Iran clings to Asian oil market as sanctions bite

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By BRIAN MURPHY, Associated Press

DUBAI, United Arab Emirates (AP) — When Iran welcomes leaders to a world gathering next week, few will get a grander reception than India's prime minister. As Tehran tries to offset the squeeze from Western oil sanctions, there is no greater priority than courting energy-hungry Asian markets.

The planned visit by Manmohan Singh, the first by an Indian prime minister in more than a decade, puts into sharp relief the sanctions-easing strategies by Iran — and the political complexities for Washington that limit its pressure on Asian powers needing Tehran's oil.

Oil purchases by India, China and South Korea — which decided this week to resume Iranian imports — have not covered Tehran's losses after it was tossed out of the European market in July. But they have given Iran a critical cushion that brings in tens of millions of dollars in revenue a day and means that Iran has dropped only one ranking, to stand as OPEC's third-largest producer.

The U.S. has pressed hard for Iran's top customers — China, India, Japan and South Korea — to scale back on crude imports, with some success, offering in return exemptions from possible American penalties. But Washington cannot push its key Asian trading partners too fast or too aggressively and risk economic rifts.

"Despite Western sanctions ... China and Japan will remain major importers of Iranian crude oil and so will India," said Siddak Bakir, a Middle East and South Asian analyst for IHS Energy in London.

The ability of sanctions to wring concessions over Iran's nuclear program remains a key divide between Israel and the U.S. and its European partners.

Washington urges allowing more time for sanctions to eat into Iran's economy, which depends on oil exports for 80 percent of its foreign revenue. Some Israeli leaders have indicated a military attack is a possibility if they conclude the international community has failed to halt Iran's uranium enrichment. Iran insists it's not seeking atomic weapons and its reactors are for energy and medical use.

For Iran, however, there's a parallel fight: Trying to keep the oil flowing to its key Asian customers, possibly through deals to sell at below-market prices.

"China and India are not doing this as a favor to Iran. Quite the contrary," said Pennsylvania-based oil trader Stephen Schork. "I am sure they are extracting a very good deal out of the Iranians. ... I don't think it's fair to say Iran is unscathed. Certainly, they are under duress."

At the same time, the U.S. is applying relentless pressure on Iran's big oil markets to cut back on Iranian imports. Published and anecdotal data suggest some headway by Washington, which sweetened the offer by granting the big-four Asian buyers exemptions from possible penalties in return for curbing Iranian imports.

On Wednesday, U.S. State Department spokeswoman Victoria Nuland said the exemptions would be reviewed at the end of their six-month term. "What's important to us is ... that the net flow is continuing to decrease," she told reporters in Washington.

Still, it's clear the U.S. is unwilling to risk trade wars with key Asian trading partners, even over the showdown with Iran.

"The U.S. needs Asia. It needs to maintain good relations. It also needs Asia as a critical partner in its efforts to pressure Iran through sanctions," said Sami al-Faraj, director of the Kuwait Center for Strategic Studies. "It's a delicate process of diplomacy, incentives and alternatives."

Even fast-growing China — which counts on Iran for about 10 percent of its energy needs — has slightly scaled back on imports from Iran: 510,000 barrels a day in the second quarter this year, compared with 560,000 in the same period last year. But some analysts say this was more over a pricing dispute than U.S. pressure.

On Tuesday, South Korea said it would resume buying Iranian oil in September after a two-month break, but at reduced levels that comply with U.S. sanctions guidelines.

Cutting Iranian crude was just too big a price for South Korea, which has nearly 3,000 companies that sold $6 billion worth of goods to Iran in 2011. Iran was also the only country that supplied oil to South Korea during the 1973 oil crisis and, in return, a major downtown street in Seoul was named after the Iranian capital, Tehran.

"South Korea does not want its ties with Tehran to irk the U.S., so it made great efforts to persuade the Obama administration to give it an exemption. Iran is probably the most important Middle Eastern country for South Korea, and it is very difficult for South Korea to sever its ties with Iran because it offers cheaper oil," said Chang Byung-ock, an Iran expert at Hankuk University of Foreign Studies in Seoul.

The 27-nation EU accounted for 18 percent of Iran's exports, or about 450,000 barrels a day. Add that to the reductions in Asia — more than half of Iran's oil exports before the EU sanctions — and Iran has lost a significant, but not yet crippling, portion of its oil revenue.

According to the International Energy Agency, a 28-nation group that monitors global energy trends, Iran's crude oil production has fallen steadily since May to 2.9 million barrels a day in July, dropping Iran to the No. 3 spot behind resurgent Iraq.

Meanwhile, imports of Iranian oil by major consumers plunged to 1 million barrels a day in July from 1.74 million barrels a day in June, according to an Aug. 10 report from the agency, which did not give a country-by-country breakdown.

In late July — about a month after the EU halted Iranian oil purchases — Iran's central bank chief, Mahmoud Bahmani, called Western sanctions akin to a "military war" that requires new economic countermeasures in return. These likely will include boosting sales of petrochemical products, such as motor oil, that are not covered by sanctions, as well as expansive diplomatic efforts to secure oil markets in China and India.

The latter is set to take center stage with the Indian prime minister's appearance at the Aug. 30-31 meeting in Tehran of the Non-Aligned Movement, a Cold War relic that Iran seeks to rebuild as a counterpoint to Western influence.

India has faced a full-scale press from both sides.

In May, U.S. Secretary of State Hillary Rodham Clinton stopped in India and made repeated appeals for Iran's No. 2 oil customer to scale back on its purchases. India has curbed some of its Iranian imports — agreeing after Clinton's visit to an 11 percent drop in the coming year. But there are limits to how far India can go as it struggles with a widening deficit and weak rupee, which drives up the costs of oil imports.

India has joined Japan in offering government-backed insurance for ships carrying Iranian crude, to bypass European sanctions that prohibit EU companies from offering coverage. The move seeks to avoid interruptions in the Iranian oil supply, with the first shipment by a government-insured tanker scheduled to arrive in India this week.

Japan was the first country to devise a workaround to the EU sanctions, passing the emergency measure in late June to avoid a disruption in critical oil supplies due to actions against Iran.

Any potential economic lifelines for Iran are likely to feed into calls by Israelis favoring a military strike on Iran. At the same time, opponents of military action have become increasingly outspoken as signs point to a war footing, such as the opening of new gas mask distribution centers in the Jewish state.

"Iran tries to present an image of having some kind of network of relationships with outside countries, and say they are not as vulnerable," said Eldad Pardo, an Iranian affairs expert at Hebrew University in Jerusalem. "But the facts on the ground show they are under a lot of pressure."

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Associated Press writers Pamela Sampson and Vijay Joshi in Bangkok, Erika Kinetz in New Delhi, Blake Sobczak in Jerusalem and Matthew Lee in Washington contributed to this report.

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