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February 11, 2020

Volume 3 Issue 7

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Iran Gets Creative with Base Oil Exports

Demand for Iran’s API Group I base oils continues despite tough United States sanctions on the Islamic Republic’s oil and petrochemical exports, an executive at an Iranian shipping agency told Lube Report. But Washington’s embargo is forcing Iranian refiners to find alternative export channels in a bid to avoid detection and shore up vital export revenues, they add.

Mojgen Moftakhari, general manager of Nedaye Sahele Jonoub Shipping Co. in Tehran, says Iran is still exporting to major customers but noted that the trading environment is deteriorating and the risk to refiners has increased dramatically. “Countries dealing with Iran base oils are limited to India, China and Africa. There are hugely unreliable dealers acting as buyers, as well as suppliers in between.”

Moftakhari claims base oil cargo sizes have declined as exporters alter tactics to maintain overall volumes and safeguard payments. “Flexitanks and containers are used, but [among] shipments over 3,000 tons, the number of bulk carries or charterers accepting Iran loads is very low. One reason is insurance coverage for the vessel and … high risk of vessel demurrage, due to cargo not being available on time.” Demurrage charges are raised when a full container isn’t moved out of a port or terminal for unpacking within the allowed free days offered by a shipping line. The shipping line levies the charge on the importer.

At its peak, Iran dominated Group I markets in the region, exporting up to 450,000 tons per year of Group I base oils, according to Dubai-based GP Global Group.

Although Iran persists with direct shipments, the port of Jebel Ali in the United Arab Emirates remains an important transshipment hub for Iranian base oil exporters.

“Flexitanks are naturally sent direct. Drums, however, are normally via Jebel Ali, then either cross stuffed or transshipped with switched documents. It depends on destination, country and buyer,” Moftakhari added. A document switch changes the consignment’s bill of lading – a document issued by a carrier to acknowledge receipt of cargo for shipment – and can be used to cloak the original consignee, as well as the origin of cargoes, according to U.S. website iContainers.

But a base oil executive in Tehran said that although shippers are under pressure, the move away from direct shipments is muted.  “It is not exactly like that – shipments by tanker vessels are still in progress but less so than before.” Meanwhile, a trader in the U.A.E. said flexitanks supply a niche market. “Flexi load was part of the business from long back – it covers part of the market that is small and does not need re-stuffing or changing of documents.” Stuffing of a container is the process by which cargo is loaded into an empty container, which is then sealed and transported to the carrier for loading onboard a ship.

Before U.S. President Donald Trump ramped-up sanctions, the U.A.E. was the destination for the bulk of Iran’s base oil exports. However, both Abu Dhabi and Dubai have come under U.S. pressure to cut off access to their ports. The U.A.E. has evolved to become a springboard for re-exports of Group I base oils, supplying a burgeoning market for low-cost engine oils in Africa. Still, according to TankerTrackers.com, ship-to-ship transfers continue to take place, an indication that the U.S. government is finding it difficult to completely clamp down on Iran’s exports.

Iran is also reportedly transporting base stocks overland to Iraq and re-consigning cargoes as Iraqi origin before exporting through local ports. Analysts say the development has distorted data for Iraq’s base stocks exports, which are down to less than 45,000 tons per year, GP Global estimates.

Still, the pressure to maintain exports whilst skirting sanctions has resulted in costs piling up for Iranian refiners and traders as traditional methods of trade finance are increasingly off-limits, Moftakhari, said. “Since there is no direct banking connection between Iran and international banks nor letter of credit option, money transactions are arranged through exchange offices as well as trading companies with accounts outside Iran. This is causing additional time and expense.”

Iran’s access to foreign exchange could be dealt a further blow after President Trump recently agreed to the first phase of a deal in the trade dispute between the U.S. and China. Trump could use the agreement as leverage to stop China from buying Iranian oil products, analysts say. Bank of Kunlun, the state-owned bank at the heart of China-Iran bilateral trade has reportedly said it might cease processing Iran-related payments as early as April 9.

Such a move would likely have a major impact on imports of Iranian base oils into China at a time when the economy is cooling. It is unclear who could fill the void if base oil imports from Iran were suspended. However, the gap between Group I and Group II base stock prices in Asia has narrowed, according to recent reports from ICIS, suggesting Group II base oils – possibly from South Korea – might offset the shortfall.

But despite accumulating evidence that shows Iran’s base oil exports are flagging, the Islamic Republic continues to have a disproportionate influence on base oil trade, particularly on Group II and III exports from Middle East Gulf refiners. Iranian President Hassan Rouhani has frequently stated that if Iran’s exports are brought to a halt, Iran will move to counter all other regional exports.