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3. Iran's Production Cut

The oil markets were shaken last week by a statement from an unidentified Iranian official that Irans oil output would be cut by between 400,000 and one million b/d beginning next month. The report was given credence by other reports that Tehran had chartered large tankers to store up to 30 million barrels of crude in the Persian Gulf and that these tankers were nearly full.

The report was followed by a statement by Irans oil Minster and later confirmed by President Ahmadinejad that the matter of cutting production was still under review and that no decision had been taken as yet.

The problem is a growing mismatch between the proportion of heavy sour crudes available for sale on world markets and the capability of refineries to turn this crude into profitable products. As production of North Sea and Nigerian light crudes slows, the share of heavy crudes is increasing to the point where there is no capacity to refine the heavy crude at a profit. When refineries install processing units called "cokers," which cost hundreds of millions of dollars, they are able to take asphalt-like "residuals" and break them down into valuable products. While light oils may contain only 5 percent residuals, heavy oils may approach 30 percent, thus light crudes tend to sell for less than heavy oils. Recently the price discount for Irans heavy crude as compared to the benchmark West Texas Intermediate has quadrupled to $11 a barrel vs. $2.65 last year.

Iranian officials and refiners both say the problem is one of price and quality. Iran is refusing to cut the prices further and refiners are saying this crude is a nightmare to refine and that if the Tehran wants to get rid of it they will have to lower the price. Iran had a similar problem in 2006 and eventually sold the crude to Shell and India at a steep discount.

These problems are unlikely to be solved soon. The addition of cokers and hydrocrackers is not only expensive but takes years to accomplish. In the meantime, Irans inability to sell its oil except at unacceptably large discounts may slow global production.

4. Energy Briefs

(clips from recent Peak Oil News dailies are indicated by date and item #)

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Aramco and Conoco said they will proceed with plans to build a 400,000 barrel-per-day refinery in Yanbu, Saudi Arabia, even as costs for new refining facilities soar. (5/17, #7)

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