More than 6,000 kilometers from Tehran, in treacherous waters off the shores of Singapore, a "dark fleet" of oil tankers waits to offload the precious cargo that helps keep Iran's economy afloat -- a dependency that could also sink it.
The fleet has grown steadily over the past five years, delivering Iranian crude to China as the countries work in concert to circumvent international sanctions that target Tehran's lucrative oil exports. But while the clandestine trade has buoyed Iran's budget, it also comes at tremendous cost and risk to Tehran.
Iran gives China a hefty discount to take its banned oil, taking 12 to 15 percent off the price of each barrel to make it worthwhile for Beijing to take on the liability of skirting sanctions, according to research by the data analysis unit of RFE/RL's Radio Farda.
Additional costs add up as well: ship-to-ship operations to offload the oil, middlemen, hidden-money transfers, and rebranding the oil to mask its Iranian origin and make it appear to come from a third country, said Dalga Khatinoglu, an expert on Iranian energy issues.
Altogether, said Khatinoglu, who contributes to Radio Farda's data analysis unit, Iran's budget figures and official statements indicate that 30 percent of the country's potential oil revenue was wasted last year.
And with the draft budget for the next fiscal year currently being debated by the Iranian parliament, there are no guarantees that Tehran's bet on quenching China's thirst for oil will continue to be a panacea.
With Iran almost entirely dependent on Beijing to take its oil and on other entities to facilitate the trade, Tehran has managed to inject desperately needed revenue into its economy. But Iran has also put itself at risk of seeing its main revenue stream dry up.
"There's definitely an extent to which Tehran has become more dependent on the likes of China or those who would be willing to deal with Iran in spite of Western sanctions," said Spencer Vuksic, a director of the consultancy firm Castellum, which closely tracks international sanctions regimes.
Vuksic said Iran is "definitely put in a weak position by having to depend on a single external partner who's willing to deal with and engage with Tehran."
Oily Deficit
Iran has trumpeted its foreign trade, claiming in December that oil revenue had contributed to a positive trade balance for the first eight months of the year.
But the oil and gas sector, by far the largest part of the Iranian economy, will not be enough to save the current budget of around $45 billion that was approved last year.
The Iranian fiscal year, which follows the Persian calendar and will end in March, is expected to result in a major deficit. In presenting the draft budget to parliament in December, President Ebrahim Raisi acknowledged a $10 billion deficit.
But the shortfall could be much higher -- up to $13.5 billion, the largest in Iran's history -- by the end of the fiscal year, according to Radio Farda. This is because data shows that just half of the expected oil revenues were realized, in part due to lower than expected oil prices and additional costs and discounts related to Tehran's oil trade with China.
Whereas the budget expectations were based on oil being sold at $85 per barrel, the price of crude dipped below $75 per barrel in December and has fluctuated wildly recently amid concerns that tensions in the Middle East could disrupt shipping and production.
And while Iran expected to export 1.5 million barrels of oil per day (bpd), it exported only 1.2 million bpd in the first eight months of the year, according to Radio Farda.
Altogether, Radio Farda estimates that Iran lost some $15 million per day in potential revenue through its trade with China, which accounts for more than 40 percent of the Iranian budget.
For the upcoming budget of about $49 billion, expectations for domestic and foreign oil revenue have dipped by 3 percent, according to Khatinoglu, even as the projected budget itself has risen by about 18 percent.
Accounting for the fluctuation of global oil prices, which fell far short of the average estimated for the current year, the peg has been lowered to $71 per barrel. Tehran is also expecting lower oil-export volumes -- which only briefly met forecasts of 1.5 million bpd, the highest levels seen since 2018 -- with only 1.35 million bpd forecast.
Iran is reportedly expected to plug the gap left by the lower oil revenue by increasing taxes on wealthy individuals and businesses, while Khatinoglu says Tehran will try to boost revenue by raising domestic energy prices.
Shipping Competition
Adding to the uncertainty of Iran's finances is the potential for weaker Chinese demand for its oil and competition from Russia which, like Tehran, sends banned oil to Beijing.
And international sanctions are continuously evolving to punish countries and entities that foster Iran's illegal oil trade, threatening to capsize the dark fleet that helps sustain Tehran's so-called resistance economy.
On the other hand, the mercurial nature of oil price fluctuations and demand could work to Iran's advantage. With Venezuelan oil no longer under sanctions, Russia is left as the only competitor for clandestine oil sales to China.
And Iran's capacity to export oil is greater than ever, allowing it to more easily sell its oil to Beijing when demand is high.
This is largely due to the considerable expansion of the global "dark fleet" of oil since crippling U.S. sanctions targeting Iran's oil exports were restored after the United States unilaterally withdrew in 2018 from the Iran nuclear deal that has been agreed with six world powers.
The deal, known formally as the Joint Comprehensive Plan of Action (JCPOA), offered sanctions relief in exchange for curbs on Tehran's controversial nuclear program. After the deal went into effect in January 2016, Iran more than doubled its legal oil exports in a few months, eventually reaching a high of 1.54 million bpd in 2018.
But with the U.S. withdrawal from the deal and subsequent reintroduction of sanctions that year, Iranian oil exports plummeted. And after the exceptions granted to a handful of countries -- including China -- that were allowed to continue to import Iranian oil expired in 2019, Iranian oil exports slowed to a trickle.
This was partly because Iran was not equipped to export its oil and had no immediate customers willing to defy the sanctions. But that changed with the fine-tuning of Iran’s efforts to defy sanctions, the fivefold rise in the number of dark-fleet tankers, and China's willingness to take the risk of doing business with Tehran -- although Beijing has not acknowledged unregistered imports of Iranian oil.
Today the dark fleet of often aging ships -- nearly half of them VLCCs (very large crude carriers) -- has risen to up to 1,000 vessels, according to Vortexa, which tracks international shipping. Many smaller ships are involved in Russian oil exports, which account for about 80 percent of all opaque tanker activity. But Iran had access to nearly 200 tankers, many of them supertankers, as of early 2023, according to Vortexa.
More than 20 ships, 13 of them VLCCs, joined the Iranian fleet in 2023, Vortexa reported in June, contributing to record-high Iranian oil exports under sanctions.
Vortexa attributed the rise to increased Chinese demand, the addition of the new tankers to shuttle Iranian oil after many had switched to shipping Russian oil, and the decline of Iranian inventories drawn down to boost exports amid heightened competition with Russia for the Chinese market.
While Chinese demand for Iranian oil slowed in October, Vortexa noted in a subsequent report, Washington’s removal of oil sanctions on Venezuela that month opened the possibility of higher demand for Iranian oil.
Uncertain Waters
In an October report, the global trade intelligence firm Kpler explained that tankers illegally shipping Iranian oil commonly "go dark" upon entering the Persian Gulf by turning off their transponders, technically known as the automatic identification system (AIS). After visiting Iran's main oil terminal on Kharg Island or other ports, they then reemerge after a few days indicating they are carrying a full load.
From there, the ships offload the oil with ship-to-ship transfers that take place in unauthorized zones, mostly in the Singapore Straits. Eventually the oil, rebranded as coming from Malaysia or Middle Eastern countries, enters China, where it is processed by more than 40 independent "teapot" refiners that have little exposure to international sanctions or the global financial system.
Sanctions Revisited
The challenge for those trying to halt the illicit trade in Iranian oil as a way to hold Tehran accountable for its secretive nuclear activities and dire human rights record, is how to make the negatives of dealing with Iran greater than the financial benefits.
That has put the illicit seaborne trade of oil -- both Iranian and Russian, owing to the ongoing war in Ukraine -- under greater scrutiny by the international community.
"There's continuous refining of the sanctions programs to include and expand sanctions against those involved in evasion, and that includes sanctioning so-called dark fleets," said Castellum’s Vuksic, noting that the number of targeted sanctions against Iranian individuals and entities rose by more than 1,000 last year.
The big question is enforcement, an issue that is being debated in the United States and other countries and is leading to increased calls for countries like Panama to de-flag illegal tankers and for countries to clamp down on dark-fleet ships anchored off their shores.
"My expectation is that governments, including the United States, will take action against these dark fleets, especially the facilitators and the [ship] owners when they're identified," Vuksic told RFE/RL.
Other factors, including concerns about the impact of a broader Middle East conflict potentially involving Iran, could also hurt or help Iran's financial standing.
As Kpler noted while reporting that Chinese imports of Iranian oil had dropped significantly in October, the changing global landscape can have a big effect on the independent Shandong-base refineries that purchase Iranian oil.
"Middle East tensions/threat of stricter enforcement of U.S. sanctions may have turned Shandong refiners more risk-adverse," the global trade intelligence firm wrote in a post on X, formerly Twitter.
In the past week, supply fears also exposed the volatility of global crude prices, potentially to Iran's benefit.
Oil prices rose sharply on January 2 on news that Iran had sent a frigate to the Red Sea and was rejecting calls to end support for attacks by Tehran-backed Huthi rebels that have disrupted shipping in the important trade route.
Prices surged again following the deadly January 3 bombing attack in Iran, for which the Islamic State militant group has claimed responsibility.
But the week ended with questions about the future of Iran's cut-rate deal with the only country willing to help prop up its economy, with Reuters reporting that China's oil trade with Iran had stalled after Tehran withheld supplies and demanded higher prices.
This content originally appeared on News - Radio Free Europe / Radio Liberty and was authored by News - Radio Free Europe / Radio Liberty.
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