Iran’s Energy Exchange: What’s the Risk?
Iran's energy problems
Since US sanctions against the Iranian energy sector were launched, the Iranian government has sought more creative ways of maintaining a stake in regional and global energy markets to mitigate the economic fallout of its confrontation with the United States. This is how the Energy Commission of the Islamic Consultative Assembly arrived at the idea of creating an oil stock exchange to encourage the private sector to continue activities with Iran.
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During the Obama Administration, Iran used the concept of energy exchanges to maintain its share in the oil market and increased foreign exchange earnings. However, this led to the country missing out on finances thanks to a spat of pay disputes.
Delivering on its promises
The Energy Exchange scheme holds many benefits to the country, namely the mitigation of sanctions and transparency in the sale of oil. By implementing this law, the government was able to create a new market for domestic oil sales with the help of the private sector as well as other existing capacities in the country to sell oil to traditional foreign customers. Maximum use of formal market power, price flexibility, and compliance with supply and demand conditions have led Iran to export Iranian crude oil on the energy exchange, which is an important signal for maintaining Iran's export position in global markets.
This experience demonstrates Iran's ability to maintain export markets and the variety of terms of sale despite restrictions – provided that price flexibility is made on a formal and transparent market. What is important in this regard should be the importance of the proposed price in the export markets. Buyers should still be ready to buy crude oil from Iran, and with the flexibility of the export market of the Energy Exchange, the volume of export of crude oil from this platform should be intensified.
Special discounts offered to buyers such as India have constituted another strategy to keep Iran’s share in various markets, alongside other strategies such as personally taking-on tanker insurance to transit oil shipments to consumers.
Iran's oil targets
Whether the targeting of a daily supply of one million barrels of oil in the energy market is to be achieved, it should be noted that there is no high technology capability in Iran, and the government is expected to increase the processing capacity by supporting investment in small refineries.
The supply of crude oil and petroleum products through the stock exchange and the provision of the presence of foreign refineries and buyers of these products can, in addition to increasing the number of contributors, improve the conditions and stability of the sale of oil and petroleum products in the country.
Determining the bottom line
The price of oil in the energy market should be determined by the supply and demand mechanism of the market. Changes in this pricing method in terms of bureaucracy has created a lot of ambiguity regarding the pricing of oil in the energy bourse. Still, there seems to be hope for the establishment of a stock exchange after 17 years through the Energy Exchange, and even under the influence of these hopes, some foreign investors have begun trading deals and are awaiting the start of oil deals.
During the last bout of sanctions, one of the obstacles to physical supply came in regard to the exchange of currency. The Ministry of Petroleum will offer its main products at the Export Exchanges of Energy Exchange; however, the problem has so far been the discussion of currency transfers. Previously, crude oil was supplied to the domestic refineries on the Energy Exchange.
"Over the years, we have been faced with an internal resistance to supplying oil on the energy exchange, because there were few interests associated with the transparency of the supply of oil. However, now the Ministry of Petroleum, Economics, and the Bourdard Stock Exchange are working hard to achieve results.”
Accordingly, Ali Adiani, a member of Parliamentary Energy Commission, claims that the small amount of crude oil supplied to the stock market in 2012 was a failure due to the lack of capacity building for the private sector. However, now with the establishment of consortiums, he believes good oil stocks can be made.
It should be noted that foreign companies are also invited to purchase oil in Iran's energy exchanges. Iran needs to create a competitive mechanism for energy exchanges, by which foreign companies can pay for oil in Iran in order to be valued for Iran, but the supply mechanism would be such that ports or major refineries deliver oil to the private sector and are declared by vendors in ports at a specified price.
Other issues are also on the horizon, such as the fact that different types of oil are based on various IPUs; the amount of sulfur, carbon and lead in the content; which countries are specialized in which products; and price determinants - amongst others.
The positive result of this mechanism would be to reduce pressure on the government and, given that the private sector is not sanctioned, help improve the circulation of capital in the sector by financing part of the demand. It is expected that neighboring countries will provide the foreign currency needed by Iran.
Government and private sectors
The government should have begun a process of transferring some of its activities to the private sector a year ago. As a first step, the government should distinguish between the real private sector and those who come in the name of the private sector, such as Babak Zanjani. Indeed, it is important to determine the ownership of consortia, and the government must trust them in the success of the private sector.
Iran is enthusiastic about the potential fruits of the project and hopes to use its energy exchange to bypass sanctions, but according to Managing Director of the Energy Exchange, pointing to the core issues of the Tehran Stock Exchange and speculation about the supply of crude oil on the stock exchange, asks "How do we want to create a new software system for oil futures?"
Many energy experts argue that if the Oil Ministry accepts to supply oil at lower prices, with the intention of taking the command and outside of the conventional supply and demand mechanism, the main function of the stock exchange will be questioned and should be considered a failed project. On the other hand, some oil industry experts say the supply of crude oil on the stock exchange should help the country's oil exports.
So, as long as there is a customer for crude oil on the global consumer markets and can be revenues for the country by selling oil at a price, why should it be offered to stock buyers at lower prices?
Omid Shokri Kalehsar is a Washington-based energy security analyst. Follow him at @ushukrik and uskenergy.com.