Iran grapples with fuel smuggling as local demand rises

The smuggling of road fuels out of the country is becoming an increasingly difficult issue to manage for Iran, particularly as it faces up to the ever-rising fuel demands of its growing population.

Iran's diesel demand currently stands at around 528,000 b/d, according to state-owned refiner NIORDC. But it estimates that actual domestic consumption is unlikely to top 470,000 b/d. This suggests a near 58,000 b/d gap between diesel distribution and actual consumption, which represents around 8pc of Iran's total 690,000 b/d diesel production. The ‘missing diesel' is likely being smuggled to neighbouring countries where prices are significantly higher than in Iran, NIORDC's managing director Jalil Salari says.

But such a significant share of Iran's diesel production is unlikely to be smuggled out of the country without some level of coordination with the authorities. "The real smuggling by people and entities not linked to the state are small ꟷ mainly to Pakistan, but also to Afghanistan and [Iraqi] Kurdistan," says Iman Nasseri, managing director for the Middle East at consultancy FGE. "In total, we think these volumes could not exceed 15,000-20,000 b/d of diesel. The rest would be large scale sales by vessels and controlled by the Iran's Islamic Revolutionary Guard Corps (IRGC)".

Fuel smuggling in Iran is encouraged by the heavy fuel subsidies that Tehran continues to grant its domestic consumers, making diesel and gasoline prices in Iran one of the lowest in the world. Currently one litre of diesel is sold at between 3,000-6,000 Iranian rials ($0.07-0.14/l) in Iran, well below the $1/l or higher cost in Pakistan or Afghanistan. Similarly, gasoline is sold at around $0.03-0.06/l, also well below the prices in the neighbouring countries. Both independent and IRGC-linked smugglers could be sourcing their export barrels from the domestic distributing centres, buying it at subsidized prices and then selling it at a market price abroad.

Previous attempts by the government to raise road fuel prices have triggered nation-wide protests, which has locked the government in something of a vicious cycle, limiting both its efforts and appetite to scrap subsidies altogether.

Just last week, Iran's oil minister Javad Owji was, once again, forced to play down talk of the government possibly planning to scale back subsidies on gasoline and raise prices at the pump. "Increasing the price of gasoline is not on the agenda of the government, and people should not pay attention to such rumours," he said.

Supplies don't come easy

Fast growing diesel and gasoline demand, exacerbated by smuggling, is forcing Iran to look for ways to boost and upgrade its refining capacity further. Despite already having ten operating refineries that take a combined 2.29mn b/d of crude and condensate, the current administration has already announced plans to build new facilities. But these are likely to take time.

In the shorter term, capacity and output growth will be limited to upgrades at existing refineries, which have also been hampered by western sanctions. At the same time, surging gasoline demand has been pushing existing refineries to run at full pelt, leaving less possibilities for downtime.

In March, government officials raised concerns that strategic gasoline reserves had dropped to extremely low levels, covering only 5 days of country's consumption. This came as Iran's gasoline demand rose to an average of 657,000 b/d in the last Iranian year which ended on 20 March. That is just 66,000 b/d below Iran's total gasoline production levels. The country said it has postponed "major refinery repairs" until next year so that the refineries could run at their maximum capacity for the time being, though it was not specified which refineries were affected.

By Ieva Paldaviciute