Iran’s oil gains at risk as Trump’s nuclear deadline nears

Financial Times | and When Iran’s deputy oil minister toured the hulking steel facility that is the Islamic republic’s largest oil refinery, he was delivering a deliberately defiant message: even if Donald Trump reimposes sanctions on the country, Iranians will not suffer the severe petrol shortages they endured at the beginning of the decade.

“We will face no problems in supplying petrol both in terms of quantity and quality,” said Alireza Sadeghabadi, as he visited the Persian Gulf Star refinery this month. “We do not need to import any [essential] equipment and material to complete the refinery and produce petrol.”

Iranian officials are putting on a brave face and are using the Persian Gulf Star refinery as an example of the progress the industry has made since the nuclear deal with six world powers was implemented in January 2016. But if Mr Trump carries out his threat to “tear up” the accord and reimpose sanctions, the Iranian sector worst affected would be the Islamic republic’s most important: the energy industry.

“The energy sector is a major target,” said Iman Nasseri at FGE, a consultancy. “Any US withdrawal [from the nuclear deal] and any re-imposition of sanctions would first hit exports of Iran’s crude and longer term its refining capabilities and future production.”

He added that while the Persian Gulf Star project has moved forward, other modernisation programmes were still on hold. The Islamic republic began building the refinery in Bandar Abbas in southern Iran in 2006 during the presidency of Mahmoud Ahmadi-Nejad, a hardliner. It was a period when relations with the west hit a low and sanctions were tightened, stymieing Iran’s ability to import equipment required to complete the refinery.

That started to change after president Hassan Rouhani sealed the nuclear accord with six world powers in 2015 and made fuel independence a priority, with the first phase of the facility inaugurated last year. After a €4bn investment it is now producing 16m litres of petrol per day, which is due to increase to 22m over the next few weeks.

“Those who complain that they have not seen the fruits of the nuclear deal, come and see this refinery,” Mr Rouhani said at the plant’s inauguration last year.

At the height of sanctions eight years ago, commodity trading houses, including Vitol, Trafigura and Glencore, stopped selling petrol to Iran, forcing the government to turn to its petrochemical plants to produce low-quality fuel. The result was smog-filled cities and damaged car engines.

Share this graphic Today, there are no queues at petrol stations and quality fuel — more than 90 per cent of it produced locally — is readily available. Crude production has been ramped up from about 3m barrels a day in 2014 to nearly 4m b/d, meaning there is more oil available to produce refined products while exports have more than doubled to about 2.6m b/d, the oil ministry’s news agency said on Tuesday.

But the challenge for the regime will be to protect the gains if the US slaps new sanctions on the country with Mr Trump due to announce his next move on the nuclear accord on May 12.

“The Islamic Republic of Iran will employ all of its experience and capacity to ensure Trump cannot harm Iran,” Bijan Namdar Zanganeh, the oil minister, told reporters last week.

But in an address to parliament, he was more candid about the threat new sanctions could pose to the industry. He said Tehran’s target was to increase production to 4.8m b/d by 2021, while stressing that the industry needed $200bn of foreign and domestic investment to achieve its goals. Iran “must co-operate with foreigners because we need both capital and technology. The [financial] resources are not good and we are facing serious problems,” Mr Zanganeh said.

Share this graphic The biggest international investment in Iran’s hydrocarbons sector since the nuclear deal is Total’s $4.8bn contract to develop part of South Pars, the world’s biggest gasfield. The development of South Pars is central to the republic’s energy and industrial plans.

But the project could be put in jeopardy as any foreign companies with exposure to the US would risk punitive measures if sanctions were reimposed.

“Most Europeans, except Total, are in a wait-and-see mode already to see if the Trump administration would allow longer term projects to proceed,” said David Jalilvand, an analyst at the Oxford Institute for Energy Studies. He added that has already caused Iran to “diversify engagement to Russian and Asian companies”.

“Iran is seeking to balance its international engagement,” he said.

Recommended FT View A last stand in defence of the Iran nuclear deal In terms of crude sales, Asia is by far the most important region for Iran, as it accounts for about 60 per cent of the republic’s exports, mostly to China, one of the nuclear accord’s signatories, and India. The crucial issue for Iran would be which companies and governments continue to buy Iranian crude if sanctions are reimposed.

“Within Europe there are enough companies with substantial US interests, that they will co-operate [with sanctions] even if their governments say not to,” said Richard Nephew, an analysts at Columbia University’s Center on Global Energy Policy.

He said Japan and South Korea would be likely to co-operate as they engage with the Trump administration over North Korea. The “wild card” was China, he added.

“They support the [nuclear deal] and don’t believe it should go away. But I don’t know how they feel about their desire to push back on Trump,” Mr Nephew said. “If they did not co-operate, they could put a massive hole in a sanctions programme.”