London, 9 April 2010

Russian oil company LUKoil’s trading arm LITASCO has decided to stop selling refined products to Iran, in what is widely understood to be a politically motivated move after pressure to do so from the Russian government. Russia has in recent months increasingly sided with U.S.-led efforts to isolate Iran further through tightened sanctions, having previously led renewed efforts to foster a diplomatic dialogue about its nuclear programme during the second part of last year but then become frustrated by Iran’s unwillingness to engage constructively. LITASCO has not been a major provider of refined products to Iran under term agreements, but has been a significant actor on the spot cargo side, shipping between 250,000 and 500,000 barrels of gasoline (petrol) to Iran per month. Last month LITASCO’s gasoline sales to Iran were reported by Reuters to have come in at about 250,000 barrels of gasoline, while Platts said that the company has reportedly already sold four contracts for April delivery with Iran for 35,000 tonnes each (256,000 barrels). Apart from Russian government pressure, LUKoil could also fear that tighter Iran sanctions could expose the company’s substantial U.S. operations to possible fines.
Significance: International momentum is now very clearly gearing up for tightened sanctions sometime relatively soon, with increasing numbers of fuel traders severing their business ties—on the fuel sales side, not necessarily the crude buying side—with the Islamic Republic. With the threat of international problems for companies dealing with Iran growing further, and the threat of tighter unilateral U.S. sanctions also rising, the benefit of selling fuel to Iran at high premiums looks likely to be cancelled out for all but perhaps some Chinese traders, or more likely small boutique outfits that deal with only a few clients and providers. Iran is increasingly having to pay a lot more for its fuel than others, with Reuters reporting that recent contracts have quoted prices of the Middle East Naphtha price plus US$90–100/b, or about 10–15% above January and February prices.

Iraq Steps Up Efforts to Audit Oil Flows with UN Help

The Iraqi Oil Ministry has presented the UN with a plan to install a complete system of oil metering and auditing tools and institutions which, it is hoped, will enable closer assessment of government revenues from its oil exports and identify misappropriations of either crude and refined products, or the funds derived from their export. Its installation would allow the UN Security Council (UNSC) to scrap the UN-controlled Iraq Development Fund (IDF) framework, which currently receives all Iraqi oil export revenues before releasing them to the government. This framework was set up by the UNSC immediately following the 2003 U.S.-led invasion to internationalise the control over Iraq’s oil revenues and dispel allegations that the invasion was fuelled by a wish to gain access to Iraq’s oil export earnings. The International Advisory and Monitoring Board—which has served as the fund’s auditing and oversight body—would also be closed down, according to Bloomberg, which quoted UN Secretary-General Ban Ki-moon as saying that "the action plan and timeline as presented by the government of Iraq is realistic".
Significance: The lack of a comprehensive and stand-alone metering system at Iraq’s oil production chain has been a longstanding problem, allowing large crude- and refined products-smuggling operations to develop, whose substantial revenues have sustained many political militias—particularly in the prolific south—during the years of high instability and weak government control after the invasion. Fighting the last remaining vestiges of oil smuggling and corruption throughout the Iraqi oil industry is therefore closely related to the country's efforts to improve its security, as well as government control of its oil operations. It is of course also important in allowing Iraq to shed the last vestiges of international control and checks over its sovereignty. Installing a thorough metering system has been politically difficult given the vested interests among certain political forces benefiting from the corruption, so the fact that this might now happen shows in itself that the overall situation in Iraq is improving.

Saudi Arabia Flags Up Further Increased Crude Use in Domestic Power Generation

Saudi Arabia will continue to increase its use of crude as feedstock in its power generation, Salah al-Awaji, the kingdom’s deputy electricity minister, told Reuters on the sidelines of an Asian power conference, estimating that the kingdom’s total feedstock use will rise from 1.5 million boe/d last year to 2.5 million boe/d in 2020 on the back of spiralling domestic power demand. "It depends on national policy, but that's our intention to increase the use of crude oil," al-Awaji (who is also chairman of the Saudi Electricity Company, SEC), told the news agency, confirming SEC expectations that domestic electricity demand will require an expansion of the power generating capacity from 46,000MW now to 67,000MW by 2020. Reuters also said that he put Saudi current power demand at about 30,000MW during the low- demand winter season and 41,000MW during the peak summer season last year, expecting this year’s demand to peak at around 44,000MW. Using more crude in its generation operations allows the kingdom to continue producing oil at some of the projects—both greenfield and producing oilfield expansion—brought onstream in recent years, so as not to lose reservoir pressure, despite current global demand leading to OPEC quotas being significantly lower than its members’ production capacity.
Significance: Saudi power demand growth is causing the kingdom significant long-term problems. The redirection of less efficient and more polluting crude to its power plants might work as an interim solution but will eat into its spare production capacity cushion when global demand starts rebounding seriously. A failure to find significant new gas reserves and a need to utilise more gas as feedstock for the petrochemical industry, which is being expanded as part of the kingdom’s job-creating industrialisation programme, leaves it little option, however, as power demand—fuelled by highly subsidised utility prices—continues to spiral, while more and more power plants have to be converted back to oil use after the country's power generation feedstock mix was almost virtually purged of crude a decade ago.

Ends --