LONDON—As a European Union oil embargo took effect Sunday, Iran was stepping up its efforts to offset the sanctions by bartering products with China and selling more refined-oil products such as gasoline to its neighbors.

 

Tehran's strategy is being closely watched because if it doesn't succeed the country may have to shut down some of its oil wells—a move that over time could damage reservoirs and push up global oil prices.

 

The EU embargo bans the purchase of Iranian oil and prohibits insurance for tankers carrying Iranian oil, which inhibits the transportation of Iranian oil to non-European nations as well. U.S. sanctions that prohibit companies that conduct oil transactions with Iran's central bank from doing business in the U.S. took effect last week, on top of existing penalties.

 

Iran says it is fully prepared to deal with the sanctions.

 

"All possible options have been planned in government to counter" the sanctions, Iran's Oil Minister Rostam Qasemi said Sunday in comments on the ministry's website.

 

Yet, Iran said it has a strategy in place to withstand the pressure and won't halt its nuclear program.

 

Mr. Qasemi, the oil minister, said Friday that Iran was now exporting gasoline rather than importing it, as it used to do, allowing the Islamic Republic to help cushion some of blow of sanctions. In the year ended March 19, Iran exported 382,000 metric tons of gasoline, including to neighboring oil producer Iraq, says Iranian customs statistics.

 

Iran has been strengthening its relationship with China, its biggest customer, which buys 500,000 barrels a day, according to the shipping tracker. Beijing bypasses banking sanctions by paying Iran in its local currency, the yuan, which is then used by Iran to pay for oil services or equipment, Iran trade professionals said.

 

A U.S. decision last month to exempt China, India and several other nations from penalties targeting financial institutions for 180 days lets Beijing continue to buy Iranian crude. Still, paying for it amounts to another challenge, amid U.S. Treasury warnings to banks to avoid dealing with Iranian lenders.

 

India approved a mechanism for Indian oil companies to deposit payments for Iranian oil into rupee accounts, which then will be used by Iran to pay for agricultural products and medicines from India.

 

Iran is developing other alternatives to maintain its production and offset lost crude sales, such as investing heavily in refining and electric sectors, which are fueled by oil and natural gas.

 

Under its five-year development plan ending in 2015, the country plans to spend $47.5 billion in new refining and distribution and to boost its power-generating capacity by 40% or 25,000 megawatts.

 

Much of this effort is geared toward exporting to neighbors that share a common land border with Iran, such as Afghanistan, Pakistan and Iraq, thus avoiding the sanctions that have hit oil shipments by sea.

 

The banking sectors of these countries also tend to be less exposed to pressure from Washington because they have less business in the U.S. than the more-developed countries in the eastern Asia.

 

In the year ended March 19, Iran increased its electricity exports by 30% from a year earlier, mostly to Iraq and Turkey, the country's Deputy Energy Minister Mohammad Behzad said in a recent interview.

 

Iran also is preparing to build a fuel pipeline to transport jet fuel or gasoline to Afghanistan and Iranian news reports say it is considering the construction of a crude-oil pipeline to Tajikistan.

 

Facing difficulties in transferring payments to Iran, China may struggle to find enough goods to compensate for its crude purchases.

 

 

Iran imports goods from China as varied as cranes, automobile technologies and teapots, which are often paid for via special accounts where Beijing has deposited its payments for Iranian crude.

 

(Source: WSJ)