EU is set to impose sanctions – an embargo on import of Syrian oil this week. What effect, if any, will it have on the Syrian economy and on the regime of Bashar al-Assad?
The Syrian economy is small. The GDP 2010 was at 107,4 billion USD. Of the total GDP oil was 5.4% as compared to tourism, which accounted for 12%. 5.4% is not a staggering number. But if we look to revenue – what the Syrian regime get in form of hard currency in their pockets.
According to IMF the Syrian state got around 14 billion USD (or 592 billion SYP) in revenue 2010. 25% or 4 billion USD, (148 billion SYP) came from export of oil. Today this figure might be more in the vicinity of 30%. As the effects of the protests and the sanctions have all but wiped out the Syrian tourism industry oil has become even more important. It is from this revenue that the regime gets a daily inflow of hard currency to pay the security forces.
Syria produced around 368 000 bbl/d (barrels a day) 2009, 380 000 bbl/d 2010 and (projected) 385 000 bbl/d of light and heavy crude oil. 2010 around 148 000 bbl/d was exported, divided between 75 000 bbl/d Souedieh sour crude and 73 000 bbl/d Syrian light crude. Of these 148 000 bbd/d 143 000, or 96%, was exported to four EU states: Italy, Netherlands, France and Spain – where the oil also is refined. Today Syria exports around 162 000 bbl/d to EU.
Would an EU oil embargo result in a direct loss of almost 4 billion USD for the Syrian regime? Could not Syria just export crude to some other states like China or India, both who have been mentioned as possible importer of Syrian crude? Not necessarily. There is a reason why Syria is exporting almost all of its oil of EU. The quality of Syrian oil, refining capacity for heavy crude, transport logistics and transport cost.
The two most important qualities determining crude value are density as measured in API gravity and amount of sulphur measured in mass. In general the higher the API and the lower the sulphur content the more valuable the crude.
A crude with low API is dense, expensive to extract and transport and poses technical challenges to refine. The physical characteristics of heavy crude differ aside from density. The presence of impurities such heavy metals dictate the level of processing and re-processing needed. A sulphurous or sour crude also poses challenges to refine. Heavy and sour crude is far more expensive to refine and puts serious demands on refinery capacity. The vast majority of refineries in import countries capable of refining heavy sour crude are located in USA and EU.
A crude is considered ‘heavy’ if API is 30 or below. 34 + is considered ‘light’, 33-31 ‘medium’. A crude is considered ‘sour’ if it contains more then 0.5-1.0%/weight sulphur. Compared to a benchmark crude such a West Texas Intermediate, a light sweet crude (API 39,6 sulphur 0.24%) Souedieh sour crude is an unattractive product (API 22 – 24, sulphur 3.90%) suitable for asphalt and heating oil. To refine petrol form this crude is only for those states with up-to date modern refineries. Syrian light crude on the other hand (API 38, sulphur 0,68%) is suitable for jet fuel and gasoline without the hassle that heavy sour crude entails.
Few refineries outside USA, EU and Syria are calibrated to handle Souedieh sour crude. Syria does not have the capacity to refine all its oil. For the two states that are mentioned as potential buyers of Syrian oil, China and India, everything is about refining capacity of heavy crude.
China is at present upgrading a lot of their refineries to handle heavy crude. 70% of China’s own oil reserves are thought to be heavy crude. The majority has not been explored due to difficulties in extraction but also because of a lack of refinery capacity. In the past China has had problems refining another similar sour heavy crude, the Iranian Sourosh/Noroush (API 18-19, sulphur 3.40-3.50%). Although China has upgraded some refineries to handle Venezuelan heavy crude, the capacity is tailored to this very heavy crude (API 10-11) and currently highly limited. It is therefore likely that China does not have the capacity today to take over importing Syrian heavy sour crude from EU.
India imports 70% of its oil and has the fifth largest refining capacity in the world. The major exporter of oil to India is Saudi Arabia (18%), Iran (16%), Kuwait (10%) and Iraq (9%). The vast majority of crude from these four states are heavy and sour, something the refineries of India are likely to have been adapted to handle. India could likely swallow the output from Syria if EU embargos import. But the question is if India wants to put their thumb in the eye of the EU and USA? India as compared to Russia lacks both the political interest in the Middle East in general and Syria in particular. India is not in the habit of acting like a former superpower with an attitude problem.
Then there is the question of transportation of crude. Today Syria pays around 18 000 USD/day for an Aframax tanker carrying 600 000 barrels of crude to the EU. As reported by Reuters in May the rate for an Aframax tanker carrying Crude from Syria to EU had in then, during two months of protests, risen sharply. On Worldscale rates the Syria – EU route was 126.25, or 26.25% above norm. This was in May when the EU slapped on the first round of sanctions. With new sanctions targeting the oil industry Syria would become radioactive and the rate on Worldscale would soar – 400 or 500% or more is not out of the question, something that would cripple Syrian oil export. If India or China would buy the Syrian crude we would also have to take into account the distance which would be another rising costs for the transport.
With an EU embargo on oil, any company with contracts in the EU transporting crude from Syria to country outside of EU would risk running afoul of the EU Commission. Of the three companies transporting Syrian crude, one expressed unease with continuing its operations due to the sanctions imposed by EU, and this was in May. A not so bold guess would be that none of these companies would be in the business of transporting Syrian crude if EU embargoes import.
EU companies would be in breach of EU law. A transport company with its headquarter in, say, Liberia, might also be in breach of EU law, which could effect their access to the EU market. Crossing EU is usually can be bad for business.
All in all I would argue that Syria would stand to loose a lot of revenue on EU sanctions. The Souedieh sour crude would be difficult to sell to any state outside EU. The Syria light crude, on the other hand, would not be difficult to realize, but with an added transport costs.
EU has also discussed sanctions on export of technical equipment and assistance to the oil sector as well as financial transactions and insurances linked to Syria oil export. Now, so far as the anonymous comments from the council this will not happen. The reasons could be that EU wants to later escalate sanctions or that France (Total), UK/Netherlands (Shell) and Italy (ENI) argued that of these oil companies where to withdraw all together from Syria Russian and Chinese companies would take their place. Two other possible areas of sanctions are on transport of oil (tankers) and transferral of deposits.
All in all the direct effect of EU sanctions on Syrian oil would be severe, even if other buyers would surface. But what would prove even more severe is the confidence in the regime. So far the protests and sanctions have taken its toll. As reported yesterday in the Guardian Syrian businessmen are reaching out to western diplomats making clear their revulsion for the regime, but at the same time voicing concern of the effects of the sanctions on the economy. It is easy to see that Syrian businessmen who in the past had add no qualms in getting into bed with the regime now are very concerned that they might be targeted for EU sanctions.
As reported by Robert Fisk the Syrian banking sector is in peril. People are withdrawing their savings, some depositing them in Lebanese banks. Although the Syrian central bank as around 17 billion USD in foreign currency reserve 50 million USD are depleted every week to shore up the Syrian pound.
As sanctions on oil are levelled on Syria there is a serious risk that this would cause a run on the banks when people start withdrawing cash as well as putting strain on the central bank’s attempts at keeping the Syrian pound afloat against the USD.
An imminent collapse of the economy and the regime is not likely. Not yet at least. Syria’s only remaining ally, Iran gave loans in the past. Since June reports/rumours in different blogs points to Iran preparing a loan of 5-6 billion USD to Syria. But as Iran’s economy is not in good shape this could only be a temporary measure. The sanctions levelled by the EU at Iranian officials and at IRGC Quds force seems to have rattled the Iranians if one is to judge from the statement of their foreign minister on the situation in Syria.