But the joint venture has been put on hold indefinitely, at least in part because sanctions made it difficult for the operation to conduct its business. Satsangi, who went back to marketing base oils in India from other sources, said there were also other reasons, but he left no doubt about the impact sanctions are having.

Implementation of Iran sanctions has become very strict lately, he said in an interview with LubesnGreases. Monitoring in the U.A.E. of Iran-bound trade and enforcing the sanctions is showing its effects. Trade is virtually being done on a cash-and-carry basis.

The sanctions stem from objections to nuclear activities conducted by the Iranian government. The United States and some other countries claim Iran is refining fuel and taking other steps to develop the capability to make nuclear weapons. Tehran insists the program has only peaceful purposes.

Sanctions against Iran are divided between those imposed by the United Nations and additional unilateral measures adopted by the United States and the European Union. Australia, Japan, South Korea and Canada have also implemented restrictions to varying degrees. The UN ratcheted up restrictions in June when its Security Council passed Resolution 1929. The U.S. and the EU strengthened their own penalties later during the summer.

Historically sanctions have focused on preventing sales to Iran of items and technology that could be used for military purposes. Newer curbs have extended to interaction with Iranian banks and individuals with links to Irans Revolutionary Guard.

The lubricants business could receive a further setback if U.S. President Barack Obama approves a set of sanctions specifically targeted at Irans refining capability. Dubbed the Comprehensive Iran Sanctions Accountability and Divestment Act, the legislation would punish companies and individuals who aid Irans petroleum sector. With a crude oil refining capacity of 1.68 million barrels per day, that is a development that worries many. Turkey and China have both been accused of supplying refined petroleum products to the country.

But the sanctions are already affecting Irans lubes industry in several ways.

They have disrupted access to raw materials such as lubricant additives and higher quality base oils, and they have also impeded Iranian refiners from up-grading their own base oil supply. They have compelled a number of international companies operating in Iran to curtail operations there. In addition, Iranian companies trying to export base oils have found it more difficult to do so.

One of the issues confronting the domestic industry is procurement of higher quality lubricants or the base stocks needed to produce them. Iran has surplus base stock capacity – a bit more than half of the capacity in all of the Middle East – but almost all of it is API Group I. As a result, Iranian lube suppliers have had to import Group II and III base stocks that are increasingly needed to blend higher quality lubricants – or else they have had to import the finished lubes. Either prospect is becoming more difficult, according to Fouman Chemie, a lube marketer based in Tehran.

Sanctions are hurting, said an official who asked not to be identified. Financing and opening letters of credits, especially in euro and dollar denominations, are a problem. Whereas before we could open letters of credit and pay our banks 10 percent up front and the remainder at customs clearance, we are now having to battle with suppliers not willing to sell products to Iran altogether, [and] paying 50 to 100 percent up front.

Madjid Safdari, of Behran Oils International Sales Department, estimated that the Iranian market requires 54,000 metric tons per year of imported base stocks that are Group II or higher – or a corresponding amount of lubricants made from them – and he said that Behran, a Tehran-based base oil and lubricant supplier, is responsible for 81 percent of that traffic. Behrans joint venture with Total Outre-Mer supplies imported finished products that include top tier engine oils and industrial lubricants, described by French energy giant Total as small quantities.

If sanctions continue unabated, Safdari said, existing base oil plants will likely need to convert some refining capacity to accommodate the markets shift towards Group II and III, projected by Behran to reach 150,000 t/y by 2015. Group I products cannot continue to dominate the market, but technical know-how will be a problem in the current situation.

In fact, two Iranian Group II and III projects were announced in 2007 and 2008 but have also been delayed by sanctions. Behran approved construction of a 220,000 t/y plant adjacent to the existing Tabriz Oil Refinery at Tabriz City but has so far failed to obtain the technology for such a facility. Most of the worlds Group II and III plants use technology supplied by Chevron Lummus or ExxonMobil, and U.S. sanctions prohibit those companies from dealing with Iran. Safdari said Behran is negotiating license agreements with an another unnamed supplier.

The other project is a joint venture between Fouman Chemie and Sepahan. They plan to build a 300,000 t/y plant at Bandar Abbas and in 2008 announced an agreement to license catalytic hydro-refining technology from the French firm Axens. But the project is at a standstill because the partner cannot secure financing.

Before banks were offering 85 percent project financing, the official at Fouman Chemie said. [That] is now reduced to 50 percent, [and] on a $500 million investment that is a huge challenge.

Another Iranian base oil producer, Iranol, also wants to form a Group II/III joint venture, according to Planning Manager Mohammad Roshangar, who said, We must do it. He did not discuss potential technical partners.

Though some put on a brave face, Iranian blenders also face acute shortages of bright stock, which is produced domestically only in small volumes. Perhaps a little optimistically, Behrans Safdari said Chinese technology may fill the void. Chinese quality is developing, he added.

Several sources talked of disruptions to supplies of lubricant additives.

Infineum decided to stop supplies to Iran, Safdari said, referring to the U.K.-based ExxonMobil and Shell joint venture. Large amounts of sub-grade Chinese and locally made additives are being used, and these do not meet inter-national specifications and are damaging local engines and machinery.

Iran has not been completely shut off from Western additives. For example, Winnington FZCO is a chemical trading company set up several years ago in Dubai Airport Free Zone, and according to its website, it supplies a variety of chemicals to a range of industries. Winnington declined to discuss its operations, but an individual at Afton Chemicals office in Dubai, who asked not to be identified, said Winnington acquires lube additives manufactured at Aftons plant in Belgium and distributes them in Iran. Afton is headquartered in Richmond, Virginia, U.S.

Sanctions are also impacting international participants in Irans lubricant market. In the face of intense political pressure, industry observers say that Shells activity in Iran has been declining for some time. This is despite the fact that as recently as 2009, Shell acknowledged the size and global importance of Irans hydrocarbon reserves. A spokesperson for Shell said it is complying with U.S. and EU sanctions.

However, rules about the timing of full compliance appear to be providing the Anglo-Dutch oil giant with room to maneuver. A Shell source who asked not to be identified said current operations in Iran are being drastically reduced. By the end of 2010 Shell staff numbers were scheduled to be in single figures and the operation effectively a representative office. A Shell joint venture with Iranian base oil and lube producer Pars Oil appears to be the main casualty.

Germanys Fuchs Petrolub AG has a United Arab Emirates-based joint venture, Fuchs Oil Middle East (the partner is Alhamrani, of Saudi Arabia), which has a subsidiary trading company in Iran. Fuchs declined to discuss the status of the trading company. Other big lubricant suppliers with operations in Iran include Castrol, Total and Agip.

Iranian base oil refiners frequently use joint ventures or foreign subsidiaries to export their products, but such activities have faced increasing obstacles as sanctions tighten. In addition to UniSep, Sepahan formed a base oil sales subsidiary in U.A.E., International Solar Oil Co., located in the Dubai Airport Free Zone. According to a spokesperson for Sepahan in Tehran, that operation was mothballed because of the embargo on trade.

Authorities are clamping down on attempts to circumvent the embargo, and Dubai in particular is under mounting pressure to comply. Nevertheless, Iranians insist that the crackdown on exports has neither hurt nor discouraged them. Reza Javanshir of Sepahans export department insists the setback for Solar Oil will only be temporary. Yes we have had some problems, but we are confident in our ability to overcome the issues.

We have felt nothing, and there has been no effect on our base oil exports, Safdari said of Behran. He stated that export sales figures for 2010 were expected to exceed 2009 levels and would be in excess of U.S. $30 million (22 million). He also contended that Behran still has access to captive regional markets such as the Middle East, members of the Commonwealth of Independent States and Turkey, the majority of which are not fully complying with sanctions.

Iranols Roshangar agreed and predict-ed sanctions will not last much longer.

Selling to Europe is not a problem, and we predict that EU sanctions will be lifted very soon, and we are working on that basis. The suggestion that sanctions may be lifted by Europe will surprise many and possibly indicates a desire to cast doubt on the cohesiveness of current policy or simply wishful thinking.

Satsangi, the former international sales chief at UniSep, said business will continue, hinting that industry will inevitably explore ways to skirt obstacles. We are looking at alternate routes – which cannot be disclosed for obvious reasons – to conduct our trade, he said. Trade will go on, come what may. Its virtually impossible to put a complete stop to it.

Indeed, although the loopholes are closing, U.A.E. regulators remain concerned about the status of satellite companies frequently structured as free zone entities and their ability to repackage or rebrand. Turkey and Malaysia look set to gain from the relocation of some of these businesses as they try to escape the grip of current policy.

Consensus about the full impact of the recent escalation in sanctions is varied but there can be no doubt they have significantly curtailed trade in critical sectors. The effects are not unique to any industry, but the concert of measures has ripped through Irans economy. Strategic sectors including the lubricants sector remain the key focus, and Irans ability to sustain further contraction of vital commercial interests is doubtful. There is something of a who blinks first psychology that will shape the final outcome, and with the prospect of further sanctions on the horizon, those odds do not look to be in Irans favor.