European refiners look to Iran

Feb 12 2016

In 2015, Iran’s total crude oil production was just over 3.1 mill barrels per day of which only 43% was exported.

As a result of the sanctions relief, in an industry note, McQuilling Services estimated that Iran will average about 3.4 mill barrels per day of crude oil production– lower than the Iranian Oil Ministry’s objective of a 500,000 barrels per day increase.

McQuilling’s said that its lower target reflected the low crude pricing environment, slowing production rates at Iranian fields, lead time for new investments to yield higher production and competition from other producers in the region, including Iraq and Saudi Arabia.

The return of Iranian production to the market is likely to influence trade flows for tankers, the consultancy said.

Looking ahead, McQuilling anticipated that European refiners, particularly those located in the Mediterranean, were likely to increase their intake of Iranian crude. Several agreements have already been reached between Iran and European countries, including France’s Total and Greece’s Hellenic Petroleum.

In the deal signed with National Iranian Oil Company (NIOC), which will take effect on 16th February, Total agreed to purchase 160,000 barrels per day of Iranian crude. A second objective in the agreement was Total’s interest to develop Iran’s Azadegan oil field, which is shared with neighbouring Iraq.

Hellenic Petroleum, which controls 341,000 barrels per day of refining capacity in Greece, also concluded a deal to resume immediate deliveries of Iranian crude. At the same time, the two oil companies agreed to settle about $600 mill in outstanding debt to NIOC with the latter’s preference to pay in Euros instead of the US Dollars.

In addition to these signed deals, market reports indicated that Italian refiners, ENI and Saras, are seeking to purchase about 170,000 barrels per day of Iranian crude.

The majority of the oil being shipped to Southern Europe during the sanctions comprised of increased volumes from other Middle Eastern countries, primarily Iraq, and to a lesser degree Saudi Arabia.

While the effect of Iranian sanctions increased the volumes from other Middle Eastern countries to Europe mitigating the impact on tonne/mile demand, the story was slightly different for volumes to the East. OECD Asian customers (Japan, South Korea) plus Singapore, averaged about 690,000 barrels per day of Iranian crude oil imports prior to the sanctions, must of which went to Japanese refiners.

McQuilling forecast a gradual increase in Iranian flows to Japan starting this year upon the extension of current contracts to purchase crude from Iran.

In examining flows from 2011 onward, the consultancy noted an increase of 141,000 barrels per day of Russian ESPO crude intake at Japanese refineries, when compared to pre-sanctions levels. These volumes are likely to face pressure from Iranian medium sour production, McQuilling said.

As a result, Aframax activity in the East will face some pressure, while demand support for larger tonnage is likely from increasing Iranian exports.

Non-OECD customers, including India and China have not shared the same fate with Western nations and OECD Asian partners. Under the Geneva accord, the P5+1 nations agreed to allow consuming countries to continue buying “average amounts” of Iranian crude oil and qualify for periodic waivers.

This pause in the growth of Iranian crude exports to India and China while refining capacity expanded in these countries necessitated the need for a change of crude oil sources. For example, other Middle East countries, including Saudi Arabia and South American countries, provided the balance of flows in order to support the refining sector’s crude intake requirements.

The inverse relationship between annual changes of flows from the Caribbean countries to China and India when compared to the changes in Iranian exports suggests that the removal of sanctions is likely to provide some pressure on the future flow for the former. The pressure will be primarily felt in flows to India as after China, it represents the largest importer of crude oil from Iran with many of India’s refineries geared to process Iranian crudes, McQuilling forecast.

These configurations were also likely the cause of the increase in grades from the Caribbean, which are primarily of the heavier variety.

Since 2011, VLCC tone/mile demand for Caribbean shipments with discharge in the Indian Sub-Continent has increased by 24% annually reaching 267 bill tonne/miles (the fifth largest contributor to VLCC tonne/mile demand).

In 2016, McQuilling expected growth to moderate to 4.3% as Iranian flows come back into the picture. The outlook beyond this year will depend on the pace of production increases from Iran.

With Indian crude intake to grow by 638,000 barrels per day through 2020, it is anticipated that a large percentage of this growth will be met by increases in Iranian exports.

Over the next five years, the consultancy forecast a notable slowdown in growth of Caribbean flows to India, likely supporting increasing export volumes of Caribbean crude to traditional customers in the West (US). In addition, it is anticipated that more Caribbean production will be used for domestic refinery intake, which is expected to grow 200,000 barrels per day by 2020.

This shift in trade flows may favour Aframaxes operating in the Atlantic Basin, while the slowdown in growth of Caribbean/India volumes may place demand pressure on larger tonnage in the region. 

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