UPDATE 1-Iran's oil exports fall in Sept, may slip further

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* Shipping issues hinder purchases by Asian buyers

* Industry source says exports may fall further

By Alex Lawler

LONDON, Oct 12 (Reuters) - Iran's oil supply, which has fallen to the lowest in more than two decades, is unexpectedly continuing to decline due to Western sanctions, putting further strain on the country's financial resources.

In a report on Friday, the International Energy Agency estimated Iranian supply fell by 220,000 barrels per day (bpd) to 2.63 million bpd in September, a steeper decline than other estimates of Iranian output last month.

The drop in Iranian supply is supporting oil prices and hurting Tehran's oil revenues, deepening hardship for a population deprived of basic imports and adding pressure on the government over its nuclear programme.

Some industry sources had expected to see Iranian exports bottoming out in August and September as customers found ways to get around difficulties in obtaining insurance, such as by using Iranian tankers. The IEA did not confirm this.

"Whereas many expected the sanctions to lose some bite in September as Iranian exporters and some of their clients were reportedly seeking ways to get around insurance constraints, in fact compliance appears to have tightened," the IEA said.

The European Union banned Iranian crude from July 1 and other countries have cut purchases in response to tighter U.S. sanctions. The EU ban prevents EU insurance firms from covering Iran's exports, hindering imports by some non-EU buyers.

Industry sources said on Friday Iranian shipments may fall further in coming months as Iran's tanker fleet has been struggling to meet delivery schedules and customers have found securing adequate insurance cover a challenge.

"The Asian buyers have shipping issues around deliveries," said a source with a company that used to buy Iranian oil. "If they don't find solutions around shipping, we may see a further decline in exports."

REPLACED IN EUROPE

Iranian exports slipped to 860,0000 bpd in September, the IEA, an adviser to 28 industrialised countries, said in Friday's report, a new low. Shipments were 2.2 million bpd at the end of 2011.

An industry source with a global oil company had a similar estimate of Iran's September exports to the IEA but estimated the month-on-month decline at almost 400,000 bpd, much more than the production drop reported by the IEA.

Other producers have stepped in to fill the gap left by Iranian crude in Europe, said an executive with French oil company Total who estimated Iranian exports fell to around 1 million bpd in the third quarter.

"Iranian volumes in Europe have been replaced mainly by Saudi barrels and Iraqi barrels," said Thomas Waymel, senior VP of crude supply and trading at Total's trading arm Totsa, at a conference in Geneva this week.

Iran is slipping down the ranks of the world's oil producers, having been overtaken by Iraq as the second-largest producer in the Organization of the Petroleum Exporting Countries behind Saudi Arabia earlier this year.

September's output is Iran's lowest since 1988, when the country pumped 2.24 million bpd, according to figures from the U.S. Energy Information Administration.

Israel and the United States have said they reserve the right to use force if necessary to prevent Iran from obtaining a nuclear weapon. Iran says its nuclear programme is peaceful.

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