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Impact of sanctions on Iranian crude

Hydrocarbon Engineering,

Back in April, Iran and the five permanent members of the UN Security Council plus German (P5+1) reached a framework agreement to guide negotiations targeting a comprehensive agreement by June 30 2015. The comprehensive agreement could result in the lifting of crude oil related sanctions against Iran, which in turn could result in an increase in Iran’s crude oil production and exports. However, the final decision and the timing that sanctions could be lifted are very uncertain.

Sanctions imposed by the US and EU at the end of 2011 and during the summer of 2012, respectively, led to the displacement of over 1 million bpd of Iranian crude oil on the global market. Iran’s main buyers in Asia, Europe and elsewhere have replaced Iranian crude oil with barrels from other members of OPEC. If oil related sanctions are lifted, Iran will look to regain export market share, competing with other OPEC members with similar crude oil grades.

Iranian crude oil and lease condensate purchases

Crude oil and condensate exports from Iran averaged 1.4 million bpd last year. Pre sanctions in 2011, Iran exported 2.6 million bpd, most of which went to Asia, particularly China, India, Japan and South Korea. The EU was the second largest regional buyer of Iranian oil in 2011, purchasing approximately 600 000 bpd of crude oil and condensate. Turkey, South Africa and the UAE were also significant buyers.

In 2012, as the US and EU sanctions were imposed, almost all of Iran’s buyers either reduced their purchases or stopped them. By 2013, Iran’s crude oil and condensate exports fell to just below 1.3 million bpd, with the main importers being China, India, Japan, South Korea, Turkey, UAE and Syria. Iran’s exports grew by almost 150 000 bpd in 2014, reflecting increased imports by China and India.

Displacement of Iranian oil

Light and heavy crude oils are Iran’s two main crude oil export grades. Countries that reduced or halted imports from Iran replaced those barrels with similar quality crude grades from Saudi Arabia, Kuwait, Nigeria, Angola and Iraq. Asian countries, which were mostly purchasing Iranian heavy crude oil, increased their purchases of similar crude grades from Saudi Arabia and Kuwait after 2011.

China in particular increased purchases of oil from Angola and Iraq, while other Asian countries imported more from Nigeria. The EU, which mostly purchased Iranian light crude oil until the embargo in 2012, substantially increased imports from Nigeria and Saudi Arabia. South Africa, which also halted Iranian imports in 2012, has replaced those volumes mostly with supplies from Saudi Arabia, Nigeria and Angola.

Differences in crude oil quality characteristics

Replacing Iranian crude oil with other grades does not necessarily result in a one for one exchange. Differences in crude oil quality characteristics can impact the volumes of petroleum products that are produced in a refinery, also known as refinery yield. Crude oil that is light and sweet more easily and cheaply produces highly desirable petroleum products, such as gasoline and diesel fuel, usually resulting in higher prices for light crude than for heavy, sour crude oil.

Although other factors, such as transportation costs, contribute to price differences, the main factors impacting refinery operations are the quality and characteristics of the crude oil itself. The decision to import more costly light, sweet oil or cheaper heavy, sour oil can depend on a refinery’s level of complexity and ability to manipulate the natural yields of crude oil and maximise production of more desirable products that sell at a premium.

Edited from press release by Claira Lloyd

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