Iran Review

Iran sweetens Asian oil deals

Tehran’s payment flexibility could also help stabilise global oil markets, which have been rattled by fears of disruption to Iranian supply

IRAN is resolutely avoiding cutting its official oil prices to its core Asian customer base and is instead sweetening payment terms, despite facing mounting Western sanctions.

The move suggests that the sanctions could impede the Islamic Republic’s ability to collect oil revenue in more subtle ways than expected, as it seeks to secure Asian sales ahead of a European Union embargo on its crude coming into force in July. Tehran’s payment flexibility could also help stabilise global oil markets, which have been rattled by fears of disruption to Iranian supply – it accounts for 4 per cent of global crude.

Muhammad Ali Khatibi, Iran’s governor with the Organization of the Petroleum Exporting Countries, says the country has no intention of discounting its prices.

“We are not off-price,” he says.

Referring to the price issue, Trevor Houser, a partner at New York-based economic research firm Rhodium Group, says the Iranians know that “once they give the first discount, other buyers will smell blood in the water.”

Given that last year Iran is estimated to have earned more than $80 billion from oil exports, estimated to be around 60 per cent of its total foreign earnings, maintaining the levels of crude-sales revenue is essential.

Khatibi’s remarks came after it emerged that Iran increased its official selling prices — the amount it charges its long-term customers — to Asia for April in line with its closest rival, Saudi Arabia. Tehran was expected to cut its oil exports and prices after the EU decided to embargo its crude and the US banned oil trades with its central bank, part of a broader push to ratchet up pressure on Iran’s nuclear programme.

Iran has reacted by offering flexible payment terms to oil buyers in Asia, which will become its main market after the EU ban came into force July 1.

For instance, Iran is offering Pakistan 80,000 barrels a day on a three-month credit, according to reports. Tehran has also says it agreed to accept rupee payments from India – its second-largest buyer – in exchange for petroleum. India’s currency would replace the US dollar normally required internationally for oil trades, according to Indian and Iranian officials.

Under a preliminary deal, Iran would use an account at an Indian bank to buy local goods such as tea, rice or equipment, effectively bypassing US sanctions by avoiding any direct payment through Iranian banks.

Despite the absence of nominal price cuts, the terms offered by Iran amount to a de facto sweetener. Tehran’s oil-for-goods barter carries “commercial advantages for Indian firms that would have a captive Iranian market,” Rhodium Group says in a note.

The practicalities of the deal remain for now, in limbo.

“It is still in the process” of being implemented, an Iranian oil official says. “India needs to make some adjustments to comply with its regulations.”

Most importantly, India’s exports to Iran amounted to about $2.5 billion in 2010, making it difficult to offset a bill of $6 billion for Iranian oil – assuming prices and volumes remain stable.

And in a radical departure from Iran’s trade policies, the country’s Central Bank Governor Mahmoud Bahmani says that it could accept payments for its goods, including oil, in gold instead of currencies.

Yet while adaptable on payment terms, Iran has contradicted analysts’ expectations by staying put on prices. This apes Saudi Arabia, although Khatibi says Iran isn’t following the Kingdom.

“We have our own strategy,” he says, adding that Iran had no problem selling its crude.

“There is no buildup in Iran oil storage,” he says.

Spokespeople for the Indian finance ministry and the Pakistan petroleum ministry couldn’t be reached.

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