Iran's potential for petrochemicals thwarted by relationship with West

Petrochemical Pariah

12 November 2008 20:35  [Source: ICB]

Iran has huge reserves of oil and gas, and great potential for petrochemical developments. But sanctions mean skilled workers and equipment are still in short supply

IRAN HAS had a love-hate relationship with the West, which continues to affect Iran's oil sector today, blighting the devlopment of its petrochemical industry.

Although the country claims to have the third-largest reserves of oil in the world, some 136bn barrels, or around 10% of the world's total proven reserves, production has never recovered to pre-Revolution levels (see box) as a result primarily of US sanctions and political unrest.

This relationship has left the country without the vital expertise (and cash) that the West can provide. "The Iranian petrochemical market is by no means as developed as it could be," says Olga-Tatjana Rauch, senior adviser at the strategic and commercial intelligence division of global consultant KPMG in Germany. "This is in no small part due to the situation with the US. The sanctions have been a real impediment for Iran, as the US is a major player in the refining sector in particular. Iran's oil industry has been cut off from that entirely and that situation will have to change before things can really start to improve there."

As a result, Iran has turned its eyes eastwards, to the fast-developing Asian market, where demand for petrochemical products has been growing steadily - although Rauch warns that the long-term impact of the global financial crisis could undermine that growth. "Iran also sees itself as a potential supplier of Europe - its geographical position between Asia and Europe makes it ideally suited - but it still needs to work on the quality and the range of its petrochemical products if it is to be a long-term competitor," she suggests. "Iran produces few specialty chemicals - it is mainly focused on ethylene and polyethylene [PE] - and the quality of both these products is not considered high, at least not high enough to meet most European demand."

Rauch explains that the vacuum left by the mass exodus of qualified personnel after the Revolution has never been entirely filled, and that that has had a knock-on effect on quality. "The entire infrastructure is not well managed," she says. "The real problem is a lack of skilled workers - Iran has a willing workforce, but the sanctions mean that people cannot travel to the US to study, and that foreign expertise is hard to recruit. The general levels of education in Iran are high compared to other Middle East states, but there simply aren't the necessary levels of expertise to bring the petrochemical sector up to date."

And that is the real challenge for Iran. "The country has many advantages - it is sitting right on the gas and oil, for example, which means it can keep its transportation costs to the bare minimum, in turn allowing it to sell products at highly competitive prices," says Rauch. "But there are many more impediments, however, such as the lack of finances for new plants. It is quite common to see one facility being completed by 'robbing' material from another, for example." She explains that it is not so much a problem of a lack of vision - state owned petrochemical company National Petrochemical  has ambitious plans to expand its operations considerably by 2014 - but that managers often appear to have different, shorter-term priorities. "There appears to be little understanding of the concept of goals and timeframes," she says.

But it is the sanctions more than anything else that have kept Iran stuck in 1979. The country shares the world's largest gas reserves - the South Pars field - with neighboring Qatar, but the tightening of the diplomatic screws following the stand-off with the US over nuclear enrichment has left Tehran with no available funds to develop the field - not least because South Pars was due to be developed using foreign investment alone.

But US companies are prevented from doing business in Iran, while non-US firms that are present, such as Anglo-Dutch oil major Shell or Spanish oil company Repsol, are wary of investing too heavily because of the continued geopolitical stand-off. Both European firms announced in June that they were freezing their investments in South Pars, leaving just a handful of smaller players to develop the field - and risk the wrath of Washington. In the meantime, Tehran has had to pump a one-off payment of around $5bn (€4bn) - 3% of the country's oil revenues - into South Pars in an attempt to keep the development moving forward, even if at a snail's pace.

The stalemate has forced Iran to take a more proactive stance - the idea that Western companies would fall over themselves to gain access to gas in South Pars has long since been quashed. Thus UK business leaders - one-time "exploiters" of Iran's oil and gas reserves - were in June treated to the sight of Mohammad Nahavandian, the president of Iran's chamber of commerce, urging UK companies to overcome their reticence about upsetting Washington and take advantage of the opportunities offered by the Islamic Republic. If they didn't, he said, they would run the risk of losing out to companies from India, China and Russia.

Indeed, Russia is increasingly seen as the savior of Iran's entire oil industry. Tehran has already held talks with Moscow over the possible creation of an OPEC-style cartel for gas-producing nations that would also include Qatar, Algeria, Libya and several Central Asian nations. The idea is that this would have the advantage to Iran of raising international interest in its gas reserves and bringing in much-needed investment. But Rauch believes that any such move would inevitably be more about Russian saber-rattling than any altruistic desire to increase interest in Iran's industry.

"Russia has 25% of the world's gas reserves with Iran, that figure rises to 40%, so that puts Russia in a very strong negotiating position - and will increase concerns in Europe and the US about Moscow's use of energy supplies as a political tool." But Rauch says that the balance of power is shifting from West to East, and that there could be some in Iran who see an alliance with Russia as the best way to boost the petrochemical sector.

"The East - Asia and Russia - is becoming increasingly wealthy, and economic growth brings power, especially if you happen to be sitting on some of the world's most important feedstocks. It is conceivable that some people in Tehran are thinking 'if we can supply the East, why do we need the West?' But, of course, things are rarely that black or white."

With the political and religious leaders in Tehran unlikely to back down in their stand-off with the US administration - even if the president-elect Barack Obama is prepared to take a less belligerent stance - there is little chance of a major influx of capital into the Iranian oil, gas and chemical sector any time soon. And without that, there seems little chance of escaping from 1979 and creating a petrochemical sector worthy of the 21st century.

THE BATTLE OVER OIL

The first successful oil drilling operations in Iran - or Persia as it was then known - began in 1901 under a 60-year concession granted at the knock-down price of £10,000 up-front and a paltry 16% share of annual profits. This provoked an understandable feeling among Iranians that they were being exploited by the West, and by the UK in particular. This resentment worsened over the next 50 years as the British government continued to meddle in Iranian affairs. This culminated in the nationalization of the Anglo-Iranian Oil Company (AIOC) and the creation of the state-owned National Iranian Oil Company (NIOC).

Such was the importance of Iran's oil to the West - and the West's money to the Iranian economy - that the nationalization of the oil industry lasted barely two years. A coup d'etat by pro-Western factions in 1953 saw a new government installed and a new concession granted to AIOC - or British Petroleum as it was now known - along with US companies and the Anglo-Dutch group Shell. The next 20 years saw the Iranian oil sector flourish. But by 1974, the tide was beginning to turn, with the Iranian authorities increasing restrictions. Five years later, all foreign investment came to an abrupt end with the Islamic Revolution. All foreign oil workers were expelled from the country, and all foreign-controlled assets passed back to NIOC.

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By: Chris Jones
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