Waivers Throw a Lifeline to Irans Base Oil Exports
Iran plays a prominent role in the Middle Easts API Group I base oil and crude markets, and refreshed sanctions imposed by the United States threaten to undermine that part. Mark Townsend shines a spotlight on the current state of play.
Irans position in the global Group I base oil market is proving surprisingly resilient after the United States imposed sanctions targeting the Islamic Republics oil and refining industries in November 2018. Exports of crude and base oil continue, albeit at reportedly lower volumes, because of Washingtons decision to grant six-month import waivers to eight countries, allowing them time to seek alternative supply sources.
The eight countries include China, India, South Korea and Turkey – all buyers of Irans Group I base oils, although one Turkish industry insider, who preferred to remain anonymous, told LubesnGreases that Iranian base oil is lower quality than domestically produced material and relatively few producers use it. Greece, Italy, Japan and Taiwan are also included in the waiver arrangement.
There are, however, worries about a looming supply crunch of Group I base stocks as the Trump administration tries to fully shut down Iranian shipments. Iran has nameplate production capacity of more than 1 million metric tons of Group I base oil per year, according to the 2018 LubesnGreases Global Guide to Base Oil Refining.
Iranian refiners exported 435,000 metric tons of base oils during the 2017-2018 fiscal year. The majority of this was destined across the Persian Gulf to the United Arab Emirates, according to a presentation by Farzad Zandi, commercial director at Sepahan Oil Co., at the AMEA Base Oil, Lubricant and Wax Conference in August in Mumbai, India.
The waivers are set to expire on May 5, raising concerns among some analysts of disruption to Group I markets as soon as the first and early second quarters of this year. They question whether there will be a uniform decoupling from the agreement, increasingly seen as a U-turn by the Trump administration after it initially pushed for zero imports of Iranian oil products.
But there is also a practical issue. China, India, South Korea and Turkey have longstanding trade relationships with Iran, which may make cutting oil imports hard. Nonetheless, they are likely to come under intense pressure from Washington to abide by the terms of the deal or face penalties.
In December, Iranian President Hassan Rouhani repeated a threat to halt all shipments through the strategically important Strait of Hormuz, in the event Iranian exports are disrupted. The strait is a major choke point for exports of crude and base stocks from refiners around the Persian Gulf. Meanwhile, the possibility the U.S. may capitulate and extend waivers adds further uncertainty to Group I markets at a time of mounting plant closures, as refiners switch to more highly refined Group II and III base stocks.
At the time of writing, prices of Iranian Group I solvent neutral 150 base oil were predicted to find support due to tighter supply of lighter-viscosity base oils, while heavier SN500 faces weaker demand but stable supply, according to price reporting company ICIS.
Prices of Iranian base oils came under pressure when a renewed round of U.S. sanctions came into effect in August 2018, resulting in discounts to cargoes from Iran. Analysts say the countrys major refiners are also mindful that any significant lapse in Group I supply could open the market to Asian refiners and to some extent Saudi Arabia, analysts say.
Irans government is poised to use a suite of options to support trading in oil and refined products. It recently revived trading of crude products on a domestic energy exchange. The exchange enables local intermediaries to buy crude and refined products and then sell them in international markets as sourced from the private sector. Barter trade may also be used, an initiative likely to be supported by the European Union within the framework of the Joint Comprehensive Plan of Action, which the U.S. exited in May 2018.
Rouhani has said oil exports could be moved from Kharg Island – which currently accounts for 90 percent of oil exports – to the Jask Oil Terminal, a process which may take several years but alleviates some logistics risk.
Once the Jask Oil Terminal is operational and at full capacity, any threat to the Strait of Hormuz would have fewer consequences for Iran, [but] the plans are overly optimistic – most of the oil production is in the western half of the country along the Iraq-Iran border, says Matthew Bey, senior global analyst at Stratfor, a U.S.-based geopolitical intelligence provider.
Cloak and Dagger
Base oil exports face increased scrutiny because refiners and traders have seemingly made some shipments undetectable in an attempt to skirt the impact of wider sanctions and once the waivers expire in May. In September 2018, almost 50 percent of crude exports were cloaked, according to TankerTrackers.com, a website that tracks and reports oil data on shipments and storage.
Despite reports to the contraryand the threat of sanctions, Iran was still able to export around 2 million barrels per day then. That has since been halved, according to a report by Oil Price, an energy news website. But by late October, it effectively became a blanket blackout, as all Iranian ships switched off their transponders to evade international tracking systems, the website reported.
Iran has embraced the media and market narrative that exports are down because it helps boost the oil price. Now, however, they have pretty much cloaked every vessel coming in to pick up oil, [but] we can still see them by satellite, said Samir Madani, co-founder of TankerTrackers.com.
Cloaking a vessel entails the shipper switching off its automatic identification system transponder, a tracking device that allows authorities to follow and monitor a ships unique identification, position, course and speed. When the AIS is turned off, voyages are categorized as ghost shipments.
The International Maritime Organization, the United Nations body that regulates shipping, requires the systems to be fitted aboard international ships with 300 or more gross metric tons on board.
They are trying every possible way they can think of to overcome these sanctions, and the [method] is commonly used. Tracking devices can be easily switched off and on by crew members, one shipping industry expert based in Istanbul, who asked not to be named, told LubesnGreases.
The UAE is a strategic re-export hub to India and China, often necessitating ship-to-ship transfers. According to TankerTrackers.com, smaller ship-to-ship tankers were also partly cloaking exports between Iran and the UAE during September 2018.
Cloaking base oil shipments is not without its risks. Tankers must traverse the Strait of Hormuz, the only sea passage from the Gulf to the open ocean and one of the worlds most important oil supply routes. This congested shipping lane makes cloaking a potential threat to navigation, although the risk is small.
When it comes to safety, nowadays technology has reached levels where a ship is safe, even if this machine is turned off for a while, said the source, who went on to explain that the risks tend to be more for the shipowners and crew. If they get caught, the captain is in serious trouble – since he is held responsible for the ships actions – and the shipowning companys assets are frozen.
But that is largely by the by, he continued. When it comes to entering a sanctioned port or approaching a sanctioned country, things get a bit tougher. However, ships coming from countries that actually are the main importers of Iranian oil, even during sanctions, dont really care that much, so they dont have a problem for their ships to turn off the tracking.
With mounting uncertainty ahead, the short-term outlook for Iranian base oils seems increasingly opaque. Monitoring shipments, an already difficult task, will become more complex. Industry predictions anticipate volatility in the market in the months ahead as the forces of supply and demand play out.
But in the immediate aftermath of import waivers, Irans Group I base stocks continue to be sold on the open market despite U.S. efforts to curtail a vital source of export revenues.
Iranian Petroleum Products Hit Hard
According to a U.S. Treasury factsheet, petroleum products under sanction include, unfinished oils, liquefied petroleum gases, pentanes plus, aviation gasoline, motor gasoline, naphtha-type jet fuel, kerosene-type jet fuel, kerosene, distillate fuel oil, residual fuel oil, petrochemical feedstocks, special naphthas, lubricants, waxes, petroleum coke, asphalt, road oil, still gas and miscellaneous products obtained from the processing of crude oil (including lease condensate), natural gas and other hydrocarbon compounds. Base oil would come under this definition.