Increasing crude oil refining capacity can be seen as a viable option to help evade US sanctions in the short term, says a senior consultant and manager for the Middle East oil research department in London-based FGE, a global energy consultancy firm.
"Under the present conditions exporting oil derivatives, namely mazut and liquefied petroleum gas, is less challenging than crude oil because they cannot be tracked," Iman Nasseri told the Persian-language economic daily Donya-e-Eqtesad, a sister publication of the Financial Tribune.
The National Iranian Oil Company is reportedly selling 500,000 barrels of mazut and LPG per day.
"Exporting petroleum products is easier because the cargoes are smaller and, more importantly, are not necessarily purchased by refiners," Nasseri said, adding that there is a large global market for mazut and LPG as these are used in a variety of industries and buyers cannot be identified.
Iranian crude has its own specific features that can be easily recognized, but the same does not apply to other products.
According to the expert, the more oil processing capacity rises the more oil derivatives will be sold and the easier sanctions can be evaded. However, he stressed that this can only be a short-term exercise simply because keeping refining capacity at higher levels for extended periods has its own drawbacks.
"First and foremost, capacity of refineries should not rise more than 20%; otherwise the quality of output declines."
Furthermore, instead of being overhauled once in four years, maintenance work must be carried out every two years, which again means an added financial burden.
Turnarounds typically cost significant sums of operational expense (opex) and capital expense (capex) money to execute. They cause lost opportunity cost through lost production while the facility is shut down.
Needless to say, in addition to mazut and LPG, other commodities, namely diesel and gasoline, will be produced in distillation columns. Selling the latter is as difficult as crude.
Gloomy Perspective
Nasseri concurred that the outlook for Iran’s sanctions-hit oil industry is not bright unless the current situation changes.
"NIOC may succeed in selling oil in the short term with the help of different strategies…but the industry needs robust development to thrive.”
Collaborating with the Europeans, who are still trying to keep the 2015 Iran nuclear deal alive, can help underpin the industry’s hopes for a better future. Minus that, the situation can further aggravate and the oil industry may not be able to stand on its feet for long.
Iran shares large hydrocarbon reservoirs with its Arab neighbors like Saudi Arabia and Qatar, and not having access to technology would mean a major loss for the country in the years to come as neighbors empty the joint reservoirs voraciously with help from American and European firms.
Nasseri is of the opinion that despite the economic sanctions imposed on Iran and Venezuela, the Saudis have not raised oil output yet because "there is no demand." Moreover, US production capacity, both conventional and shale, has surged.
It was not until a few years ago that American oil majors such as Exxon Mobil and Chevron Texaco started to invest in shale and it is projected that shale production will rise by minimum 5 million barrels per day in the next three years.
US now accounts for almost 20% of the global oil demand that now is 100 million barrels a day.
Moreover, the US Strategic Petroleum Reserve (SPR), a stockpile of crude owned by the US government, can hold up to 3 billion barrels of oil. The current storage capacity is 713.5 million barrels.
FGE is a preeminent global energy consultancy that provides leading independent research, analysis, consultation and advisory services on the oil, gas/LNG and NGL markets across the world.
