Iran's firing of more than 300 missiles and drones at Israel in mid-April led to renewed calls for tougher sanctions on Iran's oil exports, the lifeblood of its economy.
Despite the measures taken against the country, Iran's oil exports reached the highest level in the last six years in the first quarter of 2024, reaching $35,8 billion, according to Iran's customs chief.
But how does Iran manage to avoid sanctions on its oil exports?
The answer lies in the trading methods used by Iran's biggest oil buyer, China, which is the destination for 80 percent of Iran's roughly 1,5 million barrels a day of exports, according to a report by the US Congressional Financial Services Committee.
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Why does China buy oil from Iran?
Trade with Iran has risks, primarily in the form of American sanctions, so why is China, the largest buyer of oil, doing it in the first place?
Simply because Iranian oil is cheap and of good quality.
World oil prices are soaring due to international conflicts, but Iran, eager to sell its own oil under sanctions, is offering a discounted price.
China saved nearly $2023 billion in the first nine months of 10 through record purchases of oil from Iran, Russia and Venezuela, all of which sold at discounted prices
The world benchmark for the price of crude oil fluctuates, but is usually below 90 dollars per barrel.
Homajun Falakshahi, senior oil data and analytics analyst at Kpler, estimates that Iran is trading crude oil at a discount of $5 per barrel.
Last year, this discount amounted to as much as 13 dollars per barrel.
Geopolitical interests are at stake, according to Falakshahi.
"Iran is an integral part of the big game between the US and China," he says.
By supporting the Iranian economy, "China is increasing the geopolitical challenges for the US and the Middle East, especially now that tensions with Israel are ongoing," he adds.
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"Refineries-teapots"
Analysts believe that over the years, Iran and China have developed a sophisticated system for trading Tehran's sanctioned oil.
"Key elements of this trading system are Chinese 'teapots' [small independent refiners], 'dark fleet' tankers and Chinese regional banks with limited international involvement," Maja Nikoladze, deputy director of the Geoeconomics Center at the Atlantic Council, told the BBC.
The "teapots" where Iranian oil is refined are small, semi-independent refineries, alternatives to large state-owned companies.
"It's industrial jargon," explains Falakshahi, "because the refineries at first looked like teahouses, with very basic facilities, mostly located in the Shandong region, southeast of Beijing."
These small refiners pose less of a risk to China compared to state-owned companies that operate internationally and need access to the US financial system.
"Small private refineries that don't have foreign operations, they don't need to trade in dollars and they don't need access to foreign funds," Falakshahi told the BBC in Persian.
"Dark Fleet"
Oil tankers can be tracked across the world's oceans through software that records their location, speed and rough path.
To evade the tracking system, Iran and China use "a network of tankers with obscure ownership structures, which do not report their exact locations," says Nikoladze.
"They can completely bypass Western tankers, shipping services and brokerage services. That way, they don't have to comply with Western regulations and sanctions," she adds.
These "dark fleet" oil-carrying ships typically deactivate their Automatic Identification Systems (AIS), a marine transponder system, to avoid detection, or cheat by pretending to be in one location when they are actually in another.
These fleets are believed to engage in ship-to-ship transactions with Chinese consignees in international waters, outside of authorized transfer zones, and sometimes in poor weather conditions to conceal the activities, making it difficult to trace the origin of the oil.
Falakshahi of Kpler suggests that these transfers usually take place in Southeast Asian waters.
"There's a zone, east of Singapore and Malaysia, that historically has always been a location with a lot of tankers that would come in there and transfer cargo to each other."
The next stage is "rebranding".
With the help of this method, Falakshahi explains, “another ship sails from Malaysian waters to northeastern China and delivers crude oil. The goal is again to make it look like the crude oil is not from Iran, but, for example, from Malaysia."
According to the US Energy Information Administration (EIA), customs data indicates that China imported 54 percent more crude oil from Malaysia in 2023 than in 2022.
Indeed, the amount Malaysia has reported exporting to China exceeds its total crude oil production capacity, according to Atlantic Council analyst Nikoladze, "leading to the belief that what Malaysia is reporting is actually an export of Iranian oil."
There were reports that Malaysian and Indonesian officials seized Iranian tankers for "unauthorized oil transfers" in July and October last year.
Smaller banks
Instead of going through the international financial system overseen by the West, Maja Nikoladze explains that transactions are carried out through smaller Chinese banks.
"China is perfectly aware of the risks that come with buying sanctioned Iranian oil, which is why it does not want to involve large and important banks in these transactions," she says.
"Instead, it uses small banks that have no international involvement."
Payments for Iranian oil are also believed to be made in Chinese currency to avoid a financial system dominated by the US dollar.
"That money will end up in accounts in Chinese banks that have ties to the Iranian regime," Falakshahi explains.
"Then that money will be used to import Chinese goods, and obviously there is some of this money going back to Iran.
"But it is extremely difficult to understand how this is happening and whether Iran manages to recover all its money," he adds.
Some reports suggest that Iran is using "currency exchanges" within its own country to further obfuscate the money trail.
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Fear of rising prices
On April 24, US President Joseph Biden signed a foreign aid package for Ukraine, which included the extension of sanctions on the Iranian oil sector.
The new law expands sanctions to include foreign ports, ships and refineries that knowingly process or ship Iranian crude oil in violation of existing U.S. sanctions and also expands so-called secondary sanctions to cover all transactions between Chinese financial institutions and sanctioned Iranian banks used to purchase oil. and oil derivatives.
Kpler analyst Falakshahi says Washington may be hesitant to implement this fully.
"That's simply because the top priority for the Biden administration is fuel prices at home. It is much more important even than its foreign policy," adds Falakshahi.
Iran is the third largest producer in the Organization of the Petroleum Exporting Countries (OPEC), and produces about three million barrels of oil per day, or about three percent of the total world output.
The interruption of its supply can cause a big jump in the international price of oil, according to experts.
"Biden knows that if the US cuts exports from Iran, it will mean less supplies on the market, which will increase the price of crude oil in the world. If that happens, it will also increase the price of fuel in the US," says Falakshahi, adding that this is something Biden would like to avoid before the presidential election.
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