Sanction lifting: ‘muted’ impact on tanker markets (October 9th 2015)

Sanction lifting: ‘muted’ impact on tanker markets (October 9th 2015)

Iran – What Next?

Everyone is awaiting the outcome of the interim nuclear deal and how it will affect Iran’s oil exports. In July 2015,

Iran and a group of six international powers announced that the global sanctions would be lifted in return for
compliance with inspections and restrictions on its nuclear capabilities. Once inspectors verify compliance, Iran will be allowed to ramp up its Oil exports. This news was greeted with a mixture of concern and excitement.

If the Iranians could have a Carlsberg moment (alcohol free of course) then several things would happen:

  1. Sanctions would be lifted all at once
  2. All the oil stored at sea would be sold, as soon as practical
  3. All their refineries would be back up & pumping at pre-sanction levels
  4. Investment from overseas to increase production would roll in and
  5. OPEC would accommodate their return by maintaining the 30mbd limit.

Unfortunately, we live in the real world and this is not very likely.

Iran was the second largest producer in OPEC before its disputed nuclear program prompted the U.S. & the EU to ban purchases of its crude oil in July 2012. Countries including China, India, South Korea, Japan, Taiwan and Turkey had to get a waiver from the U.S. to buy limited amounts of Iranian oil or risk losing access to parts of the global financial system.
Since the financial sanctions took effect, Iran’s exports have reduced (as can be seen in the graph below) from a high of around 9.5 million tonnes in March 2012 to around 5.3 million tonnes in June 2015, that’s a reduction of roughly 43%!

Iran was forced to rely more on NITC to transport its crude oil. NITC helped by delivering oil to Iran’s clients as
sanctions had banned international insurers from providing protection and indemnity coverage to ships carrying Iranian oil.

Investment required:

The IEA puts Iran’s current sustainable capacity at 3.6 mbl/day (defined as a level achievable in 90 days and sustainable for an extended period).  Please see the below graph for a comparison of Iranian production capacity to other OPEC members.

This is roughly comparable to Iranian Oil Minister Bijan Namdar Zanganeh’s assertion that Iran could increase output by 500,000 barrels per day within a few months of sanctions being lifted and another 500,000 barrels per day in the following months. The IEA estimates Iran could “push capacity back up to 4 mbl/d mark towards by the end of the decade” a level which Iran last reached in 2008 “with the help of foreign cash and cutting-edge technology.”

Several factors will complicate Iran’s return:

  • Technical challenges will limit Iran’s daily output to less than 4 million b/d in the short run  however Iran will try  hard to attract international investment in its oil and gas sector. Many delegations have already visited Tehran including some countries Gov’t Ministers.
  • The lifting of sanctions will not be a linear process, and it is difficult to predict exactly when the maximum impact will be felt on Iran’s re-emergence into the market place .
  • 45% of Iran’s reserves are heavy oil, and will require time and expertise to bring on stream.

Iran won’t be able to finance this on its own. It has three “internal” sources of investment:

  1. Frozen Iranian funds in foreign accounts,
  2. Government budget resources (oil revenues flow to the Iranian government, a portion of which the government returns to the industry),
  3. Sale of  oil in storage, however at current depressed prices.

Several sets of numbers have been thrown around but in a recent article, Saeed Ghavampour, the oil ministry’s general manager of strategic planning, puts the total investment needed in the Iranian energy industry at $100 billion to $500 billion through 2020. And in another article, the Minister of Petroleum Bijan Zangeneh stated that Iran is planning $50 billion of investment to boost recovery from its shared oil and gas fields.

Iran has 8 Petrochemical projects due to complete by March 2016, with 18 m tonnes having been produced in the first four months of 2015. In these four months; Mehr, Laleh, Shiraz, Khorasan, Shazand, Kermanshah and Khark have operated at over 90% of their capacity. Other Petrochemical plants in operations are: Maroun, Nouri, Pardis, Aryasasoul, Tabriz, Isfahan, Ghadir, Llam, Karoun, Farabi, Razi, Arya Phosphoric and Urmia. More than 6 m tonnes of Petrochemical products valued at $3.6 bn were exported during this period. Exports of Petrochemicals increased by 12% in terms of quantities  and 6% in terms of value compared with the same period last year. In addition, around 4.4 m tonnes of Petrochemicals worth $2.6 bn were sold domestically.

According to one Middle East consulting firm Iran’s production of oil, condensate and NGL in 2016 will reach 4.26 mbpd of which crude oil will be composed of 3.38 mbpd once sanctions are lifted, with Iran’s mature oilfields requiring more enhanced oil recovery efforts.

It has been said that although Saudi took on the American Fracker’s, the Saudi’s misjudged the Fracker’s  ‘resilience’ having spent some $65 bn of Saudi’s reserves since the onset of oil price decline. The Saudi’s plan to raise an additional $27 bn by issuing bonds around the end of this year to make up for the amount they need to spend to keep their population content and not to give other extremists any more of a foothold  than they already have in the country. Another view is that the real “strategy” was to rack up as much production as the Saudi’s could, while Iran and Libya continued to be out of the markets to drive out high cost producers, to make room in the market for themselves and other OPEC producers. Fracker’s just happened to be part of the fall out.


Fleet Re-entry:

According to a recent article, the Head of NITC stated that their fleet currently consists of 42 VLCCs (6.5% of the global VLCC fleet), 9 Suezmaxes, 5 Aframaxes and 3 MR’s, with most currently absent from the conventional tanker market. Their fleet will need to re-establish compliance with international standards if it is to re-enter the market.

Apart from the obvious oil supply issues, the other factor which will have ramifications, especially to the large vessel groups is the re-entry of the Iranian fleet itself into the international market. Once vessels with stored oil discharge their cargoes, they will proceed for upgrading before they become available for regular trading and add capacity to the market.  The overall feeling is that there will be a negative impact, particularly on VLCC rates.  The only positive point is that it is not possible forall of the vessels  to hit the market at once and it will be a gradual re-introduction, as it will take time to fully reactivate the fleet.

The above table clearly shows that the NITC fleet is a very young fleet with the majority of vessels being under 10 years old.  This puts it in a very good position with the increasing number of companies that are restricting the age of the vessels they employ.  When compared with the global fleet, the NITC fleet has a much higher percentage that is under 10.

Many Owners will be praying that Iran ramps up its oil output as quickly as possible to absorb these extra vessels (NITC are likely to get first refusal on any Iranian cargoes). The obvious delays for vessels re-entering the market is re-establishing compliance with international standards but there are rumblings that the Iranian vessels could return to the market before any significant increases in crude exports and this would not be good for the market.

The closest crudes that can be compared to Iran’s, which are more sour than sweet are other Middle Eastern grades and if the Iranian crudes displaced these, the tonne-mile impact is likely to be minimal. BUT, if West African or South American crudes were displaced, the impact would be much more significant.

Iran has reportedly already begun re-establishing it former relationships and preparing itself to re-enter the global market. Mr. Ali Akbar Safaei, the managing director of the NITC, said in an interview that the company is in talks with insurance companies that are part of London’s International Group of P&I Clubs as the company seeks to speed up its return to Europe.

Relations with OPEC:

Since sanctions began, additional output by OPEC producers such as Saudi Arabia has largely replaced Iran’s declining exports on the global market.

The last official release of OPEC quotas in 2011 allocated a quota of 3.3 million b/d to Iran, equivalent to 13.4% of the OPEC’s total production limit. If Iran increases its output back to this level, either other OPEC members will have to scale back their production or the total OPEC output will increase, risking, according to some, a further price decline. OPEC’s production limit remains at 30 million barrels per day, a ceiling that’s currently three years old. Please see the below graph for current OPEC member production levels.

Realistically, the only OPEC member that could scale back its output in response to higher output by Iran is Saudi Arabia. However, tensions between the two countries have escalated since 2011. As such, many feel that it is likely that as Iran increases its export volume once the sanctions are lifted, the aggregate OPEC output will increase as well.  This increase would also coincide with a continuous increase in oil production from non-OPEC countries.

-The over-riding feeling is that several factors  need to be  in place for Iran to gain the investment it needs:

  • Improved relations with Saudi Arabia, the Gulf Arab states, and the West,
  • higher and more stable crude prices, and
  • positive experiences for foreign companies in negotiating and implementing projects,

-But as all these factors are unlikely to occur at once, it is more likely that even if foreign investment does pour in, it will take time for the infrastructure to be put into place.  This in turn will slow down Iran’s plans of achieving 4 mbl/d production.
-There can be no denying that Iran offers enormous opportunities for producers and the current mood amongst Western leaders towards the deal seems to be one of cautious optimism.
-Analysts believe that sales to Asia and the expansion of Iran’s tanker fleet helped the Islamic Republic circumvent the sanctions. In countries like China, India and Japan, Iranian oil constitutes more than 10 percent of the total crude supply – and demand from Asia continues to grow.  This can only be good news for Iran.
-One leading owner told TradeWinds that “the outcome of increased oil flows, balanced against the arrival of additional ships, would be ring-fenced or neutral. In the medium term he says the deal is a net negative for tankers as the NITC fleet returns but in the long term he sees the development as positive for both tanker owners and the LNG sector”. With reference to the LNG sector, although it is positive, it will still be a couple of years down the road, as Iran will still need to build liquefactionplants before they can start exporting.
It seems the over-riding opinion is, that the net impact of the lifting of Iranian sanctions on the tanker market is likely to be muted. There are however always chain reactions  to any action taken, that often lead to different conclusions for different players.  On the negative side, oil producers  already suffering with lower prices, will have to continue to suffer  the consequences, as will those including Iran, that will have to wait a longer time for their Return on Investment to pay off with the heavy investment that will be needed for both its oil and gas infrastructure.  On the other hand there will be a positive effect  for countries buying oil which will be cheaper, which ought to increase tanker demand as well as have a positive impact on dwt tonne mile demand.