Energy

The Saudis Use Oil to Punish the Iranians


It’s no secret that Saudi Arabia and Iran are bitter rivals. The Sunni Saudis are deeply suspicious of Iran’s influence in Arab countries such as Bahrain and Iraq and want to weaken the Shiite republic, especially when it comes to both nations’ most important export: oil. “Iran is very vulnerable in the oil sector, and it is there that more could be done to squeeze the current government to join the world efforts toward peace,” said Prince Turki Al-Faisal, the ex-Saudi intelligence chief, in a speech at a Royal Air Force base on June 8.

Now the Saudis are showing how serious they are about hitting Iran where it hurts. Iran has long supplied four refiners in India, yet thanks to U.S. sanctions, the Indians have encountered ever-tougher obstacles to paying for their Iranian crude. Indian refiners used to settle payments with Iran through a regional organization called the Asian Clearing Union. Late last year the Indian central bank scuttled that arrangement out of fear Indian banks would be barred from doing business in the U.S.

By this summer the Indians owed Iran $5 billion and the Iranians said enough was enough, according to three executives at Indian refiners, who asked not to be named because, they say, the Indian government has told the companies not to talk. In mid-July, when the Indians still hadn’t received details about the dates or amounts of their August shipments from Iran, they contacted Saudi Aramco, the Kingdom’s national oil company, which also supplies India. The Saudis were glad to help. Saudi Aramco is expected to send around 3 million additional barrels to India in August, on top of the usual 12 million. The Saudis are trying for even more Indian business, according to the refinery executives. “Because of sanctions Iran seems unable to provide the reliability a refiner wants,” says Bhushan Bahree, an analyst at IHS CERA, the energy consultants. “The Saudis are benefiting from that.”

In the past, the Saudis might have been hesitant to take business from Iran, which like Saudi Arabia is a member of the Organization of Petroleum Exporting Countries. Now, as they scramble to contain the fallout from seven months of political turmoil in the Arab world, the Saudis have no such reluctance. The Saudis also have grown weary of OPEC. As the member who has invested the most in increasing production, Saudi oil executives and policymakers view OPEC as overly influenced by misfits such as Iran and Venezuela, which are unable to increase output and almost invariably try to restrain members who do. The failure of the most recent OPEC meeting in May to agree on a production limit has freed the Saudis to produce whatever they want. Since then their output has risen rapidly from 9 million barrels per day to about 10 million.

On its website, National Iranian Oil says Iran and India have agreed “to clear the debts as soon as possible.” While Iran may yet find creative ways to receive payments, possibly through Turkey, its oil industry faces increasing difficulties as long as its government is at odds with the West. “With the sanctions getting tougher by the day, we can only expect more complications down the road, not less,” says Siamak Namazi of Access Consulting Group in Dubai.

The International Energy Agency forecasts a 20 percent decline in Iran’s production capacity, now about 3.6 million barrels per day, in the five years through 2016. Sanctions are blocking foreign investment and delaying projects. “Iran’s ability to develop its most critical industry and create jobs for its young people is at great risk,” says Stuart Levey, a senior fellow at the Council on Foreign Relations who served as Under Secretary of the Treasury for Terrorism and Financial Intelligence.

Meanwhile, the Saudis are there to make up any shortfall. “Hardly anyone has any excess capacity besides Saudi,” says Sadad Al-Husseini, a former senior Saudi Aramco executive. “So Saudi is the only game in town.”

The bottom line: Sanctions are taking a toll on Iran’s oil industry. Production capacity is expected to decline 20 percent in the five years through 2016.

Stanley_reed
Reed is a reporter-at-large for Bloomberg News and Bloomberg Businessweek.
Narayanan is a reporter for Bloomberg News.
Daya is a reporter for Bloomberg News.

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