Offering oil at IRENEX, challenges and merits

Tehran Times – Since the U.S.’s withdrew from Iran’s nuclear pact in May 2018, vowing to drive Iran’s oil exports down to zero, the Islamic Republic has been taking various measures to counter U.S. actions and to keep its oil exports levels as high as possible.

One of the main strategies that Iran chose to execute to help its oil exports afloat has been trying new ways to diversify the mechanism of oil sales, one of which is offering oil at the country’s stock market.

Since the first offering of crude oil at Iran Energy Exchange (IRENEX), it has not been very successful in attracting traders and during its total five offerings not more than 1.2 million barrels were sold. This has made some energy experts to believe that this whole strategy is doomed to fail since the necessary planning and infrastructure has not been provided.

In this article I will consider some of the pros and cons of the issue and will explore some of the reasons for IRENEX’s poor performance and also shed some light on the challenges that the Islamic Republic is facing in executing this new approach. This way we will hopefully be able to create a clearer picture of this controversial subject.

The background

The issue of offering oil at the stock exchange is considered a relatively new affair in the Iranian oil industry. Currently (by the time of writing this article), National Iranian Oil Company (NIOC) has only offered crude oil at Iran Energy Exchange (IRENEX) for five consecutive times.

However, oil offering in the stock market of Iran is not quite a new subject. The issue dates back to the Iranian calendar year of 1379 (March 2000-March 2001) since which it has surfaced several times but was never materialized until 2011.

Oil was first offered at the stock market in summer and fall of 2011, during which seven crude cargos with different volumes were offered but only one deal was made at the time, in other words, only nine percent of the total offered barrels were sold.

Following this not-so-desirable kick off, after a short while, crude offerings at the stock exchange were stopped and the reason was announced to be “lack of demand”. However according to the Majlis Research Center, the main reason for the failure of the crude sales at the stock market was in fact the provider’s reluctance to sell not lack of demand. The very strict criteria which the buyers had to meet created a barrier that led to the project to fail in a very short time span. Lack of necessary infrastructure in the stock exchange was also mentioned as a contributor to this issue.

The subject once again went hibernate up until May 2018 when the U.S.’s withdrew from Iran’s nuclear deal and re-imposed sanctions against Iranian economy. The issue came again into the spotlight as an approach to counter the new round of sanctions.

NIOC offered crude oil at IRENEX first on October 28, just few days before new U.S. sanctions on Iran’s petroleum sector took effect (November 4). In the first round, NIOC could sell some 280,000 barrels of crude oil at $74.85 per barrel. With the daily supply amount of one million barrels, the market wrapped up by selling eight 35,000-barrel-cargos of oil on the day.

The second round was on November 11 for offering 700,000 barrels of light crude oil at the price of $76.29 per barrel. NIOC offered one million barrels of light crude oil at IRENEX for the third time on January 21.

The third round witnessed some advantages compared to the first and second rounds to facilitate purchase process for the applicants. The fourth round of offering took place on February 4, when one million barrels of light crude oil was offered at the base price of $56.24 per barrel and the least amount of sale was 35,000 barrels. This round ended with no deals. Then on February 18, NIOC sold 35,000 barrels of light crude oil at IRENEX at the base price of $52.25 per barrel for the fifth time.

The advantages

Beside the fact that offering oil in the stock market will lift some of the burden that Iran’s oil industry is facing due to the U.S. sanctions, and let the country’s strong and capable private sector to have a part in the battle against the embargo, it has its own economical merits for the involving parties as well.

One of the main advantages of the stock exchange is that it provides a transparent and low-risk environment for the buyers and in return, countering U.S. sanctions, NIOC could keep its oil exports afloat and increase Iranian oil customers both domestically and internationally.

The private sector enjoys a more diverse market and is more clientele-oriented than the public sector so it is more capable in circumventing the oil-related sanctions. This means that small private companies can sell oil through foreign intermediaries in a wide range of industries and areas.

Also it should not be forgotten that the stock exchange provides a more competitive atmosphere for customers which consequently leads to the oil price to increases to its highest possible level regardless of the global prices.

The challenges and some solutions

Since establishment of IRENEX, which is considered as a turning point in Iran’s strategic oil industry and capital market, it has been facing a great deal of challenges. With all said about the advantages, the implementation of this new approach has not been without problems.

The first and the most important challenge that Iran is faced in executing its new strategic move is the impact of U.S. sanctions on the country’s banking system and its shipping lines, since there will be foreign customers at IRENEX and since the purchased oil has to ultimately be transported from the agreed oil terminals via oil tankers to different destination across the world.

Even though part of the payment in the deals are made in rials, in case of big cargos the money transfer could be a big problem. According to Amirhossein Tabianian who is an energy expert and NIOC’s representative at IRENEX, “sometimes the time needed for money transfers exceeds the time limit set by the brokers and that is a big problem.”

Another issue which is hindering the success of this project is the restrict criteria and payment conditions that NIOC needs the buyers to meet in order to participate in the oil trades.

Oil prices at IRENEX are set by NIOC each month instead of being controlled by international conditions and demand and this could be a significant threat for the trader’s investment. For instance, on the first day of IRENEX, the base price ($79.15 per barrel) was set higher that Brent prices at the time. And despite some discounts which were applied to modify this high price, the buyers didn’t make a remarkable profit and resulted in IRNEX making a very bad first impression.

According to NIOC, the payment mechanism in IRENEX Bidders have to initially pay 10 percent of the value of the contract in cash and in case their bidding is accepted they must pay another 10 percent also in cash before loading the purchased cargos. They pay the rest in allowed hard currencies including dollar, yuan, dirham and euro, after loading the cargos.

Considering the fact that IRNEX has been primarily created to foil U.S. sanctions’ impact on Iran’s oil exports, NIOC should ease some of these payment conditions and to make some amendments in cargos’ transportation and insurance costs, as well to encourage the domestic traders for participation.

Finally, IRENEX currently does not have a clear mechanism for cushioning the risk impacts for the involved parties and it merely carries out the task of clearing funds and monitoring brokers. Therefore, the IRENEX’s role as a powerful mediator instead of a sole supervisor could play a significant role in assuring the customers and increasing the level of trust in this newly implemented capital market.

With all that said, we should not forget that IRENEX is a relatively new experience for Iran’s oil industry. An industry which has followed its traditional ways for many years. Despite all its recent unsuccessful attempts, the increase in the number of bidders in the recent offerings is an indicator that IRENEX could reach its expected goals in time.

What is important is to be consistent and sustainable and to create an atmosphere of trust for both Iranian and foreign customers in which they dare to test these new waters. A path which is clearly taken by NIOC as Iranian Oil Minister Bijan Namdar Zanganeh told Islamic Consultative Assembly News Agency (ICANA) last week that [despite all its ups and downs] National Iranian Oil Company (NIOC) will continue offering crude oil at IRENEX every week.