Iran’s access to oil markets faces hurdles
Washington - Two months after Western sanctions were lifted, Iran is sending more oil onto the market but it is not clear just how much Tehran is exporting.
Some analysts said Tehran’s increased export volumes have come largely from storage, suggesting it is having trouble recovering crude production from fields that were inoperative over the last few years. Shipping and insurance issues are also hindering Iranian oil sales to Europe.
Iran on March 6th delivered its first crude volumes to Europe since mid-2012, with refiner Cepsa receiving Iranian crude in southern Spain. Russian firm Lukoil and French energy giant Total have also accepted shipments of Iranian crude.
Iran claims it has increased exports by 400,000 barrels per day (bpd) since Western sanctions were lifted in mid-January. However, the International Energy Agency (IEA) in its monthly Oil Market Report, released March 11th, suggested that “Iran’s return to the market has been less dramatic than the Iranians said it would be”.
The Paris-based energy watchdog said Iran boosted crude production by 300,000 bpd since the beginning of the year and that its crude exports rose from 1.15 million bpd before sanctions were lifted to 1.4 million bpd in February.
Iranian officials had said they could expand oil exports by 500,000 bpd within a week of sanctions being removed and by another 500,000 bpd over the following six months. That agenda seemed ambitious given the inherent challenges of restarting output from oilfields that have languished for several years without requisite financial and technical resources to maintain them.
In anticipation of sanctions being lifted, Iran stored large volumes of crude in onshore storage and offshore tankers to jump-start its exports.
Iran has refused to take part in the “production freeze” agreement that Saudi Arabia, Qatar and Venezuela, fellow members of the Organisation of the Petroleum Exporting Countries (OPEC), cobbled together with Russia in mid-February. Iran argues that four years of sanctions hampered its crude production and exports and it is the responsibility of those countries that capitalised on Iran’s reduced market access to rein in their output while Tehran returns to pre-sanctions levels.
Prior to sanctions, Europe imported an average of 400,000 bpd from Iran. After sanctions, Saudi Arabia, Russia and Iraq moved to fill the gap.
Saudi Arabia has not made much noise about Iran’s response to the freeze deal — perhaps anticipating Tehran’s challenges in returning to the oil markets — and seems willing to see how Iran’s export volumes evolve and how oil prices perform before committing to production cuts.
Europe is not Iran’s only market. In December, the National Iranian Oil Company (NIOC) renewed existing contracts with China’s largest state refiner Sinopec and Chinese state trader Zhuhai Zhenrong to supply a combined 505,000 bpd in 2016. Tehran also began negotiating with PetroChina, China’s second largest state refiner, and state oil firm CNOOC for new supply contracts. NIOC appears to have also made headway with Taiwan, which agreed to modestly boost its imports of Iranian crude for 2016. Iran also has found renewed interest from Japanese firms.
Iran is facing some procedural obstacles in returning to oil markets at full speed, particularly in Europe. US financial restrictions still in place affect Iranian oil trade and many European banks are unwilling to issue letters of credit for Iran-linked transactions for fear doing so would harm their ability to do business in the United States.
Tehran also faces insurance issues that make ship owners wary of committing to carrying Iranian oil. Because European procedural ambiguities regarding the processing of payments for Iranian crude have yet to be sorted out, Tehran is reportedly offering deferred payment options to large buyers to secure new sales.
The question of whether Iran’s initial boost in crude export levels derives from storage or a combination of storage and resumed production from existing fields will become clearer in the next few months, especially if increased export volumes don’t materialise or if volumes drop as storage is depleted.
Because Iran was denied access to Western oil field technology and equipment, it faces inherent difficulties in substantially boosting its oil production and exports. Iran’s operations must be upgraded, which takes expertise, technology, time and money.
In addition to recovering lost production capacity from the ageing oilfields that were idled over the past four years and ensuring that this capacity is sustainable, Iran must develop new oilfields, which can be a lengthy process. In late January, NIOC signed its first post-sanctions exploration contract — valued at $6 million — with Lukoil to explore for hydrocarbons in the country’s south-western Khuzestan province.