Decades of operating under some of the most stringent sanctions in history has given Iran's oil sector plenty of time to hone its coping strategy, establishing ways to keep crude exports flowing by at least enough to keep the country's hydrocarbon-driven economy ticking over. But a desire to insulate itself from further shocks means that the government of president Ebrahim Raisi has turned its attention towards formalising downstream partnerships with allies such as Venezuela and Syria in order to help secure demand for its crude.
Tehran faces the same crushing sanctions that former US president Donald Trump reimposed in 2018, after pulling the US out of the 2015 nuclear deal. Despite this, Iran's oil sector enjoyed something of a renaissance last year, with crude production rising by about 650,000 b/d, according to Argus estimates, largely supported by a recovery in crude exports. These averaged just shy of 1.3mn b/d in the fourth quarter of 2023, according to Vortexa, up from 1.05mn b/d a year earlier, and 832,000 b/d for the whole of 2022.
The lion's share of exports has gone to long-time buyer China, where independent refiners took full advantage of Iran's deep price discounts. China imported about 1.2mn b/d of Iranian crude last year, mostly masked as Malaysian crude, up from just over 700,000 b/d in 2022. Iran sent more modest volumes of crude and condensate to long-time allies Venezuela and Syria, to feed into their refineries — primarily the 140,000 b/d El Palito plant in Venezuela and Syria's 140,000 b/d Banias facility. But whereas economics has driven trade with China, flows to Venezuela and Syria have largely been underpinned by politics.
Buy now, pay later
Successive Iranian governments have talked up the merits of securing what they describe as "extra-territorial refineries". Formalising agreements with such refiners, they argue, will increase their dependency on Iran's crude, making it more difficult for them to halt purchases abruptly, as many of Iran's customers have in the past because of sanctions. "The biggest benefit of such refineries is securing markets for the stable sale of our crude," Ali Shahverdi, who handles relations with foreign plants at state-owned refiner NIORDC, says.
Of course, Iran almost perpetually being under sanctions limits its appeal, causing most countries and refiners to steer clear. But for other similarly afflicted countries such as Venezuela and Syria, the benefits of co-operation with a country with as much oil sector experience and expertise as Iran are clear.
Relations between Tehran and Caracas have largely been good since the late Hugo Chavez became president in 1999. He turned not only to Iran, but also Russia and China, to create an alternative set of alliances to his predecessors, who were more aligned with the west. But it was not until Washington began tightening sanctions on Venezuela in the late 2010s that the relationship took off.
"The sanctions that the US imposed on [state-run oil firm] PdV in 2019… dramatically increased relations with Russia first," Francisco Monaldi, director of the Latin American energy programme at Rice University's Baker Institute, says. "But when secondary sanctions kicked in [in 2020], we saw a severing of relations with [Russian state-owned] Rosneft, and China and India stopped buying [Venezuelan] crude. This is when the relationship with Iran took on another level."
The sanctions triggered a collapse in Venezuela's refining sector through a lack of both investment and maintenance, prompting serious domestic fuel shortages. Monaldi says operational refining capacity "fell to as low as 50,000 b/d at one point", from close to 1mn b/d before. Tehran sent several cargoes of gasoline to Venezuela in 2020 to help alleviate the shortfall. And from the second half of 2021, Iran began sending cargoes of condensate to Venezuela to help with the recovery of its extra heavy crude from the Orinoco belt, supporting an increase in Venezuelan crude output at the time.
The relationship tightened in 2022, first with the signing of an initial deal for Tehran to supply equipment to help with repairs at PdV's El Palito refinery, where operational capacity had fallen to just 20,000 b/d, and later with a wider 20-year co-operation deal that incorporated the earlier refining agreement. And 18 months on, real progress has been made. "El Palito is today running at 100,000-110,000 b/d," Jose Chalhoub, a political risk and oil analyst at consultancy Venergy, says. "And gasoline supply has improved across the country. You can definitely link that to the Iranians."
Iran has increased crude shipments to about 100,000 b/d since the first quarter of 2023 to use as a crude blendstock at El Palito, consultancy FGE says. Caracas has, in return, supplied Iran with extra-heavy Merey crude and products, typically fuel oil, to sell on. Iran hopes to send up to 140,000 b/d to Venezuela once refurbishment of the refinery is complete. PdV president Pedro Tellechea said this week that additional maintenance now under way will "bring production at El Palito back to 100pc". FGE says the work is due to be completed soon.
Where to next?
Tehran is exploring the possibility of extending co-operation to Venezuela's 635,000 b/d Amuay refinery, which has also been operating well below capacity. "There are already plans for Iran to help upgrade and revamp Amuay," Chalhoub says. And Iran has set its sights on replicating this model elsewhere. Shahverdi says it is exploring options in other Latin American countries, such as Nicaragua or Cuba, which also require heavy refinery refurbishment and lack crude.
"Overall, Latin America is second only to Africa when it comes to lowest refinery utilisation rates," FGE's managing director for the Middle East, Iman Nasseri, says. But for now, Iran's priority is to conclude a similar agreement with Syria to restore the 110,000 b/d Homs refinery, and in turn supply it with crude. Homs has also been operating well below capacity for years in the wake of infrastructur damage during Syria's civil war. Discussions will determine the scope of work needed to take its operational capacity back to 110,000 b/d or even 120,000 b/d, Shahverdi says. Tehran estimates that the cost of this work could reach €140mn, and stands "ready to sign the contract". A similar arrangement at Syria's Banias refinery, which has already been taking Iranian crude for some years on an ad hoc basis, is also on the agenda, he says.
Such countries are "structurally highly problematic" places for investing in refining, Monaldi says, because their domestic fuel markets are heavily subsidised. "If you invest in a country in which they basically never get paid market prices, how do you guarantee that you will get paid?" Monaldi says. But for Iran, the main incentive "is not and has never been economic", Nasseri says. "Ultimately, Iran has been losing money on this relationship with Venezuela," he says. "But this has always been more about supporting one another [against the west], about creating an outlet for its crude and keeping countries under its influence."
When Tehran set out on its quest for "extra-territorial" refining capacity in 2022, Iran was producing and exporting considerably less crude than it is today, making finding markets for its shunned crude a priority for the here and now. But with production today at 600,000 b/d or so below capacity, Tehran's pursuit holds longer-term importance. "Now, it is still a necessity, but more of an insurance policy," Nasseri says. "A fallback to safeguard themselves should things get tougher again, and buyers begin to retreat."
