24/10/04
Mideast crisis puts Iran’s energy facilities at risk
Dubai, 4 October (Argus) — Iran's large-scale missile attack against Israel on 1
October pushed the Mideast Gulf region another step closer to all-out war, with
Israel vowing to retaliate hard for what it saw as "a severe and dangerous
escalation." But unlike previous exchanges, which have largely targeted military
assets, critical energy infrastructure including oil facilities appear this time
to be in Israel's crosshairs. President Joe Biden on 3 October said the US and
Israel are discussing possible strikes on Iranian oil facilities as part of
consultations on a response. The Biden administration would not provide any
details and the only objection it has voiced publicly is against the prospect of
an Israeli strike on sites associated with Iran's nuclear programme. The
escalating conflict in the region, which began with a surprise cross-border
attack by Gaza-based Hamas militants on Israel almost one year ago, has had a
limited impact on oil prices, because the effect on physical supply has been
almost non-existent despite the scale of the fighting and destruction in Gaza,
northern Israel and southern Lebanon. Attacks by Iran-backed Houthi militants in
Yemen on oil tankers in the Red Sea rerouted some oil trade without affecting
global supply. That could change if Israel makes good on its threat to directly
target Iranian oil infrastructure and, especially, if Iran retaliates — as it
did in 2019 to a US attempt to cut off its exports — with indiscriminate attacks
on oil tankers and infrastructure in the Mideast Gulf. But the extent of the
effect on global supply and price will ultimately depend on Israel's intentions,
and what kind of facilities are hit. "If the objective is to hurt the country
economically, then the most obvious target would be Iran's oil export
terminals," said Vortexa senior oil risk analyst Armen Azizian. Despite US
sanctions, Iran continues to be a major crude producer — the third biggest in
Opec — and a notable exporter. Oil exports averaged around 1.55mn-1.6mn b/d in
the first half of this year, rising to 1.65mn-1.7mn b/d in July-August. Early
indications suggest September exports were higher still. Iran has several
terminals from where it exports its crude and condensate, all on its Mideast
Gulf coast. But one, on Kharg Island, dwarves all others in terms of importance.
"About 90-95pc of Iran's oil exports typically come out of Kharg, with the other
5-10pc coming out of considerably smaller terminals, such as Soroush, Sirri or
Lavan," Azizian said. "Hitting one of those smaller streams wouldn't impact Iran
too much, operationally. But if they decide to take Kharg offline, we're talking
about a hit of around 1.5mn b/d to its export capacity." Knock-on effects When
Iran was struggling to sell its oil because of sanctions the US imposed in 2018,
it had upwards of 60mn-70mn bl in floating storage. But these have fallen to
just shy of 40mn bl, which would only sustain exports of about 1.3mn b/d for a
month, Azizian noted. Iran has onshore storage, but many of the biggest tanks
are at Kharg, which could be at risk of damage should the terminal be targeted.
An attack on Kharg Island would strike at the heart of the Iranian economy,
given how big a chunk of Iran's foreign exchange revenues come from the sale of
its oil. Nearly all Iran's exports are absorbed by refiners in China's Shandong
province. But the effect of potentially removing 1.5mn b/d from global supply
would be felt far beyond Iran and China, as global markets would be forced to
adapt. Crude futures moved higher this week on the prospect of Israeli strikes
against Iran. The Biden administration for the past year has worked to keep the
conflict from escalating, in part because of the potential knock-on effects on
oil prices — a key consideration in the US election campaign where Biden's
vice-president, Kamala Harris, is facing former president Donald Trump. If the
confrontation results in an Iranian outage, avoiding a price rise would require
a co-ordinated move by the US and other large consumers and, possibly, by the
wider Opec+ group, to ensure supplies can be brought to the market. Opec+ is
holding back close to 6mn b/d of production under a series of formal and
voluntary cuts, which it could bring back sooner than currently planned. But
doing so in response to an attack on Iran could stoke tensions within Opec and
between Iran and its Mideast Gulf Arab neighbours, which improved relations with
Tehran in recent years. The US would be hard pressed to again guarantee the
security of key oil infrastructure facilities across the region. The tepid
initial US response to a 2019 attack on Saudi state-controlled Aramco's Abqaiq
complex and to a 2022 attack on UAE energy facilities prompted regional
producers to consider Washington's military security guarantee as falling short.
Kpler senior oil analyst Homayoun Falakshahi sees the the probability of an
attack on Kharg Island as low, given China's relations with Israel and Iran. "I
imagine China will put as much pressure on Israel not to target Iran's exports,"
Falakshahi said. Refining plans Alternatively, Israel could opt to target one or
more of Iran's 10 oil refineries or condensate splitters that are largely
concentrated in the west of the country. Discussion at an industry conference in
Fujairah this week about a possible Israeli retaliation centred on Iran's
largest refinery, the recently expanded 630,000 b/d capacity Abadan in Khuzestan
province. Targeting Abadan was seen as a less provocative move, while still
providing a warning to Tehran that energy installations are ‘in play' and
hitting Iran's domestic products supply. A hit to Abadan would be significant,
but not impossible to navigate for Iran, according to Falakshahi, who notes it
produces mostly fuel oil, a product primarily consumed domestically with some
exported to Fujairah in the UAE, China and Singapore, among other destinations.
Abadan produces other products such as gasoline, which Iran has recently had to
begin importing again to meet demand, but output is only enough to meet around
12-13pc of consumption. "It will primarily impact the local market, but little
else," Falakshahi said. "But not to the same extent as if, say, the 360,000 b/d
Persian Gulf Star condensate splitter was targeted, as that alone delivers
enough to meet around 20-25pc of local gasoline demand." Gasoline is a
politically-sensitive issue in Iran, with even minor changes in the price of the
road fuel sometimes sparking charged demonstrations and riots. More than 200
people were killed in riots in November 2019 triggered by a sudden cut to
subsidies that resulted in a sharp increase in gasoline prices. Israel has so
far not given any public hints as to when it plans to retaliate or how. But with
tensions in the region already at the highest they have been for some years,
Iran will be on high alert, and upping security where it can. A trading source
told Argus that Iran's state-owned NIOC has in recent days moved many of its
empty tankers away from Kharg Island. By Nader Itayim Iran’s oil refineries and
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