Sunday, July 09, 2006

Iran Spending Mlns Of Dollars On Oil Storage Ships

Dow Jones:
Iran is spending millions of dollars a day storing unwanted crude oil on ships, while at the same time preparing to slash its much-needed gasoline imports it says it can no longer afford.

Industry experts estimate the Islamic republic has for several months been storing close to 20 million barrels of crude oil on tankers, as there is a limited market for the heavier crude oil grades it produces. READ MORE

The number goes up and down, but yes its is sometimes at this level," said an official with the National Iranian Oil Company, who spoke on condition of unanimity.

Another source familiar with Iran's oil industry estimates the oil ministry is typically spending close to $4 million a day on tanker storage: "We are spending around 5 cents for every barrel of oil we store daily."

Conrad Gerber, president of Geneva-based tanker tracker Petrologistics, warns Iran could find itself spending even more cash on chartering ships in the months ahead.

"This figure could rise, especially due to opportunity costs, such as if Iran suddenly finds a buyer in Rotterdam or South Korea and has to charter a vessel," he said.

European shipping experts believe Iran is using some of its own 15 very large crude carriers and is also chartering ships for storage purposes.

Iran In Financial Crisis Over Gasoline Imports

Meanwhile, Iran's oil ministry is already facing another major crisis as its highly subsidized gasoline imports are putting it under enormous financial pressure.

The Islamic republic may be the second largest producer of the Organization of Petroleum Exporting Countries, but it still needs to import around 40% of the 70 million liters of gasoline a day it uses because it lacks sufficient refinery capacity.

Iranian Oil Minister Kazem Vaziri-Hamaneh recently warned the country could see a halt in gasoline imports and rationing from late September. The decision is politically sensitive and could easily trigger unrest.

But a lack of conventional storage and a reluctance to cut either oil prices or output means Iran has no choice but to pay the extra costs for the foreseeable future, industry sources said.

New Storage Takes 2 Years To Build

Officials have spoken of plans to increase Iran's crude storage facilities at several locations including Kharg Island. But Iranian oil sources say this offers no immediate relief because it takes at least two years to build storage capacity for 10 million barrels of oil.

Iran, currently pumps close to 4 million barrels a day of which it generally exports around 2.5 million b/d to buyers in Europe and Asia Pacific.

But the heavier crude oil grades Iran produces aren't in demand from refiners, who favor the lighter, sweeter grades, produced by countries such as Nigeria and Libya.

Leo Drollas, senior energy consultant with the London-based Centre for Global Energy Studies, however, says Iran would be able to find buyers if it were willing to cut its prices significantly. "Refiners won't buy heavy crude unless it is cheap enough," Drollas said.

But as they are currently enjoying oil prices close to $75 a barrel, Iranian officials are reluctant to see prices fall significantly.

In a widely expected move, Saudi Arabian Oil. Co., or Saudi Aramco, Wednesday marginally cut its official August selling price for its Arab Heavy crude oil to buyers in Northwestern Europe.

Iran is also expected to introduce a minor discount to its official August selling price. "We are maybe forced to do the same, but we aren't going to do anything drastic that would trigger a price war," said the NIOC official.

Petrologistics' Gerber said Iran is "notoriously stubborn when it comes to cutting prices."

And fiercely protective of maintaining its market share, Iran also seems unwilling to cut output at its oil fields.

"We aren't a swing producer like Saudi Arabia. We need to maintain our fields so when demand rises we are in a position to take advantage of the situation and quickly," said another Iranian industry source.

Saudi Arabia's Oil Minister Ali Naimi said recently that the kingdom cut output to 9.1 million b/d in April due to lack of demand.

-By Sally Jones, Dow Jones Newswires; 44 207 842 9347;

(Hashem Kalantari in Tehran contributed to this article).