Journal of Political Risk, Vol. 4, No. 10, October 2016
By Reza Yeganehshakib, Ph.D.
The oil industry has experienced numerous fluctuations in crude prices during its history. Falling prices in 2014 developed into a historic downturn by 2016, reaching lows that were last seen in the 1990s. As a result, several oil giants were forced to decommission almost two thirds of their rigs, while also dramatically decreasing their investment in the upstream oil industry. Counter-intuitively, the crude shipping industry did not go through the same catastrophic loss as its upstream counterpart. Iran, one of the world’s biggest oil exporters and crude shipping operators, experienced this firsthand. While the country’s oil revenue sharply declined, its crude shipping industry grew. This situation was not without problems, however, as explained herein.
Reza Yeganehshakib holds a Ph.D. in history with a specialization in World and Middle Eastern history at the University of California, Irvine (UCI). He received a B.S. degree in Chemical Engineering from Iran Azad University, and an M.A. in history from UCI, where he serves as a Research Associate at the Samuel Jordan Center for Persian Studies. Dr. Yeganehshakib is a member of the Middle East Studies Association and the International Society for Iranian Studies. He is affiliated with the Persian Language Institute at California State University, Fullerton and was previously affiliated with the National Iranian Oil Company.
After the imposition of sanctions in January 2012 that targeted its shipping business, Iran lost a significant number of crude oil clients in Europe and Asia. The major international supertanker companies stopped loading Iranian merchandise, while the European Union banned insurance coverage for any ship carrying Iranian cargo. The latter action was particularly damaging to Iranian cargo ships and crude tankers. Many customers in Asia and Europe replaced Iranian oil with shipments from Saudi Arabia, Russia, and Iraq. After losing this large portion of its market, Iran used its tanker fleet to store the unsold crude oil and other petroleum products, estimated at 53.7 million barrels before the Iran Deal in July of 2015.
In addition to this loss, Iran suffered substantial damage to its profitable oil transporting business, especially that of the National Iranian Tanker Company (NITC).
Iran Crude Shipping Industry
Established in 1955 as a subsidiary of the National Iranian Oil Company, NITC was privatized in 2001 after a consortium of three pension funds purchased its shares. The sanctions banned NITC from any commercial deal, and blocked its access to the world banking and insurance systems, with the result that the company lost many contracts with its traditional clients in Saudi Arabia, Kuwait, United Arab Emirates, Venezuela, Nigeria, Gabon, and Norway.
Customers came up with various ways to handle the insurance problem. In June 2014, India extended its approval for Indian companies to issue their own coverage to Iranian tankers carrying crude to India.
Japanese companies found a different way to bypass the insurance coverage issue. In early 2014, the low amount of imports allowed Japan to use its own tankers, covered by third party insurance companies, to transport oil. Japan then increased its oil imports from Iran from 56,934 bpd in May 2014 to 177,000 bpd in November 2015. Iran currently supplies 5.6% of Japan’s crude oil. Currently, Japan mostly uses its own tankers, insured by third parties, to transport Iranian oil to Japan. Hoping for a significant increase in Japan’s oil imports in the near future, NITC was considering using its Very Large Crude Carrier (VLCC) fleet for further exports. However, this situation improved after negotiations about nuclear issues between Iran and the world powers took a positive turn in 2013.
Following a partial easing of the sanctions on November 24, 2013, China, India, Japan, and South Korea increased their Iranian oil imports from 961,236 barrels per day (bpd) in June 2013, to 1.2 million barrels per day (Mbpd) in June 2014. Since then, Asian imports of Iranian oil have fluctuated a lot, mostly due to the impossibility of securing insurance coverage for tankers carrying Iranian oil during the banking embargo.
However, with the lifting of international sanctions in January 2016, Iranian tankers can now purchase insurance coverage. Since the Iran Deal in July 2015, it is estimated that Iran has sold a large portion of the oil that was stored in its tankers, in particular to South Korea and China. As of January 2016, it is estimated that NITC is still in possession of around 45 million barrels of crude oil and other petroleum products, stored on tankers in the Persian Gulf. With the end of the embargo NITC has announced a plan to renovate its large but aging fleet, with an eye to increasing exports to Europe and Asia, particularly to China—Iran’s largest oil client.
Although China’s economy slowed in 2015, the country is building crude reserves to take advantage of the difference between cheap crude oil and its refined products, while securing spot prices at the current low levels and guarding against future rebounds. Thanks to this significant demand in Asia, especially in China, the world has witnessed a rise in demand for crude tankers. As a result, the crude tanker business is continuing to do well in the current oil and gas market, where oil prices are less than half of what they were last year. Iran has noticed this opportunity, and has made plans for its tanker fleet business accordingly.
Recently, NITC announced that by operating 42 Very Large Crude Carriers (VLCCs), each of which carries up to 2 million barrels of oil totaling 15.5 million deadweight tonnage (DWT), the company surpassed world giants such as Mitsui-OSK (14.4 DWT), Teekay Group (13.5 DWT), and Euronav (12.1 DWT), and became the world’s largest supertanker fleet in 2016. Shortly after this announcement Iranian media reported on NITC plans to increase capacity an additional 6 million tons by replacing tankers, including building and purchasing 25 new tankers (20 of which are slated to be constructed by China).
However, just last week, Ali-Akbar Safaee, the CEO of NITC, told the media that his company is not in a rush to enlarge its capacity anytime soon. He stated that the current 15.5 million DWT capacity is proportionate to the spot demand of the market, and any sudden increase in tanker supply would adversely impact the profitability of the tanker business. In order to renovate the fleet, NITC has decided to dismantle older ships and use them as a source for spare parts.
In addition to this decision not to oversupply the market, NITC faces a challenge that may prevent the fleet from being fully operational in all corners of the world.
Due to its relative absence from the international tanker business because of years of embargo, and also because it was operating an aged fleet, Iran had to rely almost exclusively on insurance issued by Iranian companies. This is a situation that not all countries approve of, and it may create an issue for the NITC in its quest to enter the mainstream spot markets after the lifting of the sanctions.
Iranian tankers, like all other commercial vessels, are required to obtain approval from an accreditation body that verifies their safety and environmental standards; otherwise, they are not allowed to call at international ports or obtain insurance. Although this is a time-consuming process, and may delay their tankers’ re-entry into the international market, the Iranians fully understand its necessity. In fact, Iran approached Italy’s renowned classification body, RINA, about the situation. On January 19 of this year, RINA announced that they would start classifying Iranian ships in a few weeks, which made it easier for Iranian shipping companies to sign contracts with international companies, particularly those seeking longer term agreements.
In the high-demand season of the first half of 2015, the shipping rates for some of the biggest VLCCs transporting oil to markets in Asia for short-term contracts increased to approximately $100,000 a day. This encouraged NITC to seek short-term agreements. However, although the long-term contracts have an average shipping rate of $58,250 a day, and may not seem as lucrative as short-term ones, NITC should probably focus mostly on long-term ones. The reason is that NITC is currently in the renovation and planning phases, and only long-term contracts that secure a reliable source of income for large fleet owners will allow them to create and develop long-term strategies, which guarantee the profitability of the business in the long run. This is not the only benefit of long-term contracts.
Moreover, if Iran signs more long-term agreements, it can secure future profits in case of any increase in the supply of tankers in the crude shipping business. The annual tanker supply growth in 2015 was about 5%, while during the first two quarters of the year the global tanker market witnessed a significant jump of 2.75 million DWT in total capacity. It’s predicted that tanker supply growth may increase by 9-10% in 2016. This is even after accounting for the percentage of demolitions. According to BIMCO, for crude tankers, the total order in 2015 was 12.4 million DWT, 38% of which are due to be delivered in 2016 and 51% in 2017, in addition to what has already been delivered. The orders include 28 units of Aframax and 19 unites of Suezmax, while there were only 17 orders of VLCCs. Since Iran has the biggest world VLCCs fleet, it should consider this growth as putting pressure on freight rates, while at the same time it can take advantage of the current situation in the tanker construction business, especially in China.
Since 2014, the tanker construction business has experienced lucrative growth, reaching a historic record in 2015 and continuing to rise. World tanker orders increased 14% in 2015, to a total of 424 ships. However, not all the shipbuilders enjoyed the same profit. South Korea kept the number of orders constant, to 32.2 million DWT while Japan gained the benefit of a 3% increase in its orders, reaching 29.9 million DWT. In contrast, Chinese tanker construction companies experienced a 46% loss in the amount of orders, down to 29.2 million DWT. If NITC plans to renovate its tanker fleet, it should take advantage of the current down Chinese market, which gives the Iranian party the upper hand in its negotiations for better pricing and quicker delivery. As mentioned before, however, there should be no rush to increase the crude tanker supply, since it may adversely affect freight rates.
Along with crude tanker construction plans, NITC’s recent negotiations with international shipbuilders show its desire to add LNG carriers to its current 15.5 DWT fleet. Iran has plans to launch its first 10.5-tonne (14 BCM) LNG project, known as Iran LNG, in two years. This is a no less difficult task compared to the crude tanker business, because its profitability is a function of Global LNG demand, particularly in South East and East Asia. NITC, on the one hand, is in need of a $10 billion investment to build its LNG carrier fleet, but on the other hand it should closely watch the current trends in the global LNG market — especially the rise of giant suppliers such as Australia and the United States, in addition to the traditional suppliers like Qatar. But how many LNG carriers does NITC need?
According to Ali Kheirandish, the former managing director of Iran LNG, the estimated travel time for a cargo ship from Iran to Korea and Japan is about 28-30 days, while to South China it is 20 days, and to India it is 10-12 days. If each vessel can load 70,000-75,000 tonnes of LNG every 25 days, they can carry up to 13 cargoes a year. This is equal to 1 million tonnes of LNG a year. Therefore, for Iran LNG’s 10 million tonne capacity, 10 LNG carriers are required. If the buyers provide 3-4 of them, Iran still needs 6-7 LNG carriers. This is the capacity the NITC should plan for, if Iran LNG works in an almost full capacity and can successfully sell all its LNG every year.
In addition, NITC needs to consider security and anti-piracy issues in its long-term planning. In 2015, Iranian on-board security forces and Iranian Navy destroyers neutralized more than 70 piracy attacks, mostly in Bab-el-Mandeb, the Gulf of Aden, and around Somalia. Because of the sensitive nature of such operations, there is no access to the data about these security costs.
While Iran, like the world’s other large oil exporters, has experienced a significant loss in revenues due to the decline in prices since 2014, the country’s shipping business has been able take full advantage of the simultaneous boom in the crude tanker market. As described in this article, there are steps that Iran should take in order to secure the profitability of its crude shipping business in the future.
First, the sanctions should not be allowed to affect future business. The government of the Islamic Republic should take appropriate measures to secure this business from adverse impacts of sanctions if they are re-imposed or intensified in the future.
Second, the process of issuing insurance coverage should remain smooth. This is not possible unless safety and quality control measures are taken seriously, and the Iranian fleets have a valid classification from a trustworthy accreditation body.
Third, in the event of any increase in crude shipping capacity, the priority should be to keep it proportionate to the spot demand of the market.
Fourth, long-term contracts should always have more priority than short-term ones, although they may seem less profitable.
Fifth, since pirates may use more sophisticated methods in the future, the industry should not be stingy about the costs to continually upgrade security.
And finally, as more investment goes toward LNG production in the world, the energy shipping industry should consider investing in new LNG carriers, responding appropriately to the rising demand in the global energy shipping market.
JPR Status: Working Paper.
 Clifford Krauss, “Oil Prices: What’s Behind the Drop? Simple Economics,” New York Times, updated July 27, 2016, accessed: 8/20/16, http://www.nytimes.com/interactive/2016/business/energy-environment/oil-prices.html?_r=0; “Why the Oil Price is Falling?” The Economist, December 8, 2014, accessed: 8/20/2016, http://www.economist.com/blogs/economist-explains/2014/12/economist-explains-4.
 Julian Lee, “Iran’s Oil Boom Fizzles Out,” Bloomberg, June 26, 2016, accessed: 8/20/2016, https://www.bloomberg.com/gadfly/articles/2016-06-26/iran-s-oil-boom-fizzles-out; Keith Walls and Henning Gloystein, “Exclusive: As Iran’s Oil Exports Surge, International Tankers Help Ship its Fuel,” Reuters, June 6, 2016, accessed: 8/20/2016, http://www.reuters.com/article/us-iran-oil-exports-idUSKCN0YR0XU; “Iran Crude Oil Production,” Trading Economics, updated 2016, accessed: 8/20/16, http://www.tradingeconomics.com/iran/crude-oil-production.
 Reza Yeganehshakib, “Iran’s New Generation of Oil and Gas Contracts: Historical Mistrust and the Need for Foreign Investment,” Journal of Political Risk, April 2015, accessed: 7/7/2016, https://www.jpolrisk.com/irans-new-generation-of-oil-and-gas-contracts-historical-mistrust-and-the-need-for-foreign-investment/.
 Javier Blas, “Iranian Oil Goes Back on the Market,” Bloomberg, November 5, 2015, accessed: 7/7/2016, http://www.bloomberg.com/news/articles/2015-11-05/iranian-oil-goes-back-on-the-market.
 Tim Maverick, “Oil Glut Grows: 100 Million Barrels at Sea,” Wall Street Daily, December 3, 2015, accessed: 7/8/2016, http://www.wallstreetdaily.com/2015/12/03/oil-tankers-iran-exports/.
 “bozorgtarin bank-e Japan tabadolat-e mali ba Iran ra az sar gereft,” Mashregh News, February 10, 2016, accessed: 7/8/2016, http://www.mashreghnews.ir/fa/news/533805/; Matt Egan, “Iran’s Floating Oil Stockpile for Sale at Worse Time for Market,” CNN Money, January 18, 2016, accessed: 7/8/2016, http://money.cnn.com/2016/01/18/investing/iran-sanctions-hoarding-oil-prices/.
 “Modir amel-e sherekat-e melli-e naftkesh-e Iran: Omidi be sakht kashti tavassot-e sherekat-haye Irani nadarim,” Asr-e Iran, November 2, 2009, accessed: 7/8/2016, http://www.asriran.com/fa/news/89191.
 “Hend mojavvez-e vorood-e naftkesh-ha ba bime-haye Irani ra 6 mah tamdid kard,” ISNA, June 25, 2014, accessed: 8/7/16, http://www.isna.ir/news/93040402528.
 “Tavafogh-e jadid-e nafti-e Tehran-Tokyo/naftkesh-haye Japoni be Iran baz gashtand,” Mehr News Agency, February 23, 2014, accessed: 7/8/2016, http://www.mehrnews.com/news/2241791.
 “Saderat-te naft-e Iran be Japon 3 darsad afzayesh yaft,” Mizan Online News Agency, December 30, 2015, accessed: 7/8/2016, http://www.ghatreh.com/news/nn29508185/; “Afzayesh-e 650 darsadi-e saderat-e naft-e Iran be Japon,” Asr-e Iran, May 31, 2014, accessed: 7/8/2016, http://www.asriran.com/fa/news/338549.
 “Japan’s oil tanker insurance a defeat for anti-Iran sanction,” Iran Daily, May 26, 2015, accessed: 7/8/2016, http://www.iran-daily.com/News/118857.html.
 “Iran oil exports to top Asia clients increase by 25,” NIOC, n.d., http://www.nioc.ir/portal/home/?news/7183/17208/92733/Iran%20oil%20exports%20to%20top%20Asia%20clients%20increase%20by%2025.
 Matt Egan, “Iran’s floating oil stockpile for sale at worse time for market,” CNN Money, January 18, 2016, accessed: 7/8/2016, http://money.cnn.com/2016/01/18/investing/iran-sanctions-hoarding-oil-prices/.
 Morgan Brennan, “The booming business of oil tankers,” September 21, 2015, accessed: 7/8/2016, http://www.cnbc.com/2015/09/21/the-booming-business-of-oil-tankers.html.
 Tim Maverick, “Oil Glut Grows: 100 Million Barrels at Sea,” Wall Street Daily, December 3, 2015, accessed: 7/8/2016, http://www.wallstreetdaily.com/2015/12/03/oil-tankers-iran-exports/.
 “Iran’s supertanker fleet, world’s largest,” Press TV, July 3, 2015, accessed: 7/8/2016, http://presstv.ir/Detail/2015/07/03/418583/iran-oil-tanker-fleet-sardashti-exports.
 “Maritime Solutions Powered by People,” Tanker Operator, March 2015, accessed: 7/8/2016, http://ea45bb970b5c70169c61-0cd083ee92972834b7bec0d968bf8995.r81.cf1.rackcdn.com/TOMar2015.pdf.
 Benit Faucon, “Iran’s Giant Super-Tanker Fleet Eyes Western Waters,” The Wall Street Journal, July 2, 2015, accessed: 7/8/2016, http://www.wsj.com/articles/irans-giant-super-tanker-fleet-eyes-western-waters-1435838470.
 “bara-e afzayesh zarfiyat-e navgan ajaleh nemikonim,” Shana, January 25, 2016, accessed: 7/8/2016, http://www.shana.ir/fa/newsagency/254098.
 “ajaleh-ee baraye kharid-e naftkesh nadarim/kashti-haye ghadimi ra oragh mikonim,” Tasnim News, January 25, 2016, accessed: 7/8/2016, http://www.tasnimnews.com/fa/news/1394/11/05/980966.
 “Iran Ready to Unleash Its Tanker Fleet,” World Maritime News, July 15, 2015, accessed: 7/8/1978, http://worldmaritimenews.com/archives/166580/iran-ready-to-unleash-its-tanker-fleet/.
 Jonathan Saul, Italy’s RINA to Start Classifying Iranian Ships in Weeks,” January 19, 2016, accessed: 7/8/2016, http://www.reuters.com/article/iran-nuclear-shipping-rina-idUSL8N1534EO.
 “moasseseh radebandi Italia be Iran mi-ayad,” Marine Times Iran, January 20, 2016, accessed: 7/8/2016, http://marinetimes.ir/fa/news/6173/.
 “taghaza baraye naftkesh-ha hamchenan ballast,” Marine Times Iran, January 26, 2016, accessed: 7/8/2016, http://marinetimes.ir/fa/news/6238/; “VLCC Tanker Freight Rates on the Rise Once More,” Hellenic Shipping News, October 5, 2015, accessed: 7/8/2016, http://www.hellenicshippingnews.com/vlcc-tanker-freight-rates-on-the-rise-once-more/; “Tanker Shipping: Still Strong Market with Continued Positive Prospects Especially for Crude,” BIMCO, June 16, 2015, accessed: 7/8/2016, https://www.bimco.org/Reports/Market_Analysis/2015/0616_TankerSMOO2015-3.aspx.
 “One Stop Shop,” Ernst Russ, n.d., accessed: 7/8/2016, http://ernst-russ.de/de/.
 Costas Paris, “Energy Boom Boosts Tanker Construction,” The Wall Street Journal, June 10, 2014, accessed: 7/8/2016, http://www.wsj.com/articles/energy-boom-boosts-tanker-construction-1402400984.
 “Kahesh-e 40 darsadi-e sefaresh-e sakht-e kashti,” MANA, April 6, 2015, accessed: 7/8/2016, http://www.mana.ir/110/index.aspx?nid=59956&mId=11538.
 “Amadegi-e sherekat-e melli-ye naftkesh baraye haml-e naft-e Iran pas az laqv-e tahrim-ha,” Mizan Online, January 13, 2016, accessed: 7/8/2016, http://www.mizanonline.ir/fa/news/121387/; “Ba aghd-e gharardad ba sherkat e Iran LNG; sherkat-e melli-e naftkesh-e Iran amade haml LNG mishavad,” NIOC, n.d., accessed: 7/8/2016, http://www.nioc.ir/portal/home/showpage.aspx?object=relatedtopics&categoryid=f75f0445-5f58-4669-a3b8-7290db8dfc5f&webpartid=0ca67b69-a15d-4dc1-a456-fa285fff5f7b&id=2a7d47bb-659a-4cc3-9559-b0ee794d762b.
 “Cheraq-e sabz-e vazir-e naft baray-e vagozari-ye tanha proje LNG be khareji-ha,” Fars News, December 20, 2015, accessed: 7/8/2016, http://www.farsnews.com/newstext.php?nn=13940823001496.
 “Hamle nakam-e dozdadn-e Daryaee be naftkesh-e Irani,” Young Journalist Club of Iran, March 21, 2015, accessed: 7/8/2016, http://www.yjc.ir/fa/news/5161116/; “Navshekan-e Sabalan naftkesh-e Irani ra az dast e dozdan-e daryaee dar Bab al-Mandeb nejat dad,” Press TV, December 23, 2015, accessed: 7/8/2016, http://www.presstv.ir/DetailFa/2015/12/23/442930/Iran-BabelMandeb-Sabalan-Destroyer–; “Amar-e hamle dozdan-e Daryaee be naftkesh-haye Irani,” IRINN, January 13, 2016, accessed: 7/8/2016, http://www.irinn.ir/news/147639.