How Iran’s Refineries Became Unprofitable And Unhealthy

Iran, ranked as the 11th largest consumer of petroleum products globally, grapples with an increasingly unprofitable and outdated crude oil refining sector.

The majority of its petroleum products, approximately 85percent, are sourced from refineries established before the Islamic Revolution in 1979.

According to an official document, prepared by Iran’s oil ministry and seen by Iran International, only three of its nine crude oil refineries have beenoperationalized post-1979, with combined capacity of less than 265,000 barrels per day. Originally constructed based on Western licenses, these refineries now rely on domestic or Chinese technologies for upgrades.

Iran's refining facilities primarily yield bitumen and mazut from crude oil, with a minimal portion meeting global standards for gasoline and other petroleum products. The report reveals that only 25 percent of gasoline and 54 percent of gasoil (diesel) produced meet Euro 4 or Euro 5 standards.

In 2015, shortly after the JCPOA was sealed, Iran's oil ministry proposed a $43 billion plan to modernize its refineries and increase crude oil refining capacity by 25 percent to 2.2 million barrels per day. Contracts were signed with companies like South Korea's Daelim Industrial and SK Engineering and Construction, as well as China's Sinopec, to upgrade refineries. However, all agreements were scrapped following the US withdrawal from the JCPOA in 2018 and subsequent sanctions on Iran.

Despite the construction of the Persian Gulf Star refinery in 2017, which uses domestic and Chinese technologies to refine gas condensate, it does not produce standard gasoline or diesel. The refinery's focus on gas condensate, an ultra-light oil extracted from gas fields, further underscores Iran's challenges in modernizing its refining capabilities.

The oil ministry's document reveals that less than 25 percent of domestically produced gasoline meets Euro 4 and 5 standards, and it is only available in eight out of 31 provinces. In the remaining provinces, non-standard gasoline is utilized. However, the most concerning issue with the country's refineries is the conversion of 30 percent of crude oil into highly polluting mazut and bitumen. According to the oil ministry's report, Abadan, the nation's largest refinery with over a century of operation, converts 44 percent of crude oil into mazut and bitumen.

Iran's refineries not only convert 30 percent of crude oil into mazut and bitumen, but they also produce highly sulfur-laden fuel, with a sulfur content of 3.5 percent. This sulfur level exceeds the required standards for fuel used in ships navigating open seas by sevenfold. Despite its environmental hazards, Iran utilizes this highly polluting fuel in power plants and industries located within or near urban areas.

According to the oil ministry's report, Iran's consumption of mazut surged by 110 percent last year, reaching about 9 million metric tons. This sharp increase reflects the country's ongoing struggle with gas shortages since 2018. In response, Iran has been gradually substituting diesel and mazut with gas in both industrial and electricity generation sectors.

Data from Klpler's statistics, obtained by Iran International, reveals that Iran's exports of diesel and gasoline hit zero in 2021. Meanwhile, mazut exports experienced a significant decline, plummeting by 42 percent to 217,000 b/d between 2021 and 2023 due to escalating domestic demands.

Iran grapples with exacerbated gas shortages during winters, leading to a doubling of mazut consumption in the power sector and industries, a highly polluting practice. Additionally, the country has been contending with gasoline shortages since mid-2022.

According to documents from the oil ministry obtained by Iran International, Iran produced 96 million liters per day of gasoline, marking a modest 0.75 percent increase compared to the previous year. However, consumption surged by 13 percent to reach 116 million liters per day during the first seven months of the current fiscal year, which began on March 22, 2023.

To partially address the deficit, Iran augmented its gasoline supply by adding 13 million liters per day of chemicals, aromatics, and the carcinogenic substance MTBE (Methyl-tertiary-butyl ether), a gasoline additive known to cause testicular and lymphohematopoietic cancers in rats. Despite these measures, the remaining shortfall was filled by importing gasoline or drawing from existing storage reserves. Notably, Iran's gasoline storage as of September 2023 declined by 30percent year-on-year, dropping to below 800 million liters, equivalent to just one week's worth of consumption volume.