Iran falling short of oil refining ambitions

By Simon Webb - Analysis

DUBAI (Reuters) - Sanctions and insufficient funding are thwarting Iran's ambitious plans to nearly double domestic oil refinery capacity to end its dependency on expensive imported fuels.

Iran has the world's second largest oil reserves but lacks the refinery capacity to meet its own transport fuel demand. OPEC's second largest crude producer imports around 40 percent of its gasoline needs, which it then heavily subsidises.

The United States has said fuel imports give it potential leverage in the dispute over Tehran's nuclear programme. Washington accuses Iran of seeking to build atomic bombs, a charge Tehran denies.

"Iran's political rhetoric is toward refining self-sufficiency to end this Achilles heel of gasoline imports," said Saad Rahim, analyst at Washington-based consultancy PFC Energy.

"But the obstacles are pretty significant. With the sanctions -- which companies would be willing to go in and build these refineries?"

U.S. sanctions forbid its companies and discourage those in other countries from investing in Iran's oil and gas sector, impeding Iran's efforts to source the technology it needs.

"Sanctions have led to limited technology transfer, higher operating costs, and a much slower pace of development," said Stuart Lewis, Middle East director at energy consultancy IHS.

Iran last year embarked on a multi-billion dollar, five-year programme to revamp and expand the refining system to 3 million barrels per day (bpd) from around 1.6 million bpd now. But analysts say state funding for the programme is inadequate.

"It is doubtful that this impressive goal will be achieved within this very tight deadline," Cambridge Energy Research Associates (CERA) told Reuters, drawing on a report on Middle East refining capacity due to be published later this month.

The National Iranian Oil Company's (NIOC) investment budget this year -- for both upstream and downstream -- was not enough to cover the cost of one large refinery, CERA said.

"Fundamentally, there is not enough money," said Alan Gelder, vice president for Europe, Middle East and Africa downstream operations at oil consultancy Wood Mackenzie.

Rising costs, as the oil and gas industry strains to bring new capacity on line to meet rising global demand, have hit refining projects throughout the world.

Wood Mackenzie estimates Iran's actual refinery capacity additions would more likely come to around 700,000 to 800,000 bpd by 2014 and would cost at least $10 billion, Gelder said.

The U.S. has piled pressure on European banks and energy firms to avoid doing business with Iran, and this was impeding Iran's efforts to find funds for the new plants, analysts said.

"The informal financial pressure linked to the nuclear issue is likely to hamper the financing of Iranian new refineries, as banks are turning down any project financing in Iran and insurance exports bodies have lowered their Iran exposure," CERA said.