Iran's downstream braces for the challenge
Iran’s downstream sector is almost as important for the country’s economic and strategic goals as the headline-hogging upstream
The Iranian downstream energy industry faces many of the same problems as its upstream counterpart - a lack of finance and foreign investment, and difficulty in accessing equipment and technology, largely but not entirely because of sanctions.
The country's five-year energy plan post-sanctions involved spending about $70bn in petrochemicals and $14bn in refinery upgrades. The petrochemicals strategy is focused largely on making the most of Iran's giant, low-cost production of gas and associated natural gas liquids (NGLs) production. Iran's refining sector development has three key, related aims—to increase the output of lighter products; to minimise the yield of low-value fuel oil; and to eliminate the need for gasoline imports.
The massive condensate output expansion through the development of the South Pars gas field gave Iran greater opportunity to meet these objectives. It promoted two condensate splitter projects, Persian Gulf Star at Bandar Abbas and the private sector-financed $2.4bn, 480,000bl/d Siraf unit, north of Asaluyeh. The third phase of Persian Gulf Star should be in full operation by the end of the current Iranian year in March 2019, bringing total capacity to 360,000bl/d. In contrast, Siraf has so far struggled to get off the ground.
Iran also planned to refurbish its existing, ageing refineries, and to build several new conventional facilities. But some of the greenfield projects, such as the private-sector Yasouj plant in the Zagros mountains, had doubtful commercial rationales, and even the more realistic plans have advanced very little in the face of financing constraints.
The proposed capacity additions would have made Iran an exporter of about 1mn bl/d of products by 2025; gross exports currently hover around 250,000bl/d. But the primary goal is to meet domestic demand, the largest in the Middle East after Saudi Arabia. With consumption about 1.8mn bl/d of crude and NGLs, refining capacity is about 2.1mn bl/d.
As Fig1. shows, Iran has enjoyed some success. US sanctions on gasoline exports to Iran exposed a vulnerability, and the 2010 fuel subsidy reform, combined with investments in refining, was designed to overcome this Achilles' heel. Iran ceased importing gasoline for a while but imports then steadily grew again during 2013-17. The start-up of Persian Gulf Star has cut imports back almost to zero. Iran has also become a net exporter of diesel.
Fuel oil exports have continued to grow, particularly as greater availability of domestic gas has reduced Iran's power sector demand. But tighter enforcement of sanctions will make it harder to sell bunker fuel to ships in the UAE port of Fujairah. The planned refinery upgrades at Abadan, Tabriz, Esfahan and Shiraz would help towards the target of cutting fuel oil to less than 10% of total refining output by 2025.
Expansion of petrochemicals has been a key strategic aim. The intention has been to use outputs from South Pars and other gas fields, particularly the greatly expanded supply of ethane, to expand mostly basic industries in ethylene, ethylene glycol, propylene, aromatics, styrene, PVC, methanol, methanol-to-olefins, urea/ammonia, acrylonitrile and ethoxylates. Iran has a strategic advantage because of its low-cost feedstock, while most of its neighbours have now fully allocated their legacy cheap gas. A large-scale petrochemicals expansion would diversify the economy and export mix, and generate some, if not a great deal of, new jobs and technical capabilities. Although some production would be destined for domestic industries such as auto-making, most would be targeted at the Asian export market.
Most of Iran's current petrochemical capacity is concentrated at Asaluyeh, the onshore focus for South Pars gas, with a 22.5mn t/yr capacity, and Mahshahr, at the head of the Persian Gulf, with 19.5mn t/yr. But it is seeking to expand to other hubs, with one priority being the sparsely populated Mokran region on the southern coast, in particular the strategic port of Chabahar. The west ethylene pipeline (WEP), which delivers feedstock to plants in the underdeveloped regions of western Iran, could also become an export hub once enough capacity is built on to outstrip domestic demand, according to state-controlled news agency Irna. Iraq and Turkey are specific target markets.
The aim is to expand the petrochemicals sector as a whole to a capacity of 130mn t/yr within five years, at a cost of $70bn, including projects such as Kaveh, which would be the world's largest methanol plant, and Pardis, the biggest urea plant.
But the strategy has been beset by excessive licence allocation, particularly under the Ahmadinejad administration (2005-13)—with a mix of private companies, some owned by state pension funds, and the National Petroleum Company, competing for finance, managerial and engineering talent and feedstock. Sanctions have hampered procurement and many of the projects are years behind schedule. The Parsian oil and gas company, linked to the heavily-sanctioned Revolutionary Guards, holds about $10bn of petrochemical assets. Existing plants run below capacity because of problems obtaining catalysts and episodic interruptions to gas supply during high domestic demand periods.
In Iran's Gulf Cooperation Council (GCC) neighbours, Saudi Aramco, Kuwait's KPC and the UAE's Adnoc have diversification into petrochemicals, at home and overseas, as core elements of their strategic energy plans. In contrast, Iran's planning has not integrated its refineries with petrochemicals, nor is there a clear strategy linked to its national oil and gas companies. Its diverse landscape of petrochemical investors includes firms such as Kaveh Glass, which has gone outside its usual business to move into methanol. While this may offer greater robustness and resilience to sanctions, strategic industry coordination is much harder.
As in the upstream, Iran sought to attract international investment into its downstream sector during the joint comprehensive plan of action (JCPOA) era. Korean firms were particularly prominent in refining deals, planning about $19bn of expenditure. The most advanced project was SK's $1.9bn upgrade of the Tabriz refinery; the largest, its preliminary agreement for the $10bn Hormuz heavy oil refinery to be built at Jask. Hyundai and Daelim, along with Japan's Chiyoda, intended to work on the Siraf splitter, but now look likely to withdraw.
Hyundai, Total, Shell and German chemicals giant BASF were interested in various petrochemicals projects, but are also now, to all intents and purposes, ruled out. Denmark's Haldor Topsoe, one of the world's leading providers of catalysts and petrochemical equipment, ceased activities in the country as of November. Iran is now trying to produce its own catalysts.
As buyer and investor, China will again be key, with Sinopec having signed for a $1.3bn upgrade of the ageing, war-damaged Abadan refinery, once the world's largest. After the apparent withdrawal of SK from the Tabriz project, Chinese and Russian companies have entered negotiations.
Petrochemical exports fall under the ambit of the re-imposed US sanctions. China will probably continue to be a major customer, but shipping may be a problem, given Iranian companies' preference to sell free-on-board (FOB) and the potential increased complexity under sanctions in using the UAE for transhipment.
Iran's strategic vulnerability in refining has been partly addressed, but an outdated product slate remains. The priority in petrochemicals, to finish a long backlog of half-built plants, will advance haltingly. Past downstream investment has given some resilience to sanctions, but, as in the upstream, US barriers will hamper Iranian ability to make the most of its resources and challenge its neighbours in scale and technology.
Robin M. Mills is CEO of Qamar Energy, and author of The Myth of the Oil Crisis