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Iranian Oil Production Could Be About To Plunge

Nick Cunningham

The European Union has vowed to maintain the Iran nuclear deal despite the U.S. decision to exit, and Brussels has pushed back against Washington’s attempts to penalize European companies from doing business with Iran. However, the early evidence suggests that the EU is struggling to keep the deal alive, as European companies have already begun cutting business ties with the Islamic Republic.

It has only been a few weeks since the Trump administration announced its withdrawal from the Iran nuclear deal, and we are still several months away from the deadline for when sanctions begin to bite. However, the U.S. Treasury has advised businesses to begin unwinding their business in Iran immediately, and there are more than a few examples that suggest international companies are heeding that advice (or threat).

According to the Wall Street Journal, a series of American companies that had been doing business with Iran under a technical loophole are now ending their ties, a list that includes Honeywell International Inc., Dover Corp. and General Electric. The announcement from GE was one of the more notable decisions, since the U.S. conglomerate was selling oil and natural gas equipment to Iran. GE’s foreign subsidiaries had plans for as much as $150 million worth of business, but is now pulling the plug entirely. Meanwhile, airplane manufacturer Boeing is set to miss out on some $20 billion in sales to Iran.

The WSJ says an estimated 17 American companies began commercial activity with Iran after the nuclear deal went into effect in early 2016.

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Still, the exit of European firms is even more significant, not least because European firms had larger plans for Iran than their American counterparts following the signing of the nuclear deal. Total SA is at the top of the list. The French oil giant had a $1 billion deal to develop the latest phase of the South Pars natural gas field, a project it ran with China’s CNPC. Total was the only major western oil company to ink a deal with Iran since the lifting of sanctions more than two years ago. Total is going to hand off its stake in the gas project to CNPC and pull out of Iran.

While the cancellation of promised investment in Iran is painful, a more significant impact will be how U.S. sanctions affect oil production and exports. Already, there are signs that here, too, the Trump administration is having an impact.

The shipping giant A.P. Moller-Maersk said it would no longer ship Iranian oil on its fleet. “With the sanctions the Americans are to impose, you can’t do business in Iran if you also have business in the U.S., and we have that on a large scale,” Maersk CEO Soren Skou said in a statement in May.

One of the more surprising announcements came from Reliance Industries, an Indian oil and gas company, which said it would no longer import Iranian oil. India is a large growth market for oil and also a crucial market for Iran.

European refiners are also winding down purchases of Iranian crude, despite assurances of support from the European Union. As insurance, shipping and financial giants cut ties with Iran, buying oil is becoming more and more difficult. “We cannot defy the United States,” a senior source at Italy’s Saras, which operates a 300,000-bpd refinery in Sardinia, told Reuters. “It is not clear yet what the U.S. administration can do but in practice we can get into trouble.”

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Sources told Reuters that Total, Eni, Spain’s Repsol and Cepsa, and Greece’s Hellenic Petroleum are all reducing or ceasing oil purchases from Iran. As Reuters notes, these companies account for most of Europe’s refining capacity.

The exodus of international business is leading to rising frustration in Iran. This week, Iran said that it would ramp up work on its nuclear program if the EU is unable to offer enough security to ensure European companies can continue to operate in Iran. To be sure, Iran’s nuclear plans would remain within the limits of the international accord, but the comments are a signal that the Islamic Republic might ultimately lose patience with the constraints of the nuclear deal now that the benefits are rapidly evaporating.

The estimates for how much Iranian oil U.S. sanctions will impact ranges, perhaps as little as a few hundred thousand barrels per day, or maybe as much as 1 million barrels per day. At first blush, the vow from the EU to continue with the nuclear deal immediately after President Trump announced his withdrawal seemed to offer reassurance that any disruptions would be minimal.

But the mass flight of top American and European companies, and the early signs of a significant decline in purchases from refiners around the world, plus the difficulty in finding shipping and insurance, all suggests that the supply disruptions could potentially be at the higher end.

By Nick Cunningham of Oilprice.com

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