In an effort to counter U.S. sanctions on its oil exports, Iran offered its first oil cargo in Tehran’s energy stock exchange to “private companies”. Less than a third of the volume offered was sold at $74.85 a barrel on October 28.
One million barrels of light crude was offered and 280,000 barrels were sold reportedly to three buyers, Shana reported. Iran plans to attempt again on October 29 to sell the rest of the oil.
Iran wants to get the private sector’s help to export oil to international markets as US is preparing to implement oil sanctions on the country on November 4, expected to halve its 2.1 mb/d crude oil exports in 2017 in the first step and zero exports over an 18-month period.
Iran keeps the identity of buyer companies confidential, but ISNA reported that the participant companies include the subsidiaries of Iranian banks as well as non-stock exchange corporations.
The mechanism of purchasing oil in Energy Stock Market is that the companies must pay 20% of value before receiving cargo in Kharg oil terminal in the Persian Gulf. Then, one of state-run banks including Melli, Export Development, Sepah or semi-official banks including Saderat (Export), Tejarat (Trade), Mellat or private banks including Pasargad, Parsian as well as Saman should issue a guarantee for the rest of the payments.
The buyer should pay off all debts in 50 days after receiving the oil cargo. In case the buyer cannot sell the cargo, it should pay 5% of purchase price as compensation and return the oil to the National Iranian Oil Company (NIOC). The buyer is allowed to sell cargoes only in Iran’s non-traditional markets, which include China, India, Japan, South Korea and Turkey.
Regarding the $74.85/barrel price as well as the 50-day deadline for payment, the buyers can sell the cargoes to dealers in spot markets. NIOC itself provides 60 days of credit for purchases, free shipment and offers discounts for all its traditional clients.
But one important issue is whether the companies allowed to buy oil from this market are real private companies or connected with government banks and institutions.
If “private” companies buying oil are politically connected and fail to pay back for the oil they received, then it is basically government banks that have to carry the slack, as guarantors of the contracts. This will hugely increase the risk of corrupt deals.
Price issue and payment
According to the official website of NIOC, the country’s official selling price formula for light oil is $5.2 below Brent Oil benchmark price for northwest Europe and Africa and $4.7 below Brent price for Mediterranean markets. Regarding the current $77.66 Brent price, it is unlikely the private Iranian companies can sell the purchased cargo at $74.85/barrel in these markets, but they can sell the small cargoes to Asian or regional dealers, small refineries or companies in cash.
The value of the 280,000 barrels sold on October 28 is about $21 million and the Iranian companies should pay off the 80% of this value through foreign currencies. In spot markets -like all other oil markets- the payments are carried out through US dollar and local companies have no choice but bring cash dollars back into the country or convert them to other currencies and deposit into the NIOC’s bank accounts inside or outside of the country.
During the previous round of sanctions (2012-2015), the Iranian government attempted several times to offer oil in Energy Stock Exchange without any result. But, outside of the exchange, about $2.7 billion worth of oil cargoes were sold to an Iranian businessman named Babak Zanjani and about $230 million was sold to Iran’s Police Force. However, none of them paid off their debts. Zanjani was arrested in 2013 and sentenced to death, while in the case of the police, its commander general Esmail Ahmadi-Moghaddam was early retired and some high-ranking officials were reportedly arrested.
Risks and rewards
Involving in oil deals puts the Iranian entities as well as their foreign clients in US sanctions risk. US also can expand the range of sanctions to Iran’s private sector, banks and even stock market.
There is also the risk of involving semi-official companies in suspect deals, corruption, payment problems, etc.
The National Iranian Oil Company which has been the only official institution for oil exports until now, offers only light oil in the Energy Stock Exchange. All of Iran’s domestic refineries use only this type of oil. In case the private sector would not be able to find clients, the cargoes can easily be returned to NIOC and used in the local refineries with above 1.7 mb/d capacity.
On the other hand, Iran perhaps sees another advantage in this scheme. Involving non-governmental entities in oil export can confuse tanker tracking institutions in following Iran’s exports and its markets.