New Sanctions from the European Union May Affect Iran’s Oil Industry

The European Union (EU) has implemented tough new sanctions against Iran, with the goal of reducing Iran’s ability to fulfill their nuclear ambitions. The sanctions specifically target Iran’s oil industry, which accounts for roughly 80 percent of Iranian exports.

The European Union’s tough new sanctions of Iran, which went into effect on July 27, 2010, are designed specifically to hurt Iran’s oil industry. Oil accounts for roughly 80 percent of Iran’s exports, and Tehran derives more than half of its revenue from its energy sector. Iran has long been a major oil and gas supplier, yet is now seeing a decline in production, a predicted increase in Iraqi oil output, and thus the need to expand its refining capabilities. This situation could drastically affect the future of Iran, which has become one of the Middle East’s most powerful nations.

This third set of sanctions by the EU follow tougher U.S. measures adopted July 1st and the United Nations’ sanctions delivered on June 9th. The EU sanctions include bans on new investment, technical assistance, and the transfer of technology, services & equipment to Iran’s energy sector.

With many of its oil fields aging, Iran’s output is declining. In June, the International Energy Agency (IEA), based in Paris, predicted that Iran’s production would continue to drop by 18%, to about 3.3 million barrels per day (b.p.d.) in 2015.
Iran is developing new fields, including the South Pars natural gas field in the Persian Gulf. The South Pars is the Iranian portion of the world’s largest gas reservoir. Although Iran is a major exporter of oil, it has very limited refining capacity, and therefore imports 30% to 40% of its gasoline for domestic use. This need for imports makes Iran especially vulnerable to the recent sanctions by the EU, as well as by the United States and the United Nations. Iran has responded by reducing imports, bringing them down by 8% since 2009.

The United Nations passed a fourth round of sanctions against Iran in June, but did not include the United States in their provisions to injure Iran’s oil industry. The U.S. thus passed measures to penalize companies that invest in Iran’s energy sector, export refined petroleum products to Iran, or supply services or technology used for petroleum refining. The law also prevents firms which do business with blacklisted Iranian companies and banks from accessing the U.S. financial system.

Due to many large international oil companies already having left Iran, the main impact of the EU’s sanctions may be upon the smaller companies that help sustain Iran’s oil industry.

Additionally, the investment ban could hurt Iran due to its existing oil fields and infrastructure in need of large investments just to maintain their current output. Many critics argue that the effect may be small due to Chinese investment companies entering the open market left by Western investors and companies.

-Chris Termeer