Experts: Iran unwilling to sell oil at low prices, and cannot use foreign oil tankers as well

Posted on May 21, 2012

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Iran has so far been unwilling to sell oil at rock bottom prices to free up its storage space and keep country’s oil fields producing at current rates, Senior fellow at Nanyang Technological University’s S. Rajaratnam School of International Studies, James M. Dorsey told Trend.

The statistics published late last week by both IEA and OPEC indicates a significant drop in Iran’s oil output and export volume, as the Western sanctions over Iranian oil sector and banking system are going to take affect in two months.

Some Iranian major oil customers such as the Europe Union, South Korea, Japan and Turkey announced that they have decreased Iranian oil purchase, the fact that is proved in IEA stats, saying 15 to 25 percent of Iran’s oil output wasn’t sold and had to be pumped into floating tanker storages.

“The fact that half of Iran’s tanker fleet is idle and being used serves as further evidence that international sanctions are impacting the Islamic republic’s economy,” Dorsey said. “Iran’s onshore holding facilities at Kharg Island believed to have a capacity of 23 million barrels, and they’re full”.

Iran’s predicament is likely to become worse on July 1 when Europe’s oil embargo kicks in, Dorsey added.

“The effect of the sanctions has persuaded Supreme Leader Ayatollah Khamenei to return to the negotiating table despite opposition from President Mahmoud Ahmadinejad who has been locked out of the six party talks about Iran’s nuclear program,” he said.

Dorsey believes that only after the second round of nuclear talks on May 23 in Baghdad it would be evident to what degree the sanctions make Iran more flexible in coming to an agreement on oversight of its nuclear program.

“Iran will certainly want to avoid a slowdown of production not just because its oil fields are aging but because of the cost and difficulty in restarting production,” he noted.

“Iran’s only alternative is to sell oil at a significant loss, which at best would only buy it a bit of time.”

U.S. Northeastern University Professor Kamran Dadkhah believes that Iran could hire oil tankers from foreign companies and use them for storage, but that would be insanity.

Dadkhah notes that while Iran’s main storage facility on Kharg Island is 23 million barrels of oil, the country has been active in increasing its storage capacity.

“The Iranian fleet has a capacity of 59 million barrels of oil. Thus, the total potential storage facility of Iran, both inland and offshore, amounts to a little more than 80 million barrels,” Dadkhah explained. “This is equivalent to less than a month of Iran’s oil production or about one and half months of Iran’s export.”

The expert underscored that for Iran using tankers as storage facility poses some dangers and problems.

“To begin with the tankers are vulnerable to sabotage and technical problems that could cause explosion, fire, or leak,” he said. “The tankers cannot be insured because Iran is under insurance sanctions and the tankers are anchored. Furthermore, at a time of armed conflict, the tankers will become sitting ducks.”

Dadkhah said that sooner or later Iran will run out of storage facility and will have to curtail its production. He noted that economically, this is a costly option for Iran.

“It makes no sense to pump oil out of wells and then store it in tankers,” he said. “In addition to the loss of oil revenue, this means tankers would not generate any revenues while the country has to incur the cost of their operation and maintenance.”

Speaking of Iranian oilfields, the expert noted that if Iran shuts them down, this would deliver a major impact to the Iranian economy.

“Over the years, Iran has not properly maintained the oilfields. In addition, there has been scarce investment with up to date technology for discovering new oilfields and expanding the existing ones,” Dadkhah said.

“If Iran cannot export oil, it literally has to shut down about half of its oilfields. Reactivating them would require substantial investment and advanced technology and equipment,” he said.

Dadkhah said that Iran may be able to export some oil at hugely discounted price.

“Therefore, it may need to shutdown perhaps a quarter of its oilfields,” he said.

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