Last Sunday on October 28, just few days before new U.S. sanctions on petroleum sector take effect (November 4, 2018), National Iranian Oil Company (NIOC) could sell some 280,000 barrels of crude oil at $74.85 per barrel on the first day of offering crude oil for export at the international ring of Iran Energy Exchange (IRENEX). With the daily supply value of one million barrel per day, the market wrapped up by selling eight 35,000-barel-cargos of oil on the day.
IRENEX is founded in an attempt to permit the Iranian private sector export crude oil since Washington aims to cut Iran’s oil sales. To foil U.S. sanctions, NIOC decided to let Iranian private companies transparently buy the crude through this market and sell the purchased cargo to foreign customers.
Establishment of IRENEX, which is considered as a turning point in Iran’s strategic oil industry and capital market and also a platform for producers and consumers to be in touch and pay lower trade costs in a transparent business environment, can be translated into creation of a new energy stock market that results in economic development. Absorbing a part of available liquidity and injecting it to production sectors and financing various industries, especially those active in energy sector, it can bring financial discipline and spur domestic production and economic growth.
The energy market is basically exports-oriented and has the capacity to increase Iranian oil customers both domestically and internationally. Price setting relies on the base price determined by NIOC according to global prices. Receiving a trading code, foreign companies can purchase oil cargos from IRENEX. By now, over 100 trading codes have been received by foreign customers at IRENEX which could be used to purchase oil cargoes and oil products. The Securities and Exchange Organization (SEO) preserves the customers’ data from all across the world confidential.
Offering light crude oil at IRENEX has provided Iranian private sector with some attractions:
Buyers can easily access and get engaged in purchasing crude oil procedures.
As decided, at IRENEX, the payment mechanism was 20 percent in the Iranian rial and the rest in hard currencies. Crude oil applicants have to initially pay 10 percent of the value of the contract in cash and in case their bidding is accepted they must pay another 10 percent also in cash before loading the purchased cargos. Price setting at IRENEX relies on the base price determined by NIOC according to global Brent prices and the total price of a cargo is converted to rial by the Central Bank of Iran’s online Sana system accessible at sanarate.ir, a website that records daily forex trade from across the domestic exchange bureaux. They pay the rest in allowed hard currencies including dollar, yuan, dirham and euro, after loading the cargos.
Buyers can offer bank guarantees in rial from banks qualified by NIOC, i.e. Bank Pasargad, Bank Tejarat, Export Development Bank of Iran, Bank Sepah, Bank Saderat, Bank Mellat, Bank Melli Iran, worth 1.25 time of the 80 percent of the total price of the cargo calculated based on the rates at Sana before loading cargos.
Crude oil can be delivered in small 35,000-barel-cargos, with acceptable 10 percent error. Purchasers can receive larger crude cargos via buying several small cargos at Kharg Island Oil Terminal off the Persian Gulf.
The purchased cargos can be transported and exported freely to all countries across the globe expect the occupied Palestinian territories by the Zionist regime of Israel.
The offered oil at IRENEX is light crude oil, which is a well-known and popular type of oil internationally.
Base prices and fluctuation rates are limitless. The base price for each barrel of is $79 but the price floor and ceiling can differ according to demand and in a bid to spur competitiveness at the market.
Regarding that Mediterranean oil prices are currently lower than the Asian ones for about two dollars, the buyers can make a profit by selling the purchased oil from IRENEX to such regions, although the issue depends on price fluctuations.
However some points of interests can also be discussed about IRENEX:
IRNEX has been primarily been created to foil U.S. sanctions’ impact on Iran’s oil sales and guarantee trading physical oil, while the main goal of establishing such capital markets is globally improving a transparent business environment.
Oil prices at IRENEX are set by NIOC per month instead of being controlled by international conditions and demand.
The base price of $79.15 per barrel, at which the oil cargos were trades on the first day of IRENEX, was higher that Brent prices. Thus, making purchases at this price do not bring buyers a remarkable amount of profit and the issue cannot make the market an attractive one for purchasers. To lure traders to IRENEX, it is vital to make some amendments in cargos’ transportation and insurance costs, as well.
The influence of U.S. sanctions on Iran’s and Iranians’ banking transaction and shipping lines should not be neglected when it comes to financial transactions and money transfer issues between IRENEX and its foreign customers or transportation of oil cargos from Kharg oil terminal via oil tankers to different destination across the world.
The next date of offering crude oil at IRENEX has not been announced yet and the new decisions about continuing selling export-grade crude oil at stock market and some other details in this regard would rely on the made assessments and the gained experiences from offering oil on October 28.
Regarding the unilateral U.S. embargo posed on Iran and the limited chance provided for experts to evaluate IRNEX’s capabilities and weaknesses, the time is not rape to judge the practicality and efficiency of the energy stock market.
It does not seem fair to compare IRNEX with its foreign rivals since the aim of its establishment (circumventing sanctions) and its operating conditions differ from its competitors.
What IRNEX is expected to gain is not achievable overnight and should not be regarded as the mere leverage in deterring U.S. sanctions. To shoulder U.S. pressures on Iran’s oil sale, the market initially needs time to get experienced with attracting both domestic and foreign customers via improving its business environment and getting as transparent as possible. It is essential for the market to remain stainless from corruption and rent-seeking.
First published in our partner Tehran Times
Crunching the numbers: Are we heading for an oil supply shock?
In the detailed energy model that underpins WEO 2018, new sources of oil supply steadily come online at the right time to meet changes in oil demand and keep the system in equilibrium. This smooth matching of supply and demand minimises oil price volatility, which is why our price trajectories in each scenario are smooth, and would likely be a desirable outcome for many of the world’s oil consumers (it could also be better in the long run for many of the world’s producers.
But commodity markets don’t work this way in practice. The oil price drop in 2014 led to multiple widespread impacts on markets, not least of which was that the number of new upstream projects approved for developments plummeted. With the rapid levels of oil demand growth seen in recent years, there are fears that supply could struggle to keep up, bringing with it the risk of damaging price spikes and increased volatility.
On the flip side, with shale production in the United States continuing to grow at record levels and increasing attention on executing upstream projects that can quickly bring oil to market, there are also arguments why a future oil supply “crunch” be safely ruled out. What does the WEO 2018 have to say on this matter?
Why invest in new supply?
The discussion about investment in oil projects typically focuses on the outlook for demand. But this is only a small part of the story – the main reason why new investment is required, in all our scenarios, is because supply at existing fields is constantly declining.
In the New Policies Scenario, there is a 7.5 mb/d increase in oil demand between 2017 and 2025. But without any future capital investment into existing fields or new fields, current sources of supply (including conventional crude oil, natural gas liquids, tight oil, extra-heavy oil and bitumen, processing gains etc.) would drop by over 45 mb/d over this period – this is known as the “natural decline” in supply. If there were to be continued investment into existing fields but still no new fields were brought online – known as the “observed decline”– then the loss of supply would be closer to 27.5 mb/d. A 35 mb/d supply-demand gap would therefore still need to be filled by investments in new fields in the New Policies Scenario in 2025 (there’s also a 26 mb/d gap in 2025 even in the demand-constrained world of the Sustainable Development Scenario).
Part of this 35 mb/d gap is filled by conventional projects already under development. There is also growth in conventional NGLs, extra-heavy oil and bitumen, tight oil in areas outside the United States, and other smaller increases elsewhere. In total these sources add around 11 mb/d new production between 2017 and 2025. Another portion of the gap would be filled by new conventional crude oil projects that have not yet been approved. Around 16 billion barrels of new conventional crude oil resources in new projects are approved each year in the New Policies Scenario between 2017 and 2025: these provide around 13 mb/d additional production in 2025.
This leaves around 11 mb/d. In the New Policies Scenario, this is filled by US shale liquids – also known as “tight liquids” – which includes tight crude oil, tight condensates and tight NGLs. Shale liquids production in the United States in 2017 was just over 7.5 mb/d. If investment were to have stopped in 2017, shale liquids production would have fallen by around 4 mb/d to 2025. However, we have seen that investment and production has actually soared over the course of 2018, and average production in 2018 is set to be close to 9.5 mb/d.
In the New Policies Scenario, shale liquids grow by another 5 mb/d to 2025 (i.e. total growth of 7 mb/d from 2017). So from 2017, and including the production to offset declines, US shale liquids provide the additional 11 mb/d production that is required to fill the remainder of the supply-demand gap. This would represent a huge increase in oil production: the growth between 2015 and 2025 would surpass the fastest rate of growth ever seen previously over a 10-year period (Saudi Arabia between 1967 and 1977).
If conventional investment doesn’t pick up…
It is worth looking in more detail at the assumption that 16 billion barrels resources are approved in new conventional crude oil projects each year from 2018 onwards. In the years since the oil price crash in 2014, the average annual level of resources approved has been closer to 8 billion. The volumes of conventional crude oil receiving development approval would therefore need to double from today’s levels, alongside robust growth in other sources of production, if there is to be a smooth matching of supply and demand in the New Policies Scenario.
What if this does not occur and annual conventional approvals remain at around today’s level? This would mean that some of the supply-demand “gap” would remain and another source would need to step into the breach. The most likely candidate to do so would likely be for US operators to increase tight liquids production at a much faster rate than is projected in the New Policies Scenario.
… then the US would need to add another ‘Russia’ to the global oil balance in 7 years.
In this case, US tight liquids production would need to grow by an additional 6 mb/d between now and 2025. Total growth in US tight liquids between 2018 and 2025 would therefore be around 11 mb/d: roughly equivalent to adding another “Russia” to the global oil balance over the next 7 years.
With a sufficiently large resource base – much larger than we assume in the New Policies Scenario – it could be possible for US tight liquids production to grow to more than 20 mb/d by 2025. However increasing production to this level would require a level of capital investment and a number of tight oil rigs that would far surpass the previous peaks in 2014. It would also rely on building multiple new distribution pipelines to avoid bottlenecks that could prevent or slow the transport of oil away from production areas.
What if demand were to follow a different trajectory?
In the Sustainable Development Scenario, with concerted action to reduce greenhouse gas emissions to meet the objectives of the Paris Agreement, demand peaks in the early 2020s and falls by 1 mb/d between 2017 and 2025. We do not yet see the policies in place or on the horizon that would lead to this outcome (if we did, they would be incorporated already in the New Policies Scenario), but it is of course possible that a lower demand trajectory also helps to avoid the risk of market tightening in the 2020s.
In the Sustainable Development Scenario, shale liquids, conventional NGLs and EHOB all grow from today’s levels in this scenario, albeit to a lesser extent than in the New Policies Scenario given a lower oil price. Filling the remainder of the gap would require approvals of around 8 billion barrels between now and 2025. This is very similar to the level seen over the past few years. This places the implications of “peak oil demand” in context. Even with a near-term peak and subsequent reduction in demand of around 1 mb/d by the mid-2020s, there remains a need to develop new upstream oil investments to fill the supply-demand gap.
Is nuclear energy essential for deep decarbonization?
The world is not on track to meet the target of the Paris Agreement to limit global warming to ‘well below’ 2°C. Participants at the Ninth International Forum of Energy for Sustainable Development (12-15 November 2018) in Kiev, Ukraine, deliberated on how nuclear energy could contribute to deep decarbonization. Today, some 450 nuclear power reactors in 30 countries provide about 11% of the world’s electricity. Nuclear energy is the world’s second largest source of low-carbon power, with about 30% of the total in 2015, and it displaces about 2 gigatonnes of CO2 every year.
Speaking at the Forum’s workshop on “Nuclear Energy and Sustainable Development: Role of nuclear in a decarbonized energy mix”, Ms. Yuliya Pidkomorna, Deputy Minister for Energy and Coal Industry, Ukraine observed that nuclear energy is the mainstay of energy infrastructure in Ukraine. Experts from Ukraine showcased nuclear energy’s contributions to the country’s achievement of the Sustainable Development Goals. Participants from United Kingdom and Canada presented national programmes in which nuclear energy contributes to deep decarbonization.
“A dialogue on the energy transition is incomplete without considering nuclear power”, said Mr. Scott Foster, Director, Sustainable Energy Division, UNECE in his opening remarks. “This is why the Forum has included nuclear energy on the agenda for the first time.”
Many countries have chosen to not pursue nuclear energy because they view that the risks of incidents or accidents at nuclear power stations are unacceptable. Other countries have determined that they will not be able to achieve their development objectives without deploying nuclear power. Many countries such as China, India and Russia are expanding their nuclear power base, while countries like Bangladesh, Belarus, Turkey and the United Arab Emirates are building nuclear power plants for the first time.
Advanced nuclear power systems incorporate passive safety features. Reducing costs through economies of scale and deployment of innovative small and medium reactors will have to be accelerated. Over fifty models of such reactors are under design and regulatory approval in different countries.
“Small and medium reactors are a possible game changer for nuclear power”, said David Shropshire, Section Head, Planning and Economic Studies, International Atomic Energy Agency. “They can be deployed by 2030 as a low carbon alternative, meet growing needs for potable water due to the climate change, and support remote and niche applications.”
“Today’s nuclear energy is the product of 60 years of innovation, supplying clean, affordable and reliable electricity on a major scale”, said Ms. Agneta Rising, Director-General, World Nuclear Association, summarizing the deliberations at the workshop. “To meet the growing demand for clean electricity, the global nuclear industry Harmony programme sets out a vision of 25% of global electricity supplied by nuclear by 2050 working alongside other low-carbon energy forms such as renewable energies.”
Deliberations on nuclear energy at the Forum intersected with discussions on renewable energy, energy efficiency, and fossil fuels and the need for finding the right mix suited for different regions and countries. Decarbonizing energy will require contributions from all low-carbon technologies.
The workshop was co-organized by World Nuclear Association and the International Atomic Energy Agency.
The impact of U.S. sanctions on Iranian oil industry, market in focus
Right from the day Trump withdrew from Iran’s nuclear deal, announcing his plan for cutting Iranian oil exports to zero, the oil scholars and experts all around the world begun contemplating the impacts of this decision on the Iranian oil industry especially on the country’s oil exports.
Today, near five months after Trump’s announcement and while the U.S. has re-imposed sanctions on Tehran, still nobody has a clear idea about the outcomes of the U.S. actions against Iran, and there is still great disagreement over the magnitude of the impact on Iranian oil industry and especially on crude exports.
However, the oil markets have been through various changes in the past few months based on which we can draw a relatively neat picture of what to expect in the future.
Markets moving toward ‘oversupply’
In January 2017 OPEC and a group of non-OPEC producers including Russia began cutting their output in order to balance an oversupplied market in which the oil prices had fallen from over $100 a barrel to under $30. After OPEC+ agreement the glut was slowly drained and the prices stared to move in an upward trend reaching $80.
The rise in oil prices started to concern Trump’s administration who were close to the midterm elections and also planning to re-impose sanctions on Iran; and the surging oil prices were not at all in line with their interests. This made Trump to begin pushing the U.S. allies in the Middle East to pump more oil in order to lower the surging prices.
In June 2018, led by Saudi Arabia as the biggest U.S. ally in the Middle East, OPEC and non-OPEC group agreed to restore some of their output to help rebalance the market which this time was considered “very tight”.
Afterward, despite the 2017 agreement, some OPEC members were allowed to pump at their maximum levels and also the world’s top three oil producers namely the U.S., Russia and Saudi Arabia, hit new production records.
Oil demand and a broken cycle
After pumping at their highest levels for over four months, Saudi Arabia and U.S. producers had to face the fact that there might not be enough demand for their oil in the markets.
The rising trade tensions between U.S. and China, rising interest rates and currency weakness in emerging markets have raised concerns about a slowdown in global economic growth and consequently in oil demand.
So getting back to the starting point [safe to say in a broken cycle], Saudi’s begun to believe that, once again, the markets were moving toward a glut and even with the cuts in Iranian output, the markets didn’t have the appetite for the new oil flows.
Consequently, in their latest gathering in Abu Dhabi, OPEC+, announced that the current situation “may require new strategies to balance the market.”
Gathered for their 11th meeting on Sunday, the OPEC-Non-OPEC Joint Ministerial Monitoring Committee (JMMC) announced that “the Committee reviewed current oil supply and demand fundamentals and noted that 2019 prospects point to higher supply growth than global requirements, taking into account current uncertainties.”
Following the meeting, Saudi Arabia announced its plans to reduce oil supply to world markets by 0.5 million barrels per day (bpd) in December, Reuters reported on Monday.
Iran sanctions and the exemptions
Facing resistance from Saudi Arabia for pumping more oil and pressured by high oil prices, the U.S. government had no choice but to soften their stance against Iran and let go of its “zero Iranian oil” dream.
So, just few days before OPEC+ meeting, when there were talks of a new strategy for cutting output, the U.S. government announced that it has agreed to let eight countries, including China, Turkey, South Korea, Japan and India to continue buying Iranian oil.
With the new waivers coming to effect, a significant amount of the cuts in Iran’s oil exports will be compensated.
The impacts on Iran’s oil industry
So far, affected by the U.S. sanctions, Iran’s oil exports have fallen from an average of more than 2.5 million barrels per day to around 1.5 million bpd in recent weeks.
This means currently near 1 million bps of Iranian crude oil has been wiped from the markets and Iran is currently selling a lot less than what it used to sell before the re-imposition of the sanctions.
So how big the effect of these cuts could project on the country’s economy?
First of all, the oil revenues envisaged in Iran’s current budget for Iranian calendar year 1397 (March 2018-March 2019) is estimated to be 1.01 quadrillion rials (near $26.5 billion) planned based upon $55 oil. This means under a $55 scenario, for this amount of oil revenues to be realized, Iran should sell 2.410 million barrels per day of oil up to March 2019.
What should be taking into consideration here, is the fact that since the beginning of the current Iranian calendar year (March 2018), average oil price has been at least over $60 and according to Reuters ship tracking data, Iran has been exporting 2.5 million barrels of oil and condensate on average during this time span, that is about 400,000 barrels more than what is expected in the country’s budget.
As for the current oil prices, according to the Reuters’ latest report on Sunday, after Saudi Arabia announced a decision for cutting their output by 500,000 bpd in December and considering the U.S. announcement regarding the waivers over Iran sanctions, oil is currently being traded at over $70 per barrel that is still over $15 more than the price based on which Iran’s budget is set.
Aside from the increase which is due to come from the resumption of purchases by the exempted countries, Iranian crude exports are also keeping steady with the demand staying strong in the EU. European buyers including Italy, France, Spain and Croatia continuing their intakes even after announcement of the sanctions.
This indicates that even at the current levels, and even without considering the barrels which are going to be back to Iranian oil exports due to the waivers for the mentioned eight countries, the U.S. sanctions are not having as a severe impact on Iran’s economy and oil industry as they were supposed to.
Let’s not forget the country’s ample domestic storage which can easily absorb the barrels that are not exported. Previously, when the U.S. and EU imposed sanctions on Iran, the country put almost 50 million barrels of crude and condensates on floating storage between 2012 and January 2016.
Meanwhile, the country’s refineries have also been picking up in the past few months. Iran’s gasoline production has surged 50 percent over the last 12 months, with further increases to come, according to the oil ministry.
In the end, considering the global supply and demand patterns, the trade tensions between the U.S. and China and with OPEC+ considering new cuts to be executed in 2019, as well as U.S.’ recent waivers over Iran sanctions, we can see that the odds are quite slim for U.S. sanctions having a significant impact on the Islamic Republic’s economy and its oil industry in the long run.
First published in our partner Tehran Times
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