DUBAI: On Apr 20 oil fell to a historic low of US$0 per barrel, prompting suppliers to pay customers to off-load oil off them as storing the commodity became a liability in cost.
With the price of crude oil plunging to negative territory in the wake of the coronavirus outbreak and the Saudi-Russian spat, oil-exporting economies are expected to be badly hit.
Iran, a major crude oil producer, in particular must be feeling the heat as its oil-revenue dependent economy had also been hit by US sanctions, which began in 2018 and were tightened as recently in March.
But Tehran has already been stepping up its backdoor sales to prop up its struggling economy – which it is likely to do more of now – as it has reportedly been using Iraq’s oil industry to sidestep the US-led sanctions.
Iraq had boosted its own oil production by 50 per cent over the past five years, allowing it to become the second-largest oil producer in the Organization of the Petroleum Exporting Countries (OPEC). It is one of the most reliable oil suppliers from the Middle East for oil-hungry Asian economies.
Of the 3.82 million barrels of crude oil it produced in December, Iraq exported the bulk of this supply to China, Korea, Japan and India. Iraq alone supplies China 10 per cent of its enormous oil demands, making it among the top three suppliers of oil to the Asian giant in the first three months of this year.
Oil is responsible for 97 per cent of Iraq’s foreign exchange earnings. Petroleum exports added more than US$68 billion to Iraqi coffers in 2018, the Organization of the Petroleum Exporting Countries (OPEC) says.
In short, if the price of oil drops, the Iraqi economy follows in-sync.
Most oil exports from Iraq’s southern Basra ports head to Asia. Shipments to China, South Korea and Japan alone were worth more than US$19 billion in 2017.
South Korea purchased 9.4 per cent of Iraqi crude exports that year and Japan took 1.5 per cent. China, Iraq’s top trade partner, snapped up 21 per cent of its oil exports, second only to India at 23 per cent.
In February, Iraq boosted oil sales to China by a third – to 1.32 million barrels a day, the most in four years – even as the spreading coronavirus eroded demand while oil prices lingered to a then-low of US$20 per barrel.
Since Iraqi leaders have an ideological affiliation with Iran, Tehran has a strong influence on Iraqi political and security affairs.
Even though this interference is one of the grievances of Iraqi anti-government protesters – it’s no surprise that Tehran would seek to use this leverage on its smaller neighbour as a conduit to Asia, amidst sanctions by the US.
SOME ASIAN NATIONS STILL LOOKING AT IRANIAN OIL
However, the current cheap oil environment actually gives Asia a chance to redraw its various agreements and buying procedures with Iraq and helps ensure a more stable Middle East as the supply glut means purchasing countries can decide who to buy from more freely in a buyers’ market.
China, the world’s largest oil importer for instance, began ramping up its oil purchases to support its domestic stockpiles some weeks ago.
That is why the current environment may offer Iran an opportunity to take advantage of the lower prices to persuade China to bolster its oil stockpiles.
The thing is, despite the sanctions, some Asian countries – China in particular – continue to purchase oil discreetly from Iran.
Last year, the US Treasury Department sanctioned six Chinese entities for violating US sanctions by trading oil with Iran. Chinese state-owned trading company Zhuhai Zhenrong had previously also been sanctioned for a similar reason.
There were also reports of Indian purchases of Iranian oil.
Asian nations such as these need to ensure their oil-purchasing contracts don’t violate international sanctions by importing Iranian crude.
Any continued indifference by these Asian countries to the source of their oil otherwise risks carving out a new reality in the Middle East – Iran’s growing control over Iraq.
Given Asia is Iraq’s largest export destination, if countries in the region continue their unchecked purchasing of Iranian oil through Iraqi supplies, then Iran will only feel more empowered and vindicated to stay in Iraq as it eyes a secure source of revenue.
Washington had imposed the sanctions to curtail Tehran’s nuclear ambitions and regional expansion – especially in Iraq – and is going after anyone who buys Iranian crude.
The sanctions have idled at least a quarter of Iranian oilrigs and drastically cut oil exports by over 50 per cent with the US even targeting Iran’s floating oil storage.
Washington has warned shippers, insurers and port authorities that storing Iranian crude will bring the wrath of US sanctions.
Yet Iran continues to export oil, using all the back channels it can think of. Plenty of trading companies handle oil, and some of these try to disguise its origin.
US administration officials have told media that Iranian and Chinese tankers avoid scrutiny by transferring oil to other ships, turning off their radio identification equipment or changing their names, for example, and that they are maintaining close surveillance on such activity.
Last year, for instance, ship tracking data from financial information provider Refinitiv Eikon showed that 14 vessels belonging to Chinese shipping company COSCO Shipping Tanker (Dalian) stopped sending location data from their automatic identification system (AIS) between Sep 30 and Oct 7.
US officials confirmed that its findings show that COSCO had been shutting off AIS on its ships.
HOW MIGHT TEHRAN REACT?
As prices continue to slide, oil-heavy and cash-hungry economies like Iran will become even more aggressive about selling large quantities of crude.
However, Iran’s sanctions, its control of Iraq, and the proximity of its oil fields to the Iraqi terminals means Tehran is more likely to engage in supply-chain subversion.
“[T]he easiest thing to do would be to run a short pipeline to the Iraqi system,” says energy analyst Michael Lynch wrote in a commentary in January. “Some oil could be moved by barges to the Iraqi facilities and be blended with Iraqi crude.”
That may already be happening. According to Lynch, it is estimated that Iran is still exporting 300,000 barrels per day (bpd) of oil.
While this is lower than the 2.5 million bpd per day Iran was exporting before the most recent sanctions and amounts to only about a supertanker a week, it is still hard to disguise the export of this much oil unless it is smuggled out of Iran.
Nevertheless, without a naval cordon, it would be nearly impossible to stop all Iranian oil exports – especially as both Tehran and its customers are busily working out ways to evade financial oversight and circumvent the sanctions.
Although the US could try to seize tankers leaving Iraq and test the chemistry of the oil to determine its origin, such a step probably isn’t legal or feasible.
That’s why it’s vital for Asian buyers to ensure that their trade policies are mindful of the realities of the Middle East, even as they grapple with the economic and medical crisis triggered by COVID-19.
Asia’s large oil buyers now have an opportunity to support Iraq become a more independent nation, and secure their own oil contracts in the process.
As the Iraqi people protest against Iranian interference, and their own government’s complicity, a broad range of pro-sovereignty and anti-Iran movements are beginning to gather steam in the country.
Falling under the management of the Sovereignty Alliance for Iraq (SAI), groups like the National Wisdom Council and the National Independent Iraqi Front are considered viable options to create an anti-sectarian and unified Iraq that could reassert Iraqi sovereignty over its own oil.
If Iraq can weather the current oil supply glut, then these movements will be crucial to help revive its oil industry once prices pick-up.
For Asia, these groups offer political and trade certainty – a unified and sovereign Iraqi oil industry would not conflict with prevailing Iranian sanctions and can be a reliable source for its oil demand.
Given it is a buyers’ market, Asian buyers can seize the moment to develop oil contracts that are cognizant of the realities in the Middle East and give the Iraqi industry a much-needed boost.
Mohammed Abdul Shihab is Managing Director of Al-Sharq Advisory.