Iran seeks ‘security of demand’ for oil, Spain eyes refinery jobs

LONDON (ICIS)–A day after the US and EU announced the lifting of certain key economic sanctions against Iran, Spain’s foreign minister revealed Spain and Iran are in talks over the possibility of constructing an Iranian-owned oil refinery at the southern port city of Algeciras.

The ambitious project – which is far from being finalised – is also expected to involve Spanish firms and could create jobs in a region plagued by high unemployment rates.

Jose Manuel Garcia-Margallo, the Spanish foreign minister, on Monday told reporters in Brussels ahead of a meeting of EU foreign affairs ministers that he hoped the refinery would be the first of many deals between the two nations.

“Our political relationship with Iran is very good because we moved faster than other countries and are now very well placed for future business,” said Margallo, who began considering potential investments during a visit to Iran in 2014.

The proposed project is at once a political move and a market strategy to grab sales, oil market analysts say.

One of the largest refineries

Previously, Iran had spoken of its interest in buying or investing in overseas oil refineries once sanctions are lifted, and spoke specifically of constructing an oil refinery in Spain as a long-term strategy to secure a buyer for its oil.

On 9 January, Iran’s deputy oil minister and managing director of National Iranian Oil Refining and Distribution Company (NIORDC), Abbas Kazemi, was quoted by the media as saying the planned refinery would have a capacity to process 200,000 barrels per day (bbl/d) of crude oil which would be solely sourced from Iran.

Source: IEA The proposed 200,000 bbl/d refinery would be one of the largest in Spain

Interestingly, the refinery will also sit close to Spain’s biggest refinery – the San Roque refinery – owned by Spanish firm Cepsa.

Spain’s total refining capacity stood at 1.5m bbl/d in 2012, as per the International Energy Agency (IEA).

Security of demand

If the project is finalised, it would mean “security of demand for Iranian crude oil”, says Ehsan Ul-Haq, senior consultant at KBC Process Technology.

“It takes 3-5 years to build a refinery. Therefore, it is unlikely to boost Iranian exports to Europe now. Russia and Iraq are the key medium sour crude suppliers in the Mediterranean, while Saudi Arabia has the rest of the market share,” Ul-Haq said.

Iran is following a similar strategy to Saudi Arabia which has a share in several Asian refineries and in the Motiva refinery in the US, Ul-Haq said.

Abhishek Deshpande, oil markets analyst at Natixis Economic Research, said European demand for refined products is not guaranteed despite the “small improvement” seen in 2015.

“Although the increase in demand led by price elasticity and improved economic growth prospect for EU after years of slowdown from the financial crisis, demand should soften by end of 2016 in the EU,” Deshpande said.

Build or buy

“It might be difficult to buy a refinery at a time when margins remain relatively healthy,” Ul-Haq said. This could be one of the reasons why Iran is planning to go ahead with building a refinery in a continent which has seen the closure of several refineries in the recent past.

Deshpande estimates a cost of over $2b to build a 500,000 bbl/d refinery, but says a new refinery has many advantages.

“It can sometimes be more cost efficient to build a new refinery that can produce more, say gasoil, as existing refineries are less complex,” Deshpande said.

Iran’s oil


Source: IEA Iran is back with its crude oil

The IEA in its January Oil Market Report estimated around 300,000 bbl/d of additional Iranian crude could be flowing to world markets by the end of the first quarter 2016.

“Even this must be treated with great care. Depending on the volumes that do emerge, Iran may be OPEC’s only source of significant production growth in 2016,” the IEA said.

If Iran manages to hike its crude oil exports to 500,000 bbl/d, the grades of crude exported would be Iranian Heavy (60%), Iranian Light (30%) and the new, heavy West of Karun crude – due to make its debut in Q2 2016 – the remainder, the IEA said.

Historical trade partners

Europe is a significant trade partner for Iran in the oil and refined products sector, said Carl Larry, director of oil and gas business development at Frost & Sullivan.

Europe has excess gasoline and a need for crude oil imports, and Iran has the excess oil and need for gasoline imports, which Larry says makes the two regions a perfect trading fit for each other.

FGE Energy Consultants estimates that in 2014 Iran imported almost 61,000 bbl/d of petroleum products, of which 94% was gasoline.

“Before the EU imposed an export ban, European refineries used to take a significant share of Iranian exports, peaking at around 0.7 mb/d. Many refineries can run Iranian crude, particularly Med refineries in Spain and Italy. Now sanctions are lifted we are likely to see Iranian barrels returning to the Med,” Richard Mallinson, geopolitical analyst at Energy Aspects said.

Focus article by Cuckoo James