Majid Safdari, commercial director at Tehrans Vista Energie, provided an overview of the impact of Irans reentry into global markets in presentations at the ICIS Middle Eastern Base Oils & Lubricants Conference last October in Dubai and at the ICIS World Base Oils & Lubricants Conference in London in February. He reviewed the effects on global markets, as well as Irans domestic market and those of neighboring countries.

Global Impacts

The removal of sanctions will have an immediate impact on world oil prices and bilateral trade, Safdari said. In 2011, Iran exported about 3 million barrels of crude oil per day. After the sanctions were imposed, exports dropped to about 1.9 million b/d by January 2012.

In July of that year, the European Union imposed a boycott on Iranian oil imports, with the result that exports dropped to 900,000 b/d. After exemptions were permitted for some Asian buyers in December 2012, exports rebounded slightly to 1.5 million b/d and remain at about that level.

Vista modeled the effect of the removal of sanctions on world oil prices. Safdari noted that Iran has about 40 million barrels of oil stockpiled on the Persian Gulf. It will take about three months for all this oil to be offered to the market, he said, and it takes about 8 to 12 months to increase export capacity to pre-sanction levels.

Vista simulated a multicountry, multisector computable general equilibrium and assumed no intervention by OPEC. The result projected a significant drop in oil prices. However, the impact has been clouded by the fact that OPEC has since adopted a policy to freeze production to prop up prices, but Iran has made it clear it wants to recapture market share lost during years of sanctions. In March, Iran announced that it expects to raise its exports to around 1.65 million b/d on the back of higher crude shipments to Europe.

The drop in oil prices will have both positive and negative impacts on the market. First of all, oil importers in the United States, Europe, China and India will enjoy the drop, Safdari related. Major petrochemical companies in Russia, Europe and some Middle Eastern countries also will benefit. The major beneficiary will be Irans oil companies because increased sales, even at the lower prices, will boost income.

On the other hand, Vista predicted that lower oil prices will have a negative impact on oil exporters in Saudi Arabia, Libya and Russia. The major negative impact will be felt by shale oil producers in the U.S., Canada other countries, Safdari said.

Safdari then compared Irans top export partners before and after the sanctions. In 2000, Japan, Korea, Italy and China accounted for more than 60 percent of Irans export market. In 2014, with the sanctions in full force, Iran adopted the policy of looking to the East, targeting China, India and Turkey to increase exports.

Also, in 2000, about one-third of Irans imports came from Europe. After the sanctions, imports from Europe dropped sharply to under 10%, and the United Arab Emirates and China became the dominant sources of imports. Safdari noted that even though the U.A.E. is not a major manufacturer of products, a large volume of trade with Iran was routed through that country. He then showed which countries would gain the most in exports to and imports from Iran once sanctions are removed completely.

Vista then used a trade model to determine what Iran would potentially gain in export revenue once sanctions are removed and determined the country stands to earn U.S. $15 billion annually. The World Bank estimates that gross domestic product will grow by about 5 percent in 2016 and 2017, while foreign direct investment will increase to nearly U.S. $3.5 billion in 2017.

Prior to 2012, foreign direct investment amounted to U.S. $4 billion per year, of which 50 percent was directed to the oil and gas sector, Safdari related. Investments dropped to zero in 2012, blocking access to modern technology and information.

China and Russia resumed investing directly or indirectly in some oil projects during 2015, he said. Most of investment in the future is estimated to target the oil and energy sectors, followed by automobile and pharmaceutical manufacturing.

Lubricants Industry

Safdari started his discussion of Irans lubricants market by outlining its key elements. First, the market has a limited number of players, which has been exacerbated by the fact that many major companies left the market due to the sanctions.

Second, Iran produces a high volume of API Group I base oil, amounting to almost twice the countrys demand. Monograde engine oils dominate about 60 percent of the automotive market. In addition, the sanctions greatly weakened the industrial segment, with significant effects on the demand for industrial lubricants.

Iran has the lowest fuel quality in the region, Safdari said. Iranian diesel has a sulfur content of about 5,000 parts per million.

The state owns most of the companies in Irans lubricants market. International companies have a very weak presence. Also, lubricant distribution channels are totally independent of the manufacturers.

Most vehicles on the roads are equipped with outdated engine technology, dating back by about 10 to 15 years. Auto manufacturing has been in severe decline due to the sanctions but is estimated to recover soon, Safdari related.

Presently, Irans lubricants market amounts to 605,000 metric tons and is dominated by the automotive sector (68 percent), with the industrial sector accounting for 24 percent, followed by driveline fluids (5 percent) and grease (3 percent). More than 90 percent of the market is dominated by four companies: Behran (44 percent), Iranol (24 percent), Pars (13 percent) and Sepahan (11 percent).

Safdari showed that before the sanctions, the market share of independent and international brands was about 15 percent. After the sanctions, the share held by these companies fell to 8 percent. Group I base oils have about 90 percent of the total, followed by Group II (6.4 percent) and Group III (2.6 percent). Synthetics hold a minuscule portion of the market.

In engine oils, diesel holds a 49 percent market share, passenger car 29 percent, compressed natural gas and dual-fuel 11 percent, and motorcycle oils 8 percent, Safdari noted. Mongrades account for 63 percent of the market, SAE 20W-XX and 15W-XX hold 31 percent while 10W-XX and 5W-XX total 5 percent.

Industrial Development

In reviewing the main areas of post-sanctions development in Iran, Safdari identified the automobile, oil industry and manufacturing sectors as major beneficiaries.

After the oil sector, the auto industry has the most potential to benefit from post-sanctions development, he said. First, Vista foresees a major rebound in auto production to 1.65 million vehicles per year from the 2013 low of 750,000 vehicles. This should greatly increase domestic consumption of automotive lubricants.

In addition, European, Japanese and U.S. car manufacturers are expected to enter joint ventures with local automakers, resulting in the introduction of new car models. This, in turn, will drive demand for higher quality engine oils, Safdari said.

The introduction of modern engine technology will lead to a demand for enhanced fuel quality standards, which will also drive demand for higher performance oils. The overall effect of developments in the auto industry will be to increase brand awareness and accessibility to better oils. Competition among brands should also increase.

As noted above, the lifting of sanctions will stimulate a major rebound in oil production, which will also impact Irans manufacturing industry. Increased oil production will drive economic growth and increase the purchasing power of the average Iranian, Safdari related. Also, the modernization of local refineries will enhance fuel quality, increasing demand for improved engine oil quality.

Finally, Vista expects development of the automotive and oil industries to increase demand for industrial oils by 3 to 5 percent.

Safdari said that only four of Irans refineries could potentially be upgraded to produce Group II or III base oils. Tabriz and Bandar Abbas refineries have the highest potential to be upgraded because they had started planning upgrades prior to sanctions being imposed, he explained. Other refineries with potential to upgrade to Group II and III output are Abadan and Isfahan.

Tabriz and Bandar Abbas benefit from easier access to international markets. Tabriz is located close to Turkey and has access to some CIS countries. Bandar Abbas is on the Persian Gulf with access to established marine shipping routes.

According to Vista, Irans location gives it the potential to be a regional hub for lubricant production, catering to markets such as East Africa, Afghanistan, Iraq and the CIS.

Retail & Distribution

Safdari related that Irans retail sector has already started to become modernized, branded and integrated. Investment in fuel and service stations and auto dealerships will lead consumers to develop brand awareness and expect a certain level of quality.

In addition, the marine lubricants segment and bunkering are expected to grow in commercial ports to take advantage of the expected increase in shipping.

Markets that will feel the greatest impact of this rejuvenation of Irans industries are presently acting as re-export destinations for Iranian commodities. Of these, the U.A.E. is expected to be hit the hardest, Safdari said. For example, Vista expects about 30 percent of products exported to U.A.E. and then re-exported from that country will be exported directly to the destination countries.

Export to South Asia and China will increase 10 to 15 percent while exports to India will increase by 30 percent. Exports to Europe and Africa will increase to a lesser degree, comprising mostly process oils to Europe and paraffin wax and lube oils to Africa.

Additive imports from U.A.E. also will be hit hard, with about 35 percent of the volume being imported directly from Europe, Singapore and India. And about 70 percent of Group III base oils presently imported from U.A.E. will shift to Asian suppliers.