Iran Giving Away Oil

Jim Brown
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Iran is in a bind. The nuclear sanctions against Iran prevent it from receiving payments for things like oil sales. After several aborted attempts to structure payment arrangements using multiple banks in different countries they are finally at a dead end.

Iran sent a letter to refiners in India where they are still accepting Iranian oil and warning them they have to pay up soon or face a halt in deliveries. Reportedly refineries owe Iran more than $2 billion in back payments because they are unable to transfer the funds to Iran.

Why India, supposedly our ally, would continue doing business with Iran is a mystery but they continue to buy Iran's oil. Maybe "buy" is the wrong word here. Since Iran continues to ship it without payment maybe they have no intention of paying. They are gladly accepting the free oil and know they won't have to pay for a very long time.

Since Iran is not willing to end its nuclear program the sanctions are likely to remain in place and even become stricter as time passes. During this period those refiners can use the money they would normally be spending for the oil.

After the letter to the refiners demanding they work out an acceptable method of payment within 30 days the Oil Ministry's website said "We have no intention of halting our supplies to the Indian market" despite what the letter said.

Iran may be delivering oil simply because they have no place to store it. Their export business has been so seriously degraded that Iranian oil facilities are literally over flowing with crude. Shipping it to India in hopes of eventually getting paid, even if it is years into the future, could also be an answer to their storage problem.

Even in normal times Iran runs out of storage and is forced to lease oil tankers to take on loads of Iranian crude and park in the Persian Gulf for months at a time. It is not unusual for Iran to have more than 20 million barrels in floating storage.

Israel's Gas Lifeline Cut Again

In other news Egypt reported the gas pipeline to Israel was blown up by terrorists for the third time since Mubarak was removed from power. The pipeline and the gas sales were negotiated during Mubarak's reign and rumors persist that Mubarak was personally profiting from the deal.

Most Egyptians hate Israel and they want the gas export deal halted. Unfortunately for Israel they depend on that gas for a large portion of their energy needs. The first time the pipeline was damaged on February 5th Egypt fixed it immediately but that was around the time of the Mubarak exit. The second time it was bombed on April 27th the country took more than a month to fix it. Reports at the time suggested they did not want to fix it only to have it blown up again.

This time the rebels, terrorists, militants, I am unsure what to call them other than men with machine guns, drove up to the pumping station in a small truck and forced the guards to leave then planted explosive charges. A security source told Reuters this was the same method of attack used in the prior bombings.

Israel is so desperate for gas they have contracted for a floating LNG terminal that will anchor at sea a few kilometers from the coastal city of Hadera. The terminal will offload LNG tankers carrying 140,000 cubic meters of LNG and pipe the gas to shore. It will be parked far enough offshore to be out of range of terrorist rockets fired from land.

Israel's demand for natural gas has more than quadrupled since 2004 and is now the primary source for generating electricity. Without the Egyptian gas the main source of their supply is the Yam Tethys offshore field, which is expected to begin depleting rapidly by 2013. That is the projected date for the first gas from the Tamar field with the Leviathan to come online shortly thereafter.

To help fill in the gaps in supply Noble Energy (NBL), the lead operator in the offshore gas fields, to present additional development plans for the small Noa North field by July 15th. Noble has a tiger by the tail with Israel asking them to accelerate development of the offshore fields. They are going to make a ton of money over the next decade and beyond. The total amount of gas thought to be in the three fields is in excess of 25 TCF.

Israel is moving ahead on all fronts because their energy lifeline to Egypt is not likely to be back online soon or remain online for any length of time.

Mexican Production Declines Again

Pemex, Mexico's state owned oil company, said production in June declined to 2.547 million barrels due to declining output at its older fields. This compares to the 2.556 mbpd produced in May. The amount of the decline from month to month is small but it is persistent and production has been declining since 2004. Mexico's exports have declined to 1.437 mbpd. Exports provide more than 40% of Mexico's revenue. Analysts believe Mexico could become a net IMPORTER by 2020 unless there is a major push to find and develop new fields. So far there is little progress in that area.

Pemex is currently working on adding 12-18 offshore rigs to try and halt the production decline. Hercules Offshore (HERO) is expected to win the bidding for the majority of the jackup rigs.

No Fracking Way

The ban on fracturing in New York is back on again. There were rumors last week the state of New York was going to begin issuing permits for fracturing in the portions of New York State that did not supply water to New York City.

Unfortunately for drillers the environmental agency said this week that no permits are likely to be issued in 2011. The rumor was attributed to wishful thinking after Joe Martens, commissioner for the states Department of Environmental Conservation, after he said "we believe high volume fracturing can be done safely in New York."

Martens was referring to a recently completed study that still has to wind its way through the governmental process and public comment period. Drillers should not get their hopes up.

Jim Brown

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