Iran looks to keep its oil flowing as sanctions bite

TEHRAN - Iran is discreetly scouring the globe for second-hand oil tankers to replace its ageing fleet and keep crucial crude exports flowing as US sanctions start to bite, Iranian and Western sources said.

Since US President Donald Trump reimposed sanctions in November, exploratory talks with South Korea for up to 10 new supertankers have stalled, Panama has removed at least 21 Iranian tankers from its registry and Tehran is now looking for extra vessels in places such as Vietnam, the sources said.

Washington has put restrictions on Iran's port, energy and shipping sectors but it has given waivers to the country's eight biggest oil customers, which include China, India and Japan, so they can keep buying Iranian crude.

With oil exports accounting for an estimated 70 percent of Iran's revenues, maintaining an effective fleet of tankers to store and move that oil is crucial for Tehran.

But potential sellers of used vessels are more wary this time round after a Greek network that helped Iran buy tankers under previous sanctions was blacklisted. Western insurers are also steering clear, complicating Iran's attempts to export crude to US-approved buyers.

If Iran runs into difficulties exporting its oil it could have a significant impact. Besides the importance of oil for its budget, Iran is estimated to produce about 2.8 million barrels a day, more than 9 percent of OPEC's output.

"Whatever sector you look at, companies will keep in mind being cut off from the US financial system when deciding whether to trade with Iran," said Mehdi Varzi, an independent oil consultant who has previously worked at the state-run National Iranian Oil Co.

'Happy to do business'

Israel warned this month that its navy could take action against Iran, which it said was smuggling oil using clandestine measures similar to those employed during the previous round of sanctions, prompting Iran's defence minister to respond that it will react to any Israeli naval action against its oil shipments,

Israel's Prime Minister Benjamin Netanyahu told naval officers last week that Iran was still resorting to clandestine measures to ship fuel, and said the Israeli navy could act against Iranian oil "smuggling" to enforce US sanctions.

Iran's Minister of Defense Amir Hatami was quoted as saying by the state news agency IRNA that Tehran had the military capabilities to confront any Israeli intervention, and said the international community would also not accept such action.

Hatami said such confrontation would be considered as "piracy" and warned that "if it happens, we will firmly respond."

"The Iranian armed forces have certainly the capabilities to protect the country's shipping lines in the best way against any possible threat," Hatami said.

Iran's navy has extended its reach in recent years, dispatching vessels to the Indian Ocean and the Gulf of Aden. They intervened on Friday to repel pirates who attacked an Iranian oil tanker in the Gulf of Aden.

An Iranian Revolutionary Guards commander also said on Wednesday that enemies will regret any confrontation with the Islamic Republic.

"We never welcome any war, but we are ready to respond to any invasion. We hope the aggressors do not need to understand this point by trying it and paying a high price," Major General Gholamali Rashid was quoted as saying by Tasnim news agency.

'Happy to do business'

According to maritime experts, Iran has used a variety of measures to evade sanctions, including changing the names of ships or flag registries, switching off location transponders on ships and conducting ship-to-ship transfers offshore and away from large trade hubs.

Since the previous round of sanctions in 2012, ship tracking has become more sophisticated and more available. Washington has also cracked down on more Iranian networks, making it riskier to get involved with Iran, according to bankers.

Iranian officials have threatened to block the Strait of Hormuz, a major oil shipping route in the Gulf, if the United States attempts to stop the Islamic Republic's oil exports.

"Many big oil traders are very worried about going into Iran due to Trump, and even the Chinese are trying to comply with what the Americans want," said Varzi, who is based in Britain.

A senior Iranian official played down the threat to its oil exports because of pressure on its fleet.

"Plenty of countries are happy to do business with Iran," the official said. "As we have done in the past, there are several ways to overcome the shortage, including using tankers of other countries."

More scrutiny

A second Iranian official said discussions with South Korea over the possibility of ordering as many as 10 supertankers, each able to carry up to 2 million barrels of oil, had been delayed by US sanctions.

"We are working on it," the official said.

A South Korean government official had no comment on the matter.

After Western sanctions were lifted, Iran also started talks with South Korea's Daewoo Shipbuilding and Marine Engineering Co. about forming a joint venture to establish a shipyard in Iran.

A spokesman for Daewoo said it signed a preliminary agreement with Iran in December 2016 to cooperate on developing the shipyard, but said no progress had been made since then. A third Iranian official said talks were still ongoing.

According to one shipping source, Iran has been searching for more ships in places such as Vietnam and two sources said it had also been looking for middlemen in the Greek market, one of the main hubs for second-hand ship deals.

"Iran has been looking for ships, but this time round it is going to be harder - there is so much more scrutiny now. It is going to take them longer," one of the shipping sources said.

When asked about Iran's efforts to secure ships, a third Iranian source said they were looking at all options.

Vietnamese officials did not respond to requests for comment.

Iran has more than 50 tankers, but needs them for both transporting oil and storing unsold stocks in its territorial waters - given its limited onshore storage capacity.

Data based on AIS tracking by shipping intelligence platform MarineTraffic showed 12 Iranian tankers, or more than a fifth of its fleet, were being used for floating storage in March.

'Floating liability'

Iran is struggling to keep its ships flagged to foreign registries too. All commercial ships have to be registered - flagged in a particular country - partly to comply with safety and environmental laws.

Following the reimposition of sanctions, Panama, the world's leading flag state for commercial shipping, decided to de-flag Iran's ships, a fourth Iranian official said. Shipping data shows nearly all Iran's tankers had been registered with Panama.

A source at Panama's flag registry said the cancellation, "affects approximately 60 Panama registered ships that are related to Iranian and Syrian owners". The source did not provide further details.

A US Treasury spokesperson said: "We intend to fully enforce these sanctions and we encourage the cooperation and compliance of our allies and partners."

Renewed US sanctions have also meant Iran has been unable to secure vital certification services from foreign providers to ensure its ships remain seaworthy, shipping officials said.

Shipping records show that 16 of Iran's tankers are at least 19 years old - and three of those vessels have been in service since 1996.

Iranian tanker Sanchi sank off China in 2018 after colliding with another vessel while five of the eight tankers Iran bought via the Greek network under previous sanctions have since been scrapped, adding to the need for more ships to fill the gaps.

In November, US Special Representative for Iran Brian Hook described Iran's tanker sector as a "floating liability", saying the US sanctions would bar them from international insurance markets, making them a risk for ports and canals which allow them access.

Iranian flag

Shipping data showed at least two Panama flagged tankers - the Sarak and the Sobar - were re-flagged to Iran on Jan. 1. The owners of the vessels, who were listed in the British Virgin Islands, could not be contacted.

More than 20 other tankers in Iran's fleet have been reflagged to Iran this year.

Having its tankers flagged in Iran rather than a third country such as Panama presents further problems for Tehran, even if it can secure more vessels and approved buyers for its oil, shipping experts say.

Besides China, India and Japan, Washington also gave South Korea, Taiwan, Turkey, Italy and Greece the green light to keep buying Iranian oil, although it's unclear whether these waivers will be renewed when they expire in May.

Dealing with Iran's flag registry raises compliance issues for counterparties as there is a risk they might interact with individuals or entities blacklisted under US sanctions.

And with few buyers now willing to take all the commercial risks involved in oil sales, Iran is also having to cover the shipment of cargoes, including securing insurance in most instances, shipping sources said.

Mike Salthouse with the International Group, which represents companies that insure about 90 percent of the world's commercial shipping, said Western insurers were very unlikely to do business with Iranian shipping companies.

"The biggest problem for insurers these days is finding a bank willing to handle a payment for goods or services where the beneficiary is designated by the US," said Salthouse, chairman of the International Group's sanctions sub-committee.

"Banks will not engage when you mention the Iran word."