Italian, Spanish and Greek companies have extended most of their oil supply deals with Iran for 2012, so that most of Tehran's supplies to the European Union are likely be exempted from sanctions for at least the first half of the year. Trading sources told Reuters that Italy's Saras, ERG and Iplom, Greece's Hellenic as well as Spain's Repsol have either extended or have not scrapped existing term supply contacts with Iran for 2012. "We kept our 2-year deal with Iran,» said a trader with a refiner. "At the moment it is business as usual, but of course we are considering potential alternatives. Asking the Saudis for more crude is one possibility,» said a trader with an Italian company. Italy, Spain and Greece take some 500,000 barrels per day out of European Union's imports of Iranian oil of around 600,000 bpd, according to the latest available data. Diplomatic sources told Reuters the three countries, the EU's most fragile economies, were pushing for a grace period for up to 12 months as an immediate switch to oil from other producers may prove too costly and painful for them. Some diplomats said that when EU foreign ministers meet on Jan. 23 to decide on sanctions, they will most likely agree on a compromise of six months for the grace period, and no longer.
Only existing deals would be granted that period while new or spot deals would not be exempted from sanctions. European entities will also be allowed to continue receiving repayments in oil for debts they are owed by Iranian firms. These include Eni and Norway's Statoil to whom Tehran owes $2 billion and $0.5 billion respectively and pays in oil and petroleum gas (LPG). "We expect a slow and gradual implementation of what will eventually become a full embargo,» said Mike Wittner from Societe Generale. «Europe has the same concerns about its fragile economy and an oil price spike as the U.S., probably even more». Iran's standoff with the West over its nuclear programme has complicated Tehran's oil exports and often prompts it to sell crude at steep discounts, appealing for struggling European refiners. Most contracts are long-term annual supply deals and spot market sales are rare as U.S. sanctions against Iran make quick and smooth trade finance at banks almost impossible.
The EU is moving to impose sanctions at a time when the United States, which has banned Iranian oil imports since 1979, is acting to add Iran's central bank to the sanctions list – a measure that will make it even more difficult to trade oil with Tehran, according to traders. But even a full European oil embargo may not seriously weaken Iran, Its budget reaches breakeven with oil prices of just $81 per barrel as opposed to Thursday's market level of $114.
"If Iran is not able to send to other customers the oil that it would not sell to the EU, it could lose between 25-30 percent of its export volume but with oil prices 40 percent higher than its budget, it will probably not be enough to make a big difference for Iran,» said analyst Oliver Jakob of Petromatrix. "To have an impact on Iran, the oil embargo needs to come together with much lower oil prices,» Jakob said. «What is required to have an impact on the regime is to have Iran lose a third to a half of its export volume and oil prices down to $60." U.S. officials have already travelled to China, South Korea and Japan to persuade Iran's biggest customers in Asia to cut purchases. In Europe, real cuts will take time.
"A preliminary agreement hammered out by diplomats could be watered down before being signed by ministers. That is normally what happens in the EU in all spheres,» said Sam Ciszuk, a Middle East analyst at KBC Energy. Diplomats and traders say the grace period would give European companies time to find alternative sources of crude, but the process would be far from smooth. "Some (EU members) are saying: 'help us find alternative suppliers and find a way to sustain the discounts we currently have',» one diplomatic source said. The problem of replacement supplies to Europe could be partially solved with the help of Saudi Arabia. European diplomats have spoken to the kingdom's leadership who have signalled readiness to fill a supply gap, although concerns mount about the producer's spare capacity nearing its limit. But there is no reason why Riyadh would agree to supply crude at a discount to a buyer like Greece, traders said.
Many in the oil market have already pulled the plug on supplies for fear that Athens might default on its debt. Greek officials have said their country imports up to 40 percent of its oil from Iran and wants to continue the flow without disruption and on the same funding terms. Italian refiner Saras said it received about 10 percent of its feedstock from the Islamic Republic in 2011. "A ban on Iran exports would cause a shortage in heavy crude oils, putting further pressure on already high oil prices, and compressing margins for all refiners,» said Massimo Vacca, Saras' head of investor relations.