LONDON (ICIS)--The pool of western capital available for companies considering investing in Iran is too shallow at present to support the kind of multi-billion dollar petrochemicals complexes that had been considered by some European players in the country, according to KPMG's global head of chemicals and performance technologies.
BASF, Linde, Air Liquide, Shell and Total were reported at various times to be considering large-scale new developments in the country, with a $10bn-worth of memoranda of understanding (MoUs) signed with the country's National Petrochemicals Company since sanctions were lifted, according to local news agency Mehr.
However, no large new petrochemicals investments have been made yet in the country by western companies, due to perceived instability in the current sanctions framework and lack of financing due to western bank trepidation over exposure to the country.
The implications of the latter mean that, even if a company were to brave the current market uncertainty, the project finance necessary for many companies to invest in projects at the values reported in global and Iranian media would likely be impossible at present.
“From a chemical industry viewpoint, companies are taking a watch-and-wait view, and that has not changed over the last two years,” said Paul Harnick, KPMG’s global head for chemicals and performance technologies.
“In general, the financing isn’t there to do a large multi-billion dollar capital project.”
With the second-largest gas reserves in the world and a government actively seeking to develop its domestic petrochemicals capacities, the promise of the country is huge, both in terms of feedstocks and demand, according to Harnick
“Clearly, Iran, with its vast supply of raw material feedstocks, makes it potentially very attractive as a place to manufacture chemicals. There’s also the demand side. You have a large population, highly urbanised, and an economy which is very broad across many industrial segments, which makes it attractive as a location to manufacture chemicals,” he said.
“Because of the perceived dangers around remaining US sanctions and the availability of finance, we have not seen any significant investment in the chemical industry. I would say if those sanctions ever do fall off, then I think some of the big global chemicals majors are likely to invest heavily in Iran,” he added.
Uncertainty over sanctions, and the fear of sanction snapback, revolves around the US, and whether President Donald Trump will continue to waive restrictions on the country remain the key issue for western companies.
After refusing to sign the waiver in October, the issue remained in limbo until mid-January, when Trump agreed to continue to lift nuclear sanctions, but with threats to pull away from the deal entirely if European partners on the deal did not agree to impose stronger sanctions.
The waiver, which stands for 120 days before needing to be renewed, will need to be recertified in March.
The lack of any certainty for longer than a few months on the political landscape in Iran has removed the country as a possibility for the time being for most players, according to KPMG’s Middle East and North Africa (MENA) desk lead, corporate intelligence, Karim El Assir.
“That lack of clarity for more than three months about whether the deal is going to be in place, for the clients I’ve spoken to, has caused them in many cases to take Iran off the table and not think about it until that certainty returns,” he said.
The sanctions issue perpetuates the financing drought, as even European banks, many with significant US operations, fear reprisals on their US operations, or the loss of capital if sanctions snap back quickly.
“As a result, the only means of transacting with Iran is either through a few handful of medium-sized and small banks located primarily in Germany, Luxembourg, and a couple of Scandinavian countries,” El Assir said.
“[You can go] to countries like South Korea, Japan, where some of the bigger banks are less reluctant to deal with Iran, and maybe finding a local partner there who you can do your project with, but it has just complicated things,” he added.
One deal that has been agreed by a western major is Total’s contract to develop phase 11 of the South Pars gas field.
Total has not revealed how the investment – which totals $2bn for the first phase alone – is being structured, but it is rumoured to be financing the deal off its balance sheet, or raising debt capital through a Chinese bank, as it has done for some of its Russian operations.
Even under those conditions, the contract included an option for China’s National Petroleum Corporation to take ownership of the project if Total is forced to withdraw from the deal.
The immediate impact of shadow sanctions aside, it is also difficult to navigate in an economy where some of the largest players are still under individual sanctions, and where ownership can be difficult to divine.
Iran's Islamic Revolutionary Guard Corps (IRGC) controls a significant portion of Iran’s economy and remains persona non grata in the west, with shell companies and shadowy ownership statuses complicating the picture further.
“A lot of the sector has been privatised over the last 10-15 years, and some of those bigger companies have been listed on the Iran Stock Exchange and come under at least partial control of groups like the IRGC,” El Assir said.
“So it is difficult to avoid them completely, but it is possible to do business in the sector without necessarily having a certain amount of exposure that would prevent you from operating in the country,” he added.
Diffuse and fragmented documentation makes due diligence in the country extremely difficult, and fines for inadvertent or intentional sanctions breaches can be high.
“Public records can be limited, so the classic example is that there is no centralised corporate registry, and if you want to find out the ownership structure of a company you have got to go four or five different registries located across the country and retrieve the documents manually, and very often there are inaccuracies in the documents.
It can be difficult to gather a paper trail that provides evidence that you’re dealing with the IRGC, but you need to make sure that you have done all the work that you have been able to do all the work to see who sits behind the counterparties you’re dealing with,” he added.
Nevertheless, if sanctions are relaxed, then the promise of the country is strong, Harnick added.
“Given Iran’s gas reserves, if you look at what’s happened in US shale over the last five years and the impact that has had on the petrochemicals industry there, there is potentially another similar sized event in Iran,” said Harnick.
“That is the scale of it, and without sanctions it could be a game-changer for the global petrochemicals landscape, but until such time as sanctions regime dissipates, that is not going to happen.”
Pictured: A couple at a rally for Hassan Rouhani in the run-up to the country's elections in mid-2017
Source: Mohammad Farnood/SIPA/REX/Shutterstock
Interview article by Tom Brown