Iran’s Shut-In Dilemma

Iran’s national fleet of 39 oil tankers (NITC) is the subject of much scrutiny these days. Monthly reports from wire services and industry sources document changes in available storage, oil at sea, the numbers of tankers waiting for crude, and the size of each cargo. NITC is now a barometer for measuring pressure on Iran’s crude exports. If sanctions prevent Tehran from selling oil, analysts expect it will be stored on tankers in the Gulf or outside the Strait of Hormuz, in the Arabian Sea. More tankers sitting offshore means less Iranian oil is reaching the market.

In mid-April, Iran took the extraordinary step of disabling tracking devices in order to disguise which ships were inactive and where others were going. The problem, however, was that this policy had the opposite effect: precisely because the tankers suddenly disappeared, the industry, media, and–without question–intelligence agencies, refocused on Iran’s tanker fleet. Even so, data from different sources doesn’t always match up. It’s also incomplete if we look back years.

For instance, Reuters reported on April 23 that half of Iran’s tanker fleet was storing 33 million barrels of oil offshore. Storage at Kharg Island was also reportedly full. Combined, that meant Iran was storing 56 million barrels of crude in late April. The story made a big splash even though it was based on two anonymous Iranian shipping sources. It was seen as the best confirmation yet that sanctions were strangling Iran’s exports ahead of the EU’s July 1 deadline.

Platts, one of the most respected industry reporting services, shorted the Reuters estimate days later. As reported on April 26, Platts found Iranian floating storage was only 22 million barrels. According to data I’ve collected dating back to September 2010, 22 million barrels is still remarkable: in fact, it’s the most Iran has stored at sea in two years. (Between September 2010 and March 2011, Iran maintained about 12.8 million barrels in floating storage on average. Since then the average has been far lower. Not including the late April 2012 anomaly, Iran has held only 4.2 million barrels offshore in the past year on average.)

It now looks like the huge April estimates provided by Reuters and Platts this year were abnormal and not part of a larger trend. According to Reuters, Iran held only 8 million barrels offshore in May and 7 million barrels in the first week of June. So Iran apparently sold 15 million barrels in the past six weeks if we go by the more conservative Platts estimate.

In my blog posts here, and articles for Foreign Policy and Tehran Bureau, I’ve raised the prospect of Iran facing a shut-in dilemma. Because Iran’s oil industry is not in great shape, shutting in production is problematic; restarting production may not be so easy (think of it like an old car you’re afraid to turn off). Storing oil offshore is thus an easy solution–but only a temporary one. Once storage offshore and onshore approaches capacity, Iran would presumably have to choose: does it halt production, and risk damaging its industry, or does it sell oil at a discount in order to free up more tonnage?

As an added danger for Iran, releasing millions of barrels of oil onto the market at a discount could change today’s supply-demand dynamics. Prices could dive because Iran sold oil out of desperation and oversupplied the market. The problem now, however, is that future sales at steep discounts might not be an option. A Reuters report published today cited a “senior Chinese oil executive” saying that Sinopec, China’s largest oil company, had rejected discounted crude from Iran this year and would continue to do so in order to preserve relations between Washington and Beijing. “The Iranians have made some offers, but we have turned them down,” the official told Reuters’ Chen Aizhu. “The economic benefits of filling some discounted Iranian oil into the national oil reserves would be too small a consideration for the state. The key concern for the Chinese government would be China-U.S. relations.”

Many analysts initially dismissed the EU-U.S. sanctions regime because the market was flexible: oil imports once destined for Europe would presumably go to Asia instead. That logic no longer holds. More and more Asian buyers are cutting imports in order to avoid U.S. sanctions. Yesterday, Washington granted waivers to major importers of Iranian oil–including Turkey, India, South Korea, and four other countries–because each had cut Iranian imports ahead of Washington’s June 28 deadline. China did not receive a waiver yesterday even though Chinese imports of Iranian crude were halved in the first quarter of this year due to a contract dispute.

The White House might posture to score points at home and play hardball with Beijing for a couple more weeks. But ultimately, U.S.-Chinese relations are paramount, as the executive cited in today’s Reuters article said. China will be granted a waiver. China’s possession of significant U.S. debt should give Washington pause. And the overall health of bilateral economic relations is too important to forfeit by sanctioning Chinese banks and companies for doing business with Iran. U.S. sanctions law affords the president discretionary power to grant waivers on the fuzzy basis of “national security” interests as well.

The Chinese have already cut imports by a modest amount. Sinopec expects to import 80,000-100,000 b/d less this year compared to 2011. China might also prove immune to the charms of discounted Iranian oil, if today’s reporting is accurate. Just recently, Chinese shipyards sent the first of 12 new supertankers to join Iran’s national fleet. Each can hold ~2 million barrels of oil. Will those tankers be empty or full by year’s end? Chances are, they won’t be sent to Asia, as some predicted. Instead they might sit around for months–full but with no destination, or empty and useless.



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3 responses to “Iran’s Shut-In Dilemma

  1. Pingback: The Doomsday Predictions Are In | The Foreigner – الأجنبي

  2. Pingback: What Iranian Officials Are Saying about the Oil Industry | The Foreigner – الأجنبي

  3. Pingback: U.S. Treasury–not the Pentagon–Takes Lead Against Iran | The Foreigner – الأجنبي

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