DUBAI, United Arab Emirates - When the United States reinstates sanctions on Irans oil industry in November, close to U.S. $47 billion of exports are likely to be hit hard. Gauging the impact on future base oil shipments has been difficult because of a dearth of accurate data, but a recent conference presentation here by one refiner depicts the Islamic Republics base stock business as a major source of export revenues.
Since an easing of sanctions under the Joint Comprehensive Plan of Action, Iran quickly bounced back to reestablish itself as a key base oil supplier. Now U.S. withdrawal from the agreement threatens to derail relationships with important customers. If big importers of Iranian API Group I base oils - including India and the United Arab Emirates - toe Washingtons line and cut imports as expected, that will deal a blow to a vital source of earnings for Irans major refiners.
But a U.A.E. based trader said Iranian exporters may use alternative channels to maintain shipments. It is tricky, but I believein general volumes it will be less, but they can manage [to] export via intermediates. Iran could also resurrect barter trade as a way to skirt dollar-denominated transactions. The European Union has yet to decide whether it will allow European companies to continue transacting with Iran without falling foul of U.S. sanctions, potentially throwing a lifeline to base oil exports.
Still, there are few signs Iran is planning to backtrack from a market position it has fought hard to regain. Earlier this month Iranol opened a new export terminal for base oils at Imam Khomeini Port in the southern Khuzestan Province. Reports say the terminal consists of eight bunkering units of different sizes with a collective storage capacity of 25,000 metric tons. Four 2,500-ton tanks will be used for base oils.
According to Farzad Zandi, commercial director at Sepahan Oil Co., four Iranian refiners supply the Group I base oil market. Speaking at the AMEA Base Oil, Lubricant and Wax Conference, Zandi said that by the end of last year Sepahan supplied 69 percent of Irans base oil exports, while 21 percent was produced by Iranol and 9 percent by Pars Oil. Behran Oil is the countrys third-largest base oil producer but uses most of its output in-house to make finished oils. In total, Iranian refiners exported 435,000 tons of base oils during the 2017-2018 fiscal year. Sepahan has an annual base oil production capacity of 420,000 metric tons, Iranol 280,000, Behran 225,000 and Pars 160,000.
Most of the base oils exported in 2017-2018 - 379,716 tons - went to the U.A.E., but Zandi said a substantial amount of that volume is being re-exported to India and other countries, underlining Indias strategic importance to Iran. Direct base oil shipments to India amounted to 38,551 tons, while direct shipments to other countries except the U.A.E. totaled 35,777 tons.
Thirty trading companies in Iran, Iraq and the U.A.E. are actively engaged in export and import of base oils to and from Iran, as are 60 independent blenders and recycling plants, Zandi claims.
Iran also has a vibrant domestic lubricant market and is an importer of Group II and III base oils. With a growing vehicle parc and demand for lower-viscosity engine oils, Iran is following the global trend toward higher quality lubricants. Group II and III volumes in Iran are relatively small but growing. The countrys demand for Group II and III oils will grow at compound annual rates of 9.1 percent and 9.5 percent, respectively, to reach 200,000 t/y and 20,000 t/y by 2020, Zandi forecasted.
Iran currently imports 28,727 t/y of finished lubricants, but Zandi predicted that will rise to 1.1 million t/y by 2020, with the transportation sector accounting for 800,000 t/y.
Regional base oil markets could see some volatility as the next phase of U.S. sanctions unfolds. President Hassan Rouhani has said Iran could retaliate if U.S. sanctions halt oil exports, but analysts play down Irans ability to disrupt shipments through the Strait of Hormuz, a choke point for Middle East Gulf shipping. If Iran were ever in a position where it would need to harass or disrupt flows through the strait for strategic reasons - a threat Iranian officials like to make frequently - then it would also disrupt their own oil trade, said Matthew Bey, senior global analyst at Stratfor.