How Iran is boosting oil exports despite US sanctions

Iran's crude oil exports have been surging in recent months on the back of higher shipments to countries like China, according to data from companies that track the flows.  

Analytics firms like Vortexa, TankerTrackers and Kpler estimate an increase in Iranian crude and condensate exports over the past three months, averaging around 1 million barrels per day.

The numbers are far below the over 2.5 million barrels per day the Persian Gulf nation was exporting in early 2018 — before the Trump administration withdrew the US from the international nuclear deal with Tehran and imposed unilateral sanctions — but they are much higher than those at times during 2020 when exports fell to less than 500,000 barrels per day.

The surge comes despite stringent US sanctions, prompting some energy market analysts to speculate that Washington is not enforcing the restrictions strictly in an attempt to keep global crude prices in check.

"It might be that the Americans are turning somewhat of a blind eye because they are happy to have as many more barrels on the market to help displace Russian oil," said Thomas O'Donnell, a Berlin-based energy analyst.

 US officials, however, reject such claims.

Robert Malley, the Biden administration's special envoy for Iran, told Bloomberg last week that the US was not fine with increasing Iranian oil exports and that they would do "everything in our power" to enforce the sanctions.

Saying that "China is the main destination of illicit exports by Iran," Malley stressed Washington would put pressure on Beijing to stop buying Iranian oil.

Shipments to China via Malaysia?

O'Donnell said a lot of Iranian oil shipments appear to be heading to China via Malaysia, where it's mixed with other blends and relabeled to conceal its original source.  

"A lot of both Venezuelan and Iranian oil goes to Malaysia and it's not for domestic consumption. It goes there and it gets mixed to hide its origin," he noted. 

"It's well beyond anything that Malaysia can produce so it's probably Iranian oil and some Venezuelan oil coming in, being mixed and relabeled. And apparently, a good amount of it is going to China."

The US Energy Information Administration (EIA) also noted this trend.

"According to industry analysts, much of the oil that was shipped from Iran to China was relabeled from countries such as Malaysia, the United Arab Emirates, and Oman to escape detection from customs authorities," it said.

Henry Rome, a senior fellow at the Washington Institute for Near East Policy, said that the US would need to think creatively and adjust its priorities with countries like China and the UAE if it wants to see lower exports of Iranian oil.

It has "a diplomatic cost," he noted, adding that turning up the heat on Tehran "could also provoke an Iranian asymmetric response, and there may well be skepticism in the Biden administration that this added pressure would be all that productive."

"Finally, it could lead to higher oil prices, although this is less of a concern today than it was over the summer."

Iran's oil sector hit by sanctions and underinvestment

Iran, a major producer of hydrocarbons, holds some of the world's largest deposits of oil and natural gas.

The nation's crude oil production, however, has fallen since 2017 because of years of international sanctions as well as underinvestment. The EIA estimates that if sanctions were lifted, production could return to full capacity — around 3.7 million barrels per day.

But O'Donnell said Iran would face significant challenges to raise production even if a new nuclear deal were in place.

"Even if Iran gets a new JCPOA, they would still have trouble raising production. During the last JCPOA, they had such problems signing new contracts with BP and others ... because of resource nationalism," he said, referring to the Iran nuclear deal, formally known as the Joint Comprehensive Plan of Action (JCPOA).

"The Iranian Revolutionary Guards are involved in the industry and as soon as foreign oil companies come in, they'll lose their money."

No end in sight to Iran's economic woes

Iran is currently battling rampant inflation, a currency sharply losing value and an intensifying squeeze on living standards, particularly affecting the nation's poor people and middle classes. 

The country has also witnessed massive anti-regime unrest following the death of a young woman in police custody, after she was arrested for an alleged violation of the Islamic nation's strict dress code for women.

The protests have posed one of the biggest challenges to the theocratic rule in Iran since the 1979 Islamic Revolution.

The brutal crackdown on the protesters also drew fresh sanctions from Western countries.

Against this backdrop, the rising crude exports offer some respite to Iran's government and crisis-stricken economy.

The government recently unveiled a budget for the 2023 financial year that is 40% bigger than the previous year's budget, relying on projected exports of 1.4 million barrels of crude per day at an average price of $85 (€78.3) a barrel, state news agency IRNA reported.

Rome, who specializes in Iran sanctions, economic, and nuclear issues, said cracking down on oil exports and access to revenue is the most important step the US can take to increase economic pressure on Tehran.

He stressed that it's much "more significant economically than the sanctions imposed related to human rights, terrorism, or drone transfers."

"Even if the US fails to bring the overall export numbers down, it should work to make the illicit trade more costly for Tehran," he said, pointing out that by forcing it to use more circuitous shipping and banking routes, Washington can restrict the amount of money Iran is able to generate through crude exports.

Edited by: Ashutosh Pandey