November 1, 2019: Iranian efforts to export oil in spite of sanctions have often been successful. As recently as mid-2019, Iranian leaders openly boasted of selling its oil to foreign customers despite the 2017 sanctions. At the time of that boast, Iran was getting a million BPD (barrels per day) out to export customers. In contrast, before the sanctions, Iran exported two million BPD. But by July 2019 exports had been reduced to 365,000 BPD and in August it was a record low 160,000 BPD and that did not change much in September. What the Iranians don’t issue press releases about is how well sanction enforcement efforts have been at reducing those illegal exports to record lows. That doesn’t mean the American led sanctions enforcement effort can ease up on their efforts to monitor oil leaving Iran. In part that’s because Iran had, even before sanctions were lifted in 2015, continued preparations for the revival of sanctions, and that happened in 2017.

A major investment in their oil smuggling operation was to expand their own fleet of tankers. Iran had learned that lesson during the 1980s war with Iraq in which both nations attacked tankers moving their oil exports. This meant tankers could not get insurance and Iran had to rely on their own tankers. Since the 1990s Iran has not only expanded its tanker fleet so that it can handle all its oil exports. By 2019 Iran had 54 large tankers with a total capacity of 102 million barrels. That was enough to handle normal exports of two million barrels a day to customers in Asia and Europe. Now the sanctions enforcement efforts have reduced that fleet to more of a liability than an asset. This was done by documenting Iranian violation of the terms by which it has its tankers operate using foreign registration. This is a common practice for all merchant ships but to be a legally recognized registrar nation there must be a minimum of rules that must be followed. Otherwise, insurance companies won’t deal with outlaw ships and many ports will not allow such outlaw tankers to enter. That, plus a shortage of cash means that Iran cannot get its aging tankers refurbished or repaired at more efficient foreign dockyards. Iran itself cannot handle most of their own tankers, which are too large for any Iranian shipyards to handle. Some repairs can be made but obtaining some large engine or hull components is difficult and often impossible because of the sanctions. Time is not on Iran’s side.

Iran has proved resourceful in the past when it came to finding new ways to smuggle oil, but the Americans now have decades of experience dealing with Iranian ploys and it has become more difficult to come up with new ideas, given that so many of the most effective sanction evasion methods have been neutralized or made much more difficult and expensive to use.

Details of these Iranian schemes and American countermeasures are generally kept out of the news. Not just because the Iranian methods were usually illegal, but also because the U.S. and its allies didn’t want Iran to know the full extent of the new countermeasures being used. That veil of secrecy eventually fails because so many nations are involved and the details eventually get into trade journals and then the mass media. Some of the scams involve using foreign tankers taking on oil from an Iranian port. This itself is suspicious and means that tanker is now under surveillance, If that tanker then “ghosted” or “ran dark” by turning off its AIS (Automated Identification System), laws are broken. AIS allows ship owners and their customers, as well as any nearby vessels, to track the progress of large ships. At that point, the non-Iranian tanker is an outlaw and probably illegally smuggling Iran oil to somewhere. This scrutiny of tanker activity has forced Iran to be more resourceful. That’s because more and more nations and international trade groups, not to mention insurance companies, will not deal with the Iranians or anyone who does.

Iran has also become aware that American surveillance of economic activity in the oil business is more thorough and robust than anticipated. For example, while few nations will openly cooperate with American sanction enforcement efforts (so as not to offend Iran or Iranian allies like China) many nations cooperate unofficially. Now the Iranians spend more time worrying about what their sanction enforcement adversaries are up to because, since 2017, the Iranians have found themselves the ones on the receiving end of unexpected developments.

Some of the new smuggling countermeasures include monitoring the nations that provide ship registry services while maritime insurance companies have their own array of regulations regarding who can have access to insurance coverage and who cannot. This is about more than shipowners being covered against accidents at sea or in port. Ships without proper coverage, especially for vessels carrying dangerous cargo (like petroleum and natural gas), cannot enter many major ports or the territorial waters of most nations if they do not have the proper insurance. By mid-2019 Iran found it more difficult to conceal what its 61 tankers and dozens of cargo ships were doing as more and more shipping companies and nations refused to do business with Iran. For a while, Iran tried to rely on Chinese tankers using Iranian techniques. For example, the U.S. recently caught a Chinese tanker in the Indian Ocean using ghosting and, while its AIS was off, changed its ship registration to hide delivery of Iranian oil to a banned customer. Now the Americans are threatening to seize Chinese tankers if China does not enforce the terms of the Iranian sanctions.

Another smuggling technique, which is more expensive, is to illegally move oil to Iraq by truck. This activity is more difficult to monitor because there are many inland locations where the large (often-tractor trailer) tanker trucks can take on cargo and many roads that cross the border. There the Iranian oil becomes Iraqi oil and tanker ships can load Iraqi oil and deliver it anywhere. This form of smuggling is very expensive because your average tanker truck carries 5,000 gallons, which is 120 barrels. It’s relatively easy, using photo-satellites, UAVs and local informants, to monitor the six ports equipped to load or unload oil tankers. Three of these ports are high capacity and capable of loading the supertankers that move most oil by sea. One of the three smaller terminals is on the Caspian Sea and could be used to smuggle oil via other nations but that does not appear to be happening. Monitoring all the road crossings from Iran to Iraq for tanker traffic is more expensive but can be done. That was how Iran was caught illegally smuggling oil to Syria. That was a desperate move but Syria itself is constantly monitored for the many items is cannot bring in legally because of sanctions against Syria.

As a result of all this, Iranian oil exports are hobbled by sanctions. Iran is hustling to expand its usual array of deceptions to try and hide illegal exports to customers willing to risk discovery and punishment when the Iranian deceptions fail. The last time (2012-2015) Iran got hit by an oil export ban shipments dropped from 2.6 million BPD to a million. As the sanctions were once more imposed in late 2018 Iranian exports quickly fell from 2.8 million BPD to 1.8 million. By April 2019 legal shipments had declined to under a million BPD and now they are less than 200,000 BPD. By mid-2019 oil shipments were obviously falling sharply but Iran still thought it could come up with a new way around this. That is not happening this time and exemptions given to eight export customers who needed time to shift to another supplier have expired. Some of the exemptions are permanent which is why the exports never hit zero.

There are plenty of other suppliers because there has been a world oil glut since 2010 because of fracking in North America (and now elsewhere). The OPEC oil cartel has restricted production to try and drive the oil price up but that only worked for a while and only partially. Even before Iranian oil sanctions were revived the oil price was declining again. So there are plenty of oil producers willing and able to replace Iranian exports. Illegal Iranian oil exports are sold at a lower price because of the risk (financial costs if caught) and that also contributes to keeping oil prices low. But if scrutiny is too intense the smugglers find they cannot reach many customers.

By mid-2019 Iran was again threatening to close the entrance to the Persian Gulf (the Strait of Hormuz) and the Red Sea entrance as well. The Hormuz threats were a bluff because Iran would be hurt more than anyone else in the short term as well as going forward. A more immediate problem was Iran losing the cloak of secrecy that had long kept its smuggling methods out of the news. But if the oil smuggling does appear to be stymied for a long period Iran may well try desperate measures, like the September attack on Saudi oil facilities. That is also dangerous because Iran has an Arab minority, whose homeland is where most of the Iranian oil production is. There has been sabotage there by angry Arabs in the past and now those “accidents” appear to be happening again. A covert war against Iranian oil facilities is not inconceivable. That would do long term damage to Iranian oil facilities which are already in bad shape because so much maintenance has been delayed for years because of sanctions.

Iran also has to be careful because there has been growing popular opposition to the religious dictatorship that has run the country since the 1980s. The protests are public, getting larger and more embarrassing. This began in late 2017 and unlike past outbreaks has not responded to the usual suppression methods. Iranian leaders are running out of options which, for them, is the worst position to be in.