INSIGHT: Iran’s petchems sector skirts sanctions with local production

14 June 2013 16:25  [Source: ICIS news]

By Chow Bee Lin and Prema Viswanathan

Asaluyeh, IranSINGAPORE (ICIS)--Iran’s drive to attain self-sufficiency has gone into top gear thanks to re-enforcement of the US-led sanctions.

The slowdown in imports and investments into Iran’s petrochemical sector has left industry players with no option but to accelerate their efforts to produce locally the products which they traditionally imported from the advanced economies.

In late May, the US Treasury Department identified eight petrochemical companies that it says are owned by the Iranian government, making them subject to sanctions.

The Iran petrochemical industry’s progress towards self-reliance was a key topic for discussion at the 10th Iran Petrochemical Forum (IPF) held in Tehran last month.

Iran’s petrochemical sector has circumvented US-led economic and financial sanctions by developing technology and equipment to meet the requirements of local petrochemical plants,  Ramezan Oladi, director for planning and development of state-owned National Petrochemical Co (NPC), told ICIS on the sidelines of the IPF.

About 78% of the equipment and machinery used by the Iranian petrochemical industry was provided by local companies, Oladi said. Iranian companies have had difficulties importing equipment and raw materials in recent years because the US-led sanctions have made international payments problematic, industry sources added.

However, the lack of equipment and machinery appears to be a more serious problem than some Iranian companies are ready to admit and the sanctions may jeopardise Iranian chemicals and petrochemicals production.

“We’ve just completed and handed over the Arak Refinery, and this may be our last refinery project in Iran for a while because of the sanctions,” a source  close to the project said.

Economic and financial sanctions imposed on Iran had made it very difficult to obtain machinery and equipment that are needed to build refineries in Iran. “Many suppliers declined to sell machinery and equipment to us when they came to know that our project is in Iran,” the source said.

“After the sanctions were imposed, some companies refused to honour their contracts to  supply equipment to us, just because our project is in Iran,” he added.

Faced with challenges resulting from the sanctions, Iranian petrochemical companies are looking at various  options to stay viable or even expand.

One of those options is to optimise production processes and costs through value engineering (VE), said EA Foumany, chief advisor of PCC and a professor at the University of London in the UK.

This approach is particularly useful in situations such as the sanctions regime, where there are roadblocks in access to technology and resources leading to inflated costs, he said.

“Knowledge of VE will improve your ability to manage projects, solve problems, innovate and lead to cost savings, risk reduction, schedule improvements and even improved job satisfaction,” Foumany said.

The application of what is known as the 80/20 rule could lead to substantial cost savings, he added.

“Generally 20% of the cost in a project is made up of 80% of items, while 80% of the cost is made up of 20% of items, therefore a VE team should attempt to isolate and reduce the pricey 20% of the items.”

Localisation has helped Iranian companies cut costs. A telling example is the 1m tonne/year  Kavian ethane cracker project at Assaluyeh.

Because of the US-led sanctions, no foreign equipment suppliers or contractors would take on the Kavian cracker project, said Davood Reza Rabhani, managing director of Bakhtar Petrochemical Co, the parent company of Kavian Petrochemicals.

 “Therefore, we had to maximise the role of Iranian suppliers and contractors, which enabled us to significantly lower costs,” he said.

The final cost of the project was only $260/tonne of ethylene compared with the original estimated cost of $400/tonne of ethylene, he added.

An innovative idea being mooted at the IPF was that Iran’s petrochemical industry should focus on non-equity modes (NEMs) of foreign investment whereby business relationships are based on contractual arrangements, rather than equity ownership.

On a scale of one to ten, NEMs have median risks and rewards in terms of control and value chain management, compared with foreign investment that involve equity ownership, said Behrouz Alishiri, Iran’s vice minister for economics and finance.

Another new investment mode that is being mooted is the pre-pay system.

According to Chris Cook, an energy market consultant, this system would enable the Iranian producer to sell the value of petrochemicals forward and lock in the price.

The investor provides an interest-free loan which will be returned through supply when the unit goes on stream.

“From the consumer’s point of view, he pre-pays for the petrochemical product and locks in the price,” said Cook.

However, this mode of investment is not risk-free. One of the questions that could arise is: how does the producer protect himself against a rise in costs, and how can he be prevented from over-issuing pre-paid units and thereby short-changing the investor?

The answer would lie in setting up a clearing union, said Cook. “It would be possible to ensure mutual guarantee of pre-paid units by setting up a guarantee fund managed by members of the clearing union,” he said.

These new investment options could help Iran’s petrochemical sector achieve the ambitious production target it has set itself, say industry sources.

By the end of the country’s sixth Five-Year Plan in 2020, Iran is expected to account for 41% of Middle Eastern petrochemical production capacity, said NPC president, Abdolhossein Bayat.

“Iran's development plan 2020 aims at getting Iran to occupy first place in the Middle East in terms of petrochemical production value,” he added.

Total petrochemical production capacity in Iran is expected to increase to 100m tonnes/year by the end of Iran's fifth Five-Year Plan period, which runs from 2011-2015 – up from 60m tonnes/year in 2012, Bayat said.

Iran plans to develop three new free trade economic zones in its sixth Five-Year Plan, namely Lavan, Chabahar and Sarakhs, and is hoping to attract foreign investments into these developments.

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By: Staff Reporter
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