroleum minister for petrochemicalaffairs, said in May that the wide diversity of petrochemical products and highinternational demand for them made the industry unsanctionable.

However, Aaron Hutman, Washington-based counsel with law firm Pillsbury,which advises companies globally on sanctions compliance, said firms couldstill be leaving themselves open to potential penalties by dealing in Iranianpetrochemicals.

“Companies should not perceive discrepancies or loopholes in secondary sanctions,” he added. “The goal of U.S.officials appears to have been a comprehensive warning, and non-U.S. companiesor banks would be taking a risk in any attempt to parse words within thepetrochemical universe.”

Given the uncertainties over sanctions enforcement, Iranian traders saidthey had been cautious in conducting business.

Two Iranian traders said they had struck petrochemicals deals using frontcompanies in Turkey, in Dubai in the United Arab Emirates and also otherneighboring countries, declining to disclose further details.

One of the traders said cargoes were concluded either in cash using non-U.S. dollar currencies or by barter, to avoid falling foul of separate U.S. financial sanctions that bar Iranian companies from the global dollar system.

The traders said they used euros and UAE dirhams in transactions and that buyers in Turkey and the UAE were more likely to be middle men who then redistributed cargoes.

A senior Iranian government official, who declined to be named due to the sensitivity of the matter, said shipments through Turkey had been stepped up since November, with the port of Izmir a favored gateway.

A second senior official, who has been involved in meetings with buyers, said there was huge interest in Iranian petrochemical products because of their quality and price.

“Pressure by any country cannot stop Iran’s exports,” he added.

Additional reporting by Aizhu Chen and Meng Meng in Beijing, Marwa Rashad in Riyadh, Nidhi Verma in New Delhi, Saad Sayeed in Islamabad, Yuka Obayashi in Tokyo and Humeyra Pamuk in Washington; Editing by Pravin Cha