When Washington was about to end waivers for countries importing Iranian oil in May 2019, Iran had already lost many of its customers, in particular European refiners. Others, meanwhile, were either preparing to halt their imports, fearing U.S. sanctions, or reduce purchases.
Yet while it was being shunned in key markets and supplanted by oil from rival producers—namely Iraq and Saudi Arabia—one recipient resumed its shipments from Iran following a brief pause: Syria. The country has become a key destination, along with China, for Iranian oil under U.S. sanctions.
The impact of sanctions on Iran’s oil industry has unfolded gradually. When the United States ended the waivers last May, Iran’s crude and condensate exports plummeted to below 1 million barrels per day (Mbd), compared to 2.57 Mbd the same month in 2018, according to TankerTrackers.com, an independent firm that tracks and reports shipments and storage of crude oil. Direct shipments to India, Iran’s second-biggest oil customer after China back then, came to a halt, while exports to Beijing were slashed. Tehran was pushed to the margins of the market with its energy industry in the clutches of sanctions once again. The automatic identification systems (AIS) went out. The tankers went dark.
Iranian Crude Oil Exports to Syria
Iranian oil kept flowing after Washington ended the exemptions last May. Tankers, including blacklisted vessels, started leaving their AIS signals off for longer durations to mask their movements and loading activities. These have included tankers leaving the Persian Gulf laden with Iranian crude bound for the Baniyas refinery, one of the two refineries in Syria with a processing capacity reportedly of around 130,000 barrels per day (bpd).
Iran’s exports to Baniyas resumed in May last year at a rate of around 95,000 bpd before rising to more than 100,000bpd the following month, data from TankerTrackers.com show. Prior to May, Iranian oil to Syria had been absent for three months (February-April) mostly due to U.S. sanctions that affected the movement of some tankers trying to reach the Mediterranean through the Suez Canal. Iranian oil shipments to Damascus have continued also this year at a rate of 53,000 bpd in January, according to the data.
A ‘Convenient’ Oil Seller
Iran, a close ally of Damascus, is heavily involved in the Syrian conflict. It is also the most suitable oil seller for the Syrian government. “Iran sells the oil to Syria without asking Damascus to pay in cash,” said Jihad Yazigi, the editor-in-chief of The Syria Report. The payment arrangement between Tehran and Damascus over oil sales is unclear but given that Iranian oil continues to flow to Baniyas, this could indicate that the mechanism makes “Iran very convenient for Syria,” Yazigi added.
The process of shipping Iranian oil to Syria is also shrouded in obscurity. Several vessels have been engaged in moving the oil either directly from Iran or through ship-to-ship (STS) transfers in the Mediterranean. Among these are tankers said to be owned by Lebanese front companies that have been reportedly facilitating the movement of the oil particularly since last year. “The type of the activity of such companies seemingly became clear at the beginning of last year when the game of shell companies picked up,” said Albin Szakola, a freelance journalist and researcher who owns Levant Networks, a website that focuses on Syria’s political economy among other topics.
The Iranian crude oil that reaches Baniyas is used to produce much-needed refined petroleum products, given that—as Yazigi explains— local oil supplies are not sufficient to meet oil demand. According to Samir Madani, co-founder of TankerTrackers.com, one supertanker, the Iranian-flagged Adrian Darya 1 (previously Grace 1) which is now parked off Baniyas, sometimes acts “as a temporary Floating Storage in order to make sure there’s oil available in case of emergency.” However, he explained that such a case is rare, as Adrian Darya 1 is “mostly empty these days.” This is the supertanker that caught the world’s attention last summer when it was seized in Gibraltar on suspicion of carrying Iranian oil bound for Syria and in violation of European Union sanctions. The vessel was later released, and its oil was delivered to the Baniyas refinery via other smaller vessels that engaged in STS transfers.
Western sanctions against Damascus have hammered its energy sector since 2011 when the massive anti-government popular protests broke out. Additionally, violence perpetuated by all warring sides during the war has damaged the country’s oil and gas infrastructure. According to the EIA, Syria’s average oil production between 2008 and 2010 was at around 400,000 bpd, but since the conflict swept the country, output has slumped dramatically, impacting its refining capacity. The Middle East Economic Survey (MEES) reported on January 17 that Damascus is “desperately trying” now to restore small volumes of its pre-war output. Although it remains unclear what the current production is, MEES says it “reckons the figure lies around 20,000 bpd.”
Syria and China are currently Iran’s clients as sanctions have forced several importers to turn away from direct Iranian shipments, such as India, which used to be a top customer, and Turkey. Instead, these two clients appeared to be pulling more crude from other producers with lookalike grades as sanctions waivers expired, and in the aftermath. For instance, Basrah exports to India surged from 897,000 bpd in April 2019 to 1 Mbd the following month, according to data intelligence firm Kpler. Meanwhile, Basrah exports to Turkey jumped from 101,000 bpd in May to 216,000 bpd in June, Kpler’s data shows.
Iran’s Rivals Now Head-To-Head Over Market Share
Saudi Arabia and Iraq, OPEC’s first and second largest oil producers respectively, were among Iran’s main rival oil producers who moved in to replace Iranian crude with comparable grades. “Saudi, Basra, Urals (Russian),” Reuters quoted a refiner as saying in August 2018 regarding alternative crude grades to Iran’s in Europe as refiners were gearing up for the return of U.S. sanctions on Tehran’s oil industry.
Now, in light of the price war launched by Riyadh in retaliation to Russia rejecting deeper output cuts, amid falling oil prices due to the novel coronavirus, the Saudi measures—slashing its crude prices and ramping up output— appear (at least for now) to target not only Russian crude but also others, such as Basrah. “Any price war to acquire the largest market share does not serve the interests of the producing countries,” Asim Jihad, the Iraqi oil ministry’s spokesman was quoted as saying on March 10. Iraq, which relies on Asian markets for the bulk of its oil exports, flouted its quota most of 2019 as OPEC tried to stabilize the oil market by cutting oil supplies.
Among the Asian markets to watch if one wishes to see how the competition over market shares will play out is India where Iraq and Saudi Arabia are top crude oil suppliers, and especially if the current price war does not ease off.
“No country is allowed to take over the share of other members for production and exports of oil under any circumstance,” Kazem Gharibabadi, Iran’s Ambassador to Vienna-based international organizations, said in August 2018 shortly before Washington reinstated sanctions. However, given the rivalry now over market share, it is clear this statement does not apply in OPEC—and Iran has seen it before.