Iran Oil Outlook (Part 2): How Iran Stockpiles Oil And Hides The Fact

 |  Includes: DCO, DTO, OIL, SCO, UCO, USO
by: Alex Cho

This is my second Iran oil outlook article. In summary, I found out that the export figures of oil were different from the production figures that the Energy Information Administration had offered. However, because information on the amount of crude oil in strategic reserves is limited, we have to speculate on the extent of what Iran may have stored up. After all, if you have 4 to 5 million barrels per day in oil production capacity you want to take advantage of it.

Crude oil is a commodity and there's a guaranteed market for the product. So if anything Iran will have a lot of incentive to figure out a way to build an inventory of crude oil so it can release the inventory when oil embargos by the European Union and the United States come to an end. In the article, I had estimated that Iran may have up to 2.2 billion in barrels of oil stored ready to flood the crude oil market. It sounds almost apocalyptic and perhaps unbelievable.

Many of you had questioned the mechanism, by which Iran can store 2 billion barrels in oil. I am going to dedicate this article to answering the question of where oil can be stored.

Setting the stage

Having some background information on the topic of how strategic reserves are created will be crucial to the discussion. Currently, the United States is known to have the largest strategic petroleum reserve. A strategic petroleum reserve can contain both refined and unrefined materials. The U.S. government uses geologic features in Texas to create its strategic petroleum reserve. At least according to

Emergency crude oil is stored in the Strategic Petroleum Reserve in salt caverns. Created deep within the massive salt deposits that underlie most of the Texas and Louisiana coastline, the caverns offer the best security and are the most affordable means of storage, costing up to 10 times less than aboveground tanks and 20 times less than hard rock mines.

Salt caverns are carved out of underground salt domes by a process called "solution mining." Essentially, the process involves drilling a well into a salt formation, then injecting massive amounts of fresh water. The water dissolves the salt. Increasing the SPR caverns, the dissolved salt was removed as brine and either reinjected into disposal wells or more commonly, piped several miles offshore into the Gulf of Mexico. By carefully controlling the freshwater injection process, salt caverns of very precise dimensions can be created. For every barrel of crude oil to be stored in the SPR's salt caverns, it took 7 barrels of water to create the storage space.

Besides being the lowest cost way to store oil for long periods of time, the use of deep salt caverns is also one of the most environmentally secure. At depths ranging from 2000 to 4000 feet, the salt walls of the storage caverns are "self-healing."

Through that brief summarization from we were able to address many of the concerns of whether or not Iran can scale such a huge oil storage facility. Many of the Wikipedia entries on the internet mention Iran's above surface storage capacity, but above storage capacity is not necessarily indicative of the amount of crude oil that Iran may have in a strategic petroleum reserve. Again, this is because the amount of crude oil that a country can store is heavily dependent on geologic features.

Iran is known to censor a lot of the information that comes from the country. Information on strategic petroleum reserves offered by the country owned media outlets are unlikely to be accurate.

Iran has an abundance of salt caverns

The Iranian government likes to keep information to itself. The United States government and the good old folks at the energy information administration information are very cognizant of Iran's geologic features. The brilliance about science is that it tends to be extremely straight forward.

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(Click to enlarge)

Source: University of Texas

The Persian Gulf and the Caspian Sea are two sources of water that Iran can use to increase the size of its own salt caverns for the purpose of creating storage capacity for a strategic petroleum reserve. Iran is known to have some of the largest salt caves in the world. So if anything, the likelihood of Iran taking advantage of its own natural Geologic features for the storage of crude oil, should pretty much be a given at this point.

However, I have tried to identify online sources that provide information on salt cavern oil storage on the internet. The amount of information was sparse, and the amount of reporting on the topic was extremely limited. This implies that the state run media of Iran knows very little if anything about the amount of oil Iran may be tucking away in huge salt cavern formations. However this doesn't change the fact that Iran has huge salt cavern systems that allow the country to stockpile large amount of oil with very little cost. After all, the cost of a salt cavern storage facility is approximately 20 times less than conventional methods.

I approximate that a single salt cave/cavern (Ali-Sadr cave) in Iran could easily store hundreds of millions of barrels of oil. The geologic survey data is limited. But given what I know from this wiki entry, the main cavern is 100 meters x 40 meters x 50 meters. This results in 200,000 square meters. A cubic meter of oil is equivalent to 6.28 barrels of oil. This will result in 1,256,000 barrels of oil in storage capacity for just the main chamber of the salt cavern.

However, this cave is extended for 10km or 10,000 meters. So we have to say that the dimension of the salt cavern could approximately be 10,000 meters x 40 meters x 50 meters. This means that the cave could have a total volume of 20,000,000 square meters. Multiplying the size of the cave (20 million square meters) by 6.28 will result in storage capacity for 125,600,000 barrels of oil. This cavern is treated like a tourist destination. So obviously, it won't be used for the purpose of oil storage, and there are also other salt caverns that are similar in size.

Not every cave in Iran is this large. Plus, the salt caverns would need to be below the surface by 2,000 to 4,000 feet. So those two caves I mentioned were just for illustration purposes. The actual caverns where oil will be stored will not be tourist attractions. In fact, no one in the world will be able to recognize a salt cavern formation 2,000 feet below the surface, with the exception of Geologists. This doesn't discredit my short thesis.

Iran is known to have extensive cave systems that are made of salt. Storage of crude oil doesn't have to be done in a single super cave/cavern. It can be done in a number of caves. The Iranian government may alter the dimensions of a cave by pumping water into it, and then excavate the salt out of the salt cavern. Following that, Iran can pump crude oil into the cave for retrieval at a later point in time.

The geologic data, paired with the censorship of information paints a very clear picture. Iran can store a lot of crude oil. The country will take advantage of this geologic resource. When the oil embargoes end, Iran will flood the market with crude oil that was stored in salt cavern formations.


In an earlier article, I used the difference in production figures and the total export figures as a basis for determining the annual storage capacity. This is Algebra, and the beauty of math is that we can find the variable, by using known inputs and outputs of the formula. In this instance, using both math, and geology, I am extremely convinced that my thesis of 2.2 billion barrels of oil in storage isn't a farfetched reality. When Iran floods the oil market with abundant supply be prepared for a significant drop in the price of crude oil.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.