Iran is using a little-known port off the East Malaysia coast to hide millions of barrels of oil from Western sanctions, according to shipping data, industry sources and officials, Reuters reported.
A Reuters examination of shipping movements and interviews shows how Iranian crude is shipped to the area and loaded on to empty vessels at night to await potential Asian buyers. Storing the oil on hired tankers operating under the Panamanian flag in the calm waters off the tax-haven port of Labuan - an offshore financial centre about the size of Manhattan - means Iran can keep its own fleet active and ensure the flow of oil money into its struggling economy.
At least two large oil tankers have been unloaded this way in recent weeks and several more Iranian vessels were steaming towards Asia, according to Reuters Freight Fundamentals, which tracks the movement of the global tanker fleet. One was destined for a Chinese port, while three others, carrying as much as 6 million barrels of crude or fuel oil, were sailing to unknown destinations.
Iran would like to shift more oil to what is effectively a mobile storage depot off Malaysia's coast over the next few months, said an industry source familiar with Iran's planning who didn't want to be identified due to the sensitivity of the matter. But it is struggling to find shipowners willing to offer vessels for storage.
While not illegal, the dead-of-night transfer of oil in the South China Sea illustrates the lengths to which Iran will go to keep exporting its oil to skirt Western sanctions aimed at pressuring Tehran's suspected pursuit of nuclear weapons. A European Union oil embargo has virtually halted access around the world to insurance for Iranian crude and oil products.
Doing business with Iran's oil industry carries reputational and financial risk and the threat of losing insurance coverage.
Less than 10 km (6.2 miles) from the coast of Borneo, Labuan is sheltered from typhoons and is typically used to park unwanted ships rather than store expensive oil. People in the industry say this makes it an ideal place to blend or rebrand oil as non-Iranian and resell it under the radar of sanctions enforcers in Washington or Brussels.
With fewer customers, Iran has cut its oil output and almost halved exports from around 2 million barrels per day last year. The Labuan scheme means Iran can use its own tankers to move, rather than store, its oil. In April, shipping sources said more than half of Iran's tanker fleet was anchored in the Gulf just holding some 33 million barrels of oil - worth around $3 billion at today's prices.
Malaysian and Iranian officials did not respond to requests for comment for this article.
Last month, the Lantana, a tanker operated by the National Iranian Tanker Co (NITC), transferred its cargo of around 1 million barrels of crude oil to the Titan Ruchira, a floating storage vessel, off the tiny tropical island of Pulau Kuraman near Labuan, port and shipping industry officials said. Around August 10, another Iranian tanker, the Motion, discharged as much as 2 million barrels of fuel oil on to the Titan Tulshyan in the same area, said the officials.
The two ships are among 58 Iranian-owned vessels blacklisted by Washington in July for assisting in Iran's oil trade. Those measures bar U.S. companies and Americans from doing business with the ships.
"Our vessels are there and, as we understand it, there are no issues," a source familiar with NITC tanker chartering told Reuters.
A third NITC tanker, the Justice, had been heading for Labuan, but shipping data shows it changed course and should arrive at the Chinese port of Dalian on September 17. Another tanker, the Pioneer, had been expected in Labuan early this month, but has anchored off the southwest Malaysian coast.
"That (Lantana) operation took place literally in the dark of night. They didn't even use a proper operator with experience to carry out the STS (ship-to-ship transfer)," said an East Malaysian-based shipping source. "The authorities were aware only after the fact."
Iran declined to sell the stored crude to a Chinese trader who offered $54 a barrel - only around half the price of Iran's cheapest heavy crudes - said a source familiar with those discussions.
Iran reportedly faces a huge amount of oil stuck and its oil exports have dropped to 1.1 million barrels per day from 2.3 million in 2011, because of the U.S. and EU's bilateral sanctions on the country's oil export and banking system.
Iran who has lost its European oil customers since early July (EU bought about 480, 000 Iranian barrels per day in past year), repeatedly announced that it is preparing to find new crude buyers and sign oil deal agreements with them.