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Simon Watkins

Simon Watkins

Simon Watkins is a former senior FX trader and salesman, financial journalist, and best-selling author. He was Head of Forex Institutional Sales and Trading for…

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The Crucial Oil Pipeline That Could Help Iran Skirt Sanctions

Construction is now fully under way of Iran’s game-changing oil pipeline that will be able to transport huge quantities of oil and petrochemicals from its major oil fields via Guriyeh in the Shoaybiyeh-ye Gharbi Rural District of Khuzestan Province 1100 kilometres to the port of Jask in Hormozgan province on the Gulf of Oman. This 42-inch pipeline is absolutely crucial to Iran’s ability to continue to circumvent U.S.-led sanctions against it and to consolidate its burgeoning customer base in Asia.

Vitally in all respects, the Guriyeh-Jask pipeline will allow Iran to freely ship at least 1 million barrels per day (bpd) of its own crude oil anywhere in the world (with a continued focus on China initially) whilst at the same time if necessary being able to disrupt all other oil supplies that transit through the Strait of Hormuz (around 35 per cent of the world’s total).

According to reports last week from the National Iranian Oil Company (NIOC) and the Petroleum Engineering and Development Company (PEDEC), the development of the Guriyeh-Jask pipeline project is proceeding uninterrupted and Iran’s capacity to produce the required pipeline slices and related equipment has more than doubled in the last few months. Given this, the NIOC also announced that the pipeline will be up and running at least in considerable part by the end of this Iranian calendar year that ends on 20 March 2021.

According to a senior oil and gas industry source who works closely with Iran’s Petroleum Ministry spoken to by OilPrice.com last week, testing of various elements of the pipeline will in fact begin relatively shortly and completion of the basic structure that will allow for some oil flows will be in place well before the official target date.

“The logistical model Iran has at present is not sustainable in the current circumstances, with around 90 per cent of all of its oil for export currently loaded at Kharg Island – with most of the remaining loads going through terminals on Lavan and Sirri - making it an obvious and easy target for the U.S. and its proxies to cripple Iran’s oil sector and therefore its economy,” he told OilPrice.com. “Conversely, Iran wants to be able to use the threat – or reality – of closing the Strait of Hormuz for political reasons without also completing destroying its own oil exports revenue stream,” he said. Related: OPEC’s Second Largest Oil Producer Isn’t Complying With Output Cuts

“Even before U.S. sanctions were re-imposed in [May] 2018, the Kharg terminal was not ideal for use by tankers as the narrowness of the Strait of Hormuz means that they have to travel extremely slowly through it, meaning that the transit cost increases, there are delays in revenue streams, and they are easy targets for even simple attacks,” he added.

In the first instance, the oil to be pumped from Guriyeh will be drawn from the cluster of resource-rich oil fields in the West Karoun area, including the supergiant fields of North Azadegan, South Azadegan, North Yaran, South Yaran, and Yadavaran. These fields in particular are the current focus of Iran’s programme to increase the mean average rate of recovery from its key oil sites from around 4 per cent at present to at least 12 per cent within the next two years. According to the Iran source, every incremental barrel increase is being sought as, for every one per cent that the rate of recovery from West Karoun is increased the recoverable reserves increase by 670 million barrels.

Such an increase is entirely reasonable to project, given that the lifting cost per barrel of crude oil in Iran is at the same world-low level as in Saudi Arabia (US$1-2) – implying the same ease of extraction – and Saudi Arabia’s mean average rate of recovery across its fields is at minimum 50 per cent. Saudi, moreover, is looking to increase this to 75 per cent within the next couple of years. In addition, Jask will also be used to move crude oil feedstock supply to petro-refineries and petrochemical plants, with a view to increasing these exports as well to Asia.

Once the oil is in Jask it will be stored in any of the 20 storage tanks each capable of storing 500,000 barrels of oil, in the first phase (totalling 10 million barrels) for later loading on to very large crude carriers (VLCCs) headed from the Gulf of Oman and into the Arabian Sea and then to the Indian Ocean. The second phase will see an expansion to an overall storage capacity of 30 million barrels, said the Iran source. These VLCCs will be accommodated in shipping facilities costing around US$200 million in the first phase, although the plans are to expand capacity to allow for further regular shipping of various oil-adjunct and petrochemical products in particular demand in Asia.

In addition, according to a comment last week from Hossein Azimi, director of the Pars Oil and Gas Company (POGC) that oversees developments at Iran’s supergiant non-associated natural gas field, South Pars, a single point mooring (SPM) loading system with a capacity of 7,000 square metres per hour of loading capacity recently arrived in Assaluyeh, southern Iran, which would augment gas condensate loading capacity of the field. This SPM will allow for the handling of liquid cargo, such as petroleum products, for tanker ships. Related: Why Russia Finally Accepted Deeper Oil Output Cuts

“There will be a few more of these installed in the south, in the Gulf of Oman, in the coming months, as they are very useful in areas where a dedicated facility for loading or unloading liquid cargo is not available,” the Iran source told OilPrice.com. These SPMs will operate in a similar manner to those of Iran’s neighbour, Iraq, in that they will be located many kilometres away from the onshore facilities, connected to them by a series of sub-sea pipelines, and able to handle the biggest of VLCCs. According to Azimi this first SPM will be completed by September of this year.

Having huge oil storage capacity available just a short direct sea journey away from India means that pressure from India and Pakistan is likely to result in the final go-ahead for the construction of the Iran-India oil and gas pipeline or the Iran-Pakistan-India pipeline. “This would necessitate the stationing of Iranian security personnel – that is, IRGC – on Indian soil or on Pakistani and Indian soil, which is of considerable strategic interest for the IRGC,” said the Iran source. “It also means that Iran can send oil supplies – and anything else it wants in the tankers – to the Houthi faction in Yemen to keep a constant threat to the Saudi southern flank, and also to militia groupings in Somalia and Kenya,” he underlined.

By Simon Watkins for Oilprice.com

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  • Mamdouh Salameh on May 07 2020 said:
    This is no more than a rehash of an old topic dealt with previously by the author and other contributors to the oilprice.com but with a few more errors.

    The first is the claim that the Guriyeh-Jask pipeline enables Iran to continue to circumvent U.S.-led sanctions against it. US sanctions don’t stop Iran shipping its oil across the Strait of Hormuz because to do so would force Iran to close the Strait against all other oil shipments from neighbouring countries. The pipeline gives Iran the option of blocking oil shipments through the Strait without affecting its own.

    The second error is that Saudi lifting costs per barrel is $2.8 and not $1-$2 as the author claimed and this could only increase with the virtual depletion of Saudi giant oilfields and the need to inject billions of barrels of water to get the remaining oil.

    The third error is that Saudi oil recovery factor (RF) never ever reached 50% given that the overwhelming majority of Saudi crude oil comes from five aging oil fields more than 70 years old and depleting fast. Saudi RF even with the most advanced technologies could only range from 20%-23% compared with a global RF average of 34%-35%.

    Dr Mamdouh G Salameh
    International Oil Economist
    Visiting Professor of Energy Economics at ESCP Europe Business School, London

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