Crude exports are rising despite US sanctions, but domestic energy demand appears beyond control, writes Nader Itayim
Iran's energy sector appears to be going from strength to strength despite US sanctions, but rising domestic product demand could expose a new vulnerability.
Iranian crude production and exports have risen to nearly five-year highs. This puts Iran in the unexpected position of being a source of relief for global oil balances tightened by Saudi Arabia and Russia's decision to extend additional crude cuts to the end of 2023. Iranian crude output has been on a sustained climb this year. Production rose to 3.2mn b/d last month, Argus estimates, 600,000 b/d higher than at the end of 2022. Iran's oil minister Javad Owji says output will rise further to 3.4mn b/d by the end of this month.
A very tight market for sour crude has encouraged this extra output, and overseas sales are buoyant. Iran has been exporting nearly 1.3mn b/d since April, Vortexa tanker tracking data show, a more than 500,000 b/d increase on a year earlier (see graph). The lion's share is going to China — typically after ship-to-ship transfers off the Malaysian coast. Significantly smaller amounts are heading to allies of Tehran that are also under long-standing US sanctions. Venezuela is taking Iranian crude for its 140,000 b/d El Palito refinery and Syria for its 140,000 b/d Banias refinery.
Iran's success in boosting exports to such an extent despite remaining under the same US sanctions that once dragged shipments below 500,000 b/d is put down by many to the softer approach to enforcement taken by President Joe Biden's administration. This could be part of the equation, although the fact that Iran relies on its own tankers to transport much of its oil limits Washington's options in blocking those shipments, short of physical interdiction.
Another element is China's strong appetite for crude, despite seemingly weak macroeconomic readings. Iran has expanded its share in this key market thanks to competitive spot market pricing that beats even discounted Russian crude.
Domestic oil companies are also delivering key upstream projects left idle for years because of the sanctions — none bigger or more important than phase 11 of its supergiant South Pars gas field in the Mideast Gulf, which began producing last month. The project, which had originally been earmarked for foreign investment and operatorship, was finally delivered by Iran's state oil company NIOC and its subsidiaries after the sanctions drove former partners TotalEnergies and China's state-owned CNPC away. Iran should see production from the phase rise steadily to 50mn m3/d, or about 7pc of Iran's gas production, which stood at 259bn m3 in 2022, according to the Energy Institute's Statistical Review of World Energy.
Demand drain
But Iran's upstream and overseas oil trade success stands in contrast to its efforts to rein in consumption at home, whether for natural gas or gasoline. It operates more than 2.4mn b/d of refining capacity, yet rapid demand growth is beginning to threaten its hard-fought status as a gasoline exporter. Domestic gasoline demand rose by more than 70,000 b/d to a record 730,000 b/d in the first half of the current Iranian year whic began on 21 March, state-owned refiner NIORDC says. It rose by 110,000 b/d in the previous Iranian year.
Iran's oil ministry has repeatedly urged domestic consumers to better manage their gasoline use or risk supply shortages. The country announced plans in late 2021 to boost domestic refining capacity to 3.4mn-3.5mn b/d by 2026 to help meet growing demand and strengthen its position in products export markets. But as long as US sanctions remain in place on the country, Iran will struggle to secure not only the financing but also the know-how it needs to deliver these additions.
