It may have taken 12 years to reach but the framework agreement signed in the early hours of April 2 between the Islamic Republic of Iran and five permanent members of the United Nations Security Council plus Germany paves the way for a comprehensive agreement by all parties by June 30. If achieved, it will be one of the most profound changes to the Middle Easts political and economic landscape in decades.

The base oils and finished lubricants sectors are likely to be early beneficiaries, as both were starved of investment for years as sanctions were tightened against the Islamic Republic. Straight after the announcement of the framework agreement, Abbas Sheri-Moqaddam, managing director of Irans National Petrochemical Co., predicted foreign investors will flock to Irans oil and petrochemical markets. He may be right, as the petrochemical sector alone requires an estimated $8 billion of investment a year to make up for the lost years of underinvestment.

Iranian refiners already are gearing up for a post-sanctions push back into international markets. Upstream, BP calculates Iran has proven reserves of around 160 billion barrels of crude oil, the fourth largest in the world, and almost 34 trillion cubic meters of natural gas, the second largest reserves in the world after Russia. Analysts are predicting Iran could be a strong candidate for a gas-to-liquids plant given its enormous gas reserves. And downstream, Irans four major refiners – Pars Oil Co., Behran Oil Co., Sepahan Oil and Iranol – look poised for a major shake-up as the sector repositions itself for a post-sanctions environment.

Opinion may be divided as to whether a final deal will be reached but amongst the optimists there is broad agreement of how the base oils and lubricants sector will be affected. They predict there will be a torrent of fresh joint ventures as Iran seeks access to new technology and investment in the refining sector.

Mehrdad Vajedi, director of Permian Energy in the United Arab Emirates, also takes note of pent-up demand in the additives sector. I see potential for lube additive manufacturers in the market, as the Big Four Iranian refiners are thirsty for quality additives. So [global] manufacturers will have access to potentially the biggest additives market in the region. Once unshackled, Irans major refiners will move to reassert their presence in the export markets, too, as the countrys refining undergoes a wholesale upgrade.

However some in the industry are urging caution. Majid Safdari, CEO of Vista Energie in Tehran, says there is still a long way to go. (We) just can guess what might happen if things go on the right track. I think at least a year or more is required to see results in practice, but certainly the energy sector will benefit most from any probable agreement; especially trading in oil and derivatives will see a quick leap forward.

Even if it is premature, there is unbridled optimism among Iranian refiners that a deal to lift sanctions will be done, and there are signs of a concerted effort to woo investors. At recent base oil and lubricant conferences the Iranian refiner Sepahan Oil was represented by a delegation. Indeed at Aprils Base Oil and Lubes Middle East conference in Abu Dhabi, the company was quietly trying to engage U.S. companies. Mohsen Sharif, project engineering advisor to Sepahans managing director, said they were seeking unofficial correspondence as they were anticipating a change in policy towards Iran.

We want to perform a conceptual study during the next months and begin the project after sanction termination, Sharif indicated. Sepahan Oil is widely believed to require additive and refining technology if sanctions are lifted. It operates a 8,100 b/d API Group I base oil plant in the north-central city of Esfahan.

Tops in the Middle East

Estimates of the size of Irans finished lubricants market range from 700,000 to 790,000 tons/year, depending on the source, but all agree that it is by far the largest lubricant market in the Middle East region. It also holds the promise of significant increases in volume, value and quality as the lifting of sanctions is expected to precipitate an upgrading of the vehicle park. As with China previously, U.S. and European auto manufacturers will want to get an early slice of a market which is set for strong growth – and will bring along higher quality standards for lubricants. There is also likely to be a need to educate customers and build awareness of the benefits of higher specification products.

Some international lubricant manufacturers, like the French energy giant Total, are well placed to reenter the market. That is due in large part to its legacy of a previous joint venture with Behran Oil that ceased with the onset of sanctions. Total has continued to supply an Iranian distributor from the companys Middle East hub in the UAE.

Behran itself has gone on to become one of the major base oil and lubricant refiners in Iran. The company claims a 43 percent share of the countrys automotive engine oil market and a 30 percent share of its market for industrial oils. It has capacity to make around 190,000 tons/year (3,600 b/d) of Group I, and can blend 400,000 tons a year of finished lubricants.

Iran is a long-standing source of Group I base oils in the region, and despite sanctions has continued supplying India, Middle East and Sub-Saharan Africa. Indias government was one of the first to head to Tehran following the framework agreement.

Despite favorable trading relationships however, production inefficiencies and high costs are weighing on the profits of Iranian refiners – particularly as the global Group I market has become commoditized. Industry observers say Irans return to international markets could have an adverse impact on Group I and Group II prices. Extra unfettered Group I supply could unnerve markets at a time prices are fragile, and may worry Saudi Arabia, Kuwait and the UAE, particularly if crude supplies from Iran are rapidly reinstated.

It is clear that Irans refining sector needs investment, and there is a growing sense of a gold rush taking form amongst major lubricant blenders and marketers. Yet in the Gulf region, the situation is more complex. Gulf state-owned companies like Emirates National Oil Co. in Dubai (Enoc) and Abu Dhabi National Oil Co. (Adnoc) face tantalizing commercial prospects with the Iranian market. Both companies have built brands, developed sophisticated marketing and distribution networks and lie in close proximity to Iran; Fujairah in the UAE is less than 100 kilometers away.

Adnoc is due to stream its 620,000 ton/year Group II/III facility at Ruwais soon, and Iran would seemingly be a convenient outlet for that product. Same goes for Saudi Aramco Base Oil Co. (Luberef), which is bringing a 500,000 t/y Group II plant online next year at Yanbu al Bahr, Saudi Arabia; those barrels will need to find a place, too.

Trouble is, with the exception of Dubai, Qatar and Oman, the rest of the Gulf sees Iran as a double-edged opportunity, and for the most part at a political level they simply do not trust it. The degree to which politics gives way to commercial interests will be played out in the coming months. At the moment the UAE imports around 35 percent of its base oils from Iran, according to Permians Vajedi.

Ultimately, he says, economics will be a major influence on working arrangements. On the lubricants side I see chances of j.v.s with international players, as exporting finished product to Iran makes less sense due to heavy import tariffs of 40 percent for engine oils. So there will be a rush for j.v.s with local blenders; even for specialty companies like [Germanys] Kluber Lubrication it make lots of sense.

Vajedi estimates the annual output of base oils from Irans five base oil refineries comes to around 1 million metric tons (some put it closer to 800,000 t/y), and says that in the event sanctions are lifted, Africa would benefit from freer availability of Iranian supply.

Nevertheless, with expansion under way in the Gulfs capacity to make Group II and Group III base oils, refiners like Adnocs Takreer in the UAE and Luberef in Saudi Arabia can fill the vacuum as Iranian refineries will require time to upgrade. Iran is almost self-sufficient when it comes to feedstock but in previous negotiations with international oil companies the government has driven a hard bargain, rendering some contracts unprofitable. Signs are there will be a softening in their position to attract investment and access to technology that Iran requires. Vajedi says in the short term Iran currently requires between 30,000 to 40,000 tons of Group II+ base oil a year despite tariff barriers.

Calling the Outcome

The struggle between those who wish a deal to be done with Iran and those who do not is sure to intensify, but the prospect of a market of around 80 million people proffers one of the few untapped emerging-market opportunities for lubricants.

As always the devil is in the details, and the critical issue will be the pace at which sanctions are lifted. Naturally Iran wants sanctions completely rescinded as anything less would stymie a quick return to the oil markets and act as a deterrent to investors who may prefer to sit on the sidelines. Without the prospect of investment into Irans aged infrastructure and a restoration of its banking sector, Iran will perceive the deal as an asymmetrical outcome.

Having so many uncertainties surrounding a final agreement adds volatility to markets at a time base oil profits are being squeezed. In the short term refiners and markets in the Middle East will have to consider how to separate business from politics in a region where the two are often intertwined.

Dubai, as the regions base oil and lubricants re-export hub, looks well situated and despite sanctions has retained a strong but delicate trading relationship with Iran. In the meantime, industry observers will be watching to see if the steady trot towards a comprehensive agreement turns into a full-paced gallop.