Israel may target Iran's oil refineries as Middle East braces for retaliation: report

Israel could look to target Iranian oil refineries in retaliatory strikes against Tehran for its ballistic missile attack, which sharply escalated risks on energy, trade and infrastructure assets in the region, according to reports.

Citing "many" unnamed Israeli officials, the US' Axios news website said Iran's oil facilities are a likely target as part of a "significant retaliation" for the attack from some 180 Iranian missiles. The report cited the officials saying that targeted assassinations and taking out Iran's air defense systems are also possibilities for Israeli retaliation.

Though the US called Iran's attack "ineffective" and Israeli officials said there were no fatalities, some targets were reportedly hit, and Israel has vowed to retaliate while ground operations in parts of Lebanon continue.

The Wall Street Journal late Oct. 1 cited “Arab officials” saying Israel had warned Iran that “any hit on Israeli territory” would draw a retaliatory strike on Iranian nuclear or oil facilities.

Speaking Oct. 2, Israel's military chief said the country will respond to Iran’s missile attack, adding that its forces can strike anywhere in the Middle East.

"We can locate important targets and we can hit them precisely and powerfully,” said Herzi Halevi, chief of the general staff of the Israel Defense Forces. “We have the capability to reach and strike every location in the Middle East and those of our enemies who have not yet understood this, will understand this soon.”

Separately, Iran's military has said any aggression toward the country would prompt a “powerful and regrettable attack of the armed forces of the Islamic Republic of Iran at the regional level.”

Brent crude futures jumped sharply after the Iranian attack on Oct. 1 and traded 3% higher on the day early Oct 2. before losing ground. By 15:07 GMT, the December Brent contract was trading at $73.82/b, just 34 cents/b higher on the day. Platts, part of S&P Global Commodity Insights, assessed Dated Brent at $75.38/b on Oct. 1, up from the near three-year low of $70.56/b Sept. 10.

"The escalation of the Middle East conflict into a large-scale military operation potentially affecting energy assets upstream (e.g. attacks on Iranian production sites) or midstream (attacks on Iranian crude and fuel loading ports or Houthi retaliation strikes in the Red Sea or the Gulf of Aden), poses an upside risk to prices," oil analysts at Commodity Insights said in a note.

Iranian refining

Major investment bank Goldman Sachs said in an Oct. 2 note that oil prices remain sensitive to supply disruption risks, highlighting that investors are focused on potential downside risks to Iran supply, in addition to potential additional declines in Red Sea oil flows, and the "unlikely tail scenario" of an interruption of trade through the Strait of Hormuz.

Iran has one of the largest refining sectors in the Middle East with about 2.4 million b/d of capacity in 2023 spread across 10 main sites. Its three biggest refineries are the 370,000 b/d Isfahan plant, the 360,000 b/d Abadan refinery, and the 320,000 b/d Bandar Abbas site.

In addition to the 320,000 b/d crude oil refinery at Bandar Abbas, the Persian Gulf Star project located at Bandar Abbas has about 399,000 b/d of condensate splitter capacity. Completed in 2018, the Persian Gulf Star plant is Iran’s newest and most important domestic source of gasoline, accounting for about 40% of the country’s needs in 2023, according to a report by Commodity Insights.

State-owned National Iranian Oil Refining and Distribution Company, or NIORDC, has ultimate control over the transport, storage, marketing and distribution of oil products in Iran.

Although seven Iranian refineries have been partially privatized since 2010, NIORDC still operates and retains shares in all refineries, exercising a high degree of control over the energy complex, according to the report.

Large quantities of shares in Iran’s refining assets are believed to be held by groups that have links to Iran’s Revolutionary Guards and former President Mahmoud Ahmadinejad, according to the report. Government organizations also hold a large number of shares in refining companies, including Shasta, the investment arm of Iran’s Social Security Organization, which owns 35% of the Bandar Abbas Refinery, and 50% of Lavan Oil Refinery Company.