Comment: New president likely to change Iran’s oil industry

On June 24, the mayor of Tehran, Mahmoud Ahmadinejad, won the second round of Iran’s presidential elections, upsetting Ali Akbar Hashemi Rafsanjani with 61.7% of the vote. Ahmadinejad’s victory has received considerable press coverage in the US, partly because it has been alleged that he was one of the key students involved in the takeover of the American Embassy in 1979.

As the inability to definitively ascertain Ahmadinejad’s involvement demonstrates, not much is known about him. He generally is considered a conservative populist, a champion of the poor, and a nationalist. In his youth he might also have been a member of the Hojjatieh Society, a traditionalist and sectarian Islamic association that ran afoul of the Ayatollah Khomeini.

Given Ahmadinejad’s relative obscurity, many see his victory as a symptom of Supreme Leader Ayatollah Ali Khamenei’s final consolidation of power. Because decisions on the energy industry in Iran were never the sole province of the president’s administration, but subject to the consent of Iran’s (Majlis) Parliament, the Guardian Council, and the Supreme Leader, it has been argued that the success of Khamenei’s camp will simplify the decision-making process.

Amadinejad said he would name his cabinet shortly after winning the election but has not yet done so. We expect the president-elect to make some changes in management, given his statement that he intends to “cut off the hands of the mafias of power and factions which have a grasp on our oil” and the heated criticism the oil sector has received from his allies in the Majlis.

Likely cabinet choices

We expect current Minister of Petroleum Bijan Zangeneh to step down. Possible replacements under discussion include Hadi Nejad-Hosseinian and Kamal Daneshyar.

In the past, Zangeneh was partly protected from political vicissitudes by his orchestration of major changes in Iran’s oil industry. He arranged the creation of multiple private companies owned by National Iranian Oil Co. (NIOC), replacing government functions with more flexibility. He also helped Naftiran Intertrade Co. (NICO) to rise to prominence. The new structure is so complex that some wonder whether anyone other than he could manage it.

Nejad is the current deputy minister of petroleum for international affairs. The energy community would warmly greet him as a relatively known entity. In his last post as the Iranian ambassador to the United Nations, Nejad specifically met with all of the key executives of the major international oil companies. He is widely regarded as an honest and forthright interlocutor. Furthermore, he is in favor of attracting foreign investment to the Iranian oil and gas sector and is willing to continue exporting natural gas either via pipe or LNG. He is sensitive to the markets and, as such, potentially open to improving the terms of new production-sharing contracts in Iran.

However, Nejad is quite bullish as far as gas is concerned and is an advocate of higher prices for LNG sales. He is unlikely to continue the price trajectory set by the previous administration.

Buy-back contracts are unlikely to change and might even become more restrictive. Only Nejad might try to make them more attractive. What will happen to those joint ventures for gas exports still in their formative stages, on the other hand, is up in the air.

Daneshyar, chairman of the Majlis Committee on Energy, has considerable experience with energy legislation and the people involved, but he has no direct industry experience. His views are influenced by Dr. Saiidi, who was in charge of reservoir engineering for NIOC prior to the revolution and who retained his position until he retired in the 1990s. Saiidi, thought to know more about Iran’s oil fields than anyone else, strongly opposes gas exports. He has developed a strong antigas lobby in the Majlis, claiming that 20 bcfd-estimated to be 100% of South Pars gas potential-is needed for injection to support oil production.

Daneshyar and some members of the energy committee base their opposition to gas exports on the assumption that Iran currently needs to inject a total of 12-14 bcfd of gas into 30 fields. Only 3 bcfd is being injected today, which is the reason they believe the decline rates of those fields is climbing (OGJ Online, May 2, 2005). By 2010, they think that Iran will need some 20 bcfd of gas injection to avoid a massive decline in oil production and that total Iranian gas demand will be 42 bcfd.

Should Daneshyar be chosen to replace Zangeneh, we expect there to be few, if any, new gas export contracts to be signed. Although Daneshyar favors cooperating with Indian companies on a variety of levels, he is explicitly opposed to exporting gas to India via LNG or pipeline.

No one in Daneshyar’s camp, however, is suggesting that it is in Iran’s interests to interfere with existing, signed agreements.

Mohsen Yayavi, Elias Naderan, and Mohammad Reza Bahonar also have been mentioned as possible contenders for the ministry post. No one, outside of the president-elect, knows for sure who will be appointed. However, the direction is clear: there will definitely be a change of course. The political pressure to give all new contracts to Iranians will not likely be resisted. There will be a decided change in the institutional view of gas exports, either an antiexport position or a move toward higher gas prices.

Oil company changes

There has been much speculation, as well, about how the new administration will shake up the oil industry. What follows is a summary of our best guesses as to who will stay and who likely will decide to leave:

NIOC Managing Director Mehdi Mirmoezi, who has close ties to Zangeneh, may find it preferable to change positions.

NIOC Deputy Managing Director Seyed Mehdi Hosseini, the “father of Iranian buy-back contracts” reportedly is retiring. We think there is some likelihood, however, that he will be retained or even promoted to managing director.

Fard H. Ghanimi, NIOC’s Director of International Marketing since 1989, is known as a competent technocrat with links to the conservatives and likely will stay on. Generally, executives with extensive institutional memory and sector expertise will stay on in some capacity because it is difficult to see how things would be managed without them.

The falling out of Deputy Minister for Caspian Affairs A. Salehi-Foroz with Zangeneh may serve him well in a reshuffling. He is former managing director of Pars Oil & Gas Co. (POGC) and is connected to Ayatollah Taheri, the former Friday prayer Imam of Isfahan. Salehi-Foroz likely will remain in a senior position, or he might return to POGC.

There also is likely to be some changes in National Iranian Gas Exporting Co., led by Managing Director Rokneddin Javadi, a Zangeneh protégé, who has been leading the charge on LNG and pipeline gas export. Members of the Majlis have been critical of these policies.

NICO, which owns Petropars Ltd. and PetroIran Development Co., is the largest private upstream company in Iran. Although it is incorporated offshore, it is wholly owned by NIOC. It was under Zangeneh’s stewardship that NICO became the powerful entity it is today, and it may have been one of what Ahmadinejad had in mind when he remarked that, “The atmosphere ruling over our deals, production, and exports is not clear. We should clarify it.”

However, dismantling NICO would be difficult without disrupting the oil industry. If the new administration does decide that major changes are necessary, they likely will move slowly and with some caution. NICO’s Chairman Kazempour Ardebelli has been representing Iran in OPEC for 20 years. Although he has ties with the reformists, it would be difficult to operate without him.

NICO’s Managing Director Majid Heyayatzadeh, who is in charge of all trading activities, is closely tied to Zangeneh but also has close links to senior clerics.

Ali Akbar Hashemi Rafsanjani’s son Mehdi Hashemi Rafsanjani is the managing director of the Organization for the Optimization of Fuel Consumption, the organization responsible for the clean fuels program in Tehran. Given Ahmadinejad’s warning that he will “get rid of the family which holds control over Iran’s oil,” we think it is likely that Rafsanjani will be asked to step down.

The final arbiter for all decisions, of course, is the supreme leader. It would have been impossible for Zangeneh to instigate the changes he made during his tenure without Ayatollah Khamenei’s assent.

The supreme leader may be more comfortable with the current structure of Iran’s oil and gas industry than Ahmadnejad’s apparent hostility would suggest. ✦