IRAN

The state-owned oil industry of Iran remains a puzzle. Since 1991, it has declared itself willing to work with international companies in upstream oil and gas projects within the formerly isolationist Islamic republic. Deals, however, have been scarce. The much-heralded welcome of international capital has been intermittent at best.

Aug. 16, 1993

8 min read

The state-owned oil industry of Iran remains a puzzle.

Since 1991, it has declared itself willing to work with international companies in upstream oil and gas projects within the formerly isolationist Islamic republic.

Deals, however, have been scarce. The much-heralded welcome of international capital has been intermittent at best.

President Hashemi Rafsanjani recognizes the need for foreign investment in Iran and has made normalization of international relations a goal. The country has a rapidly growing population exceeding 60 million, widespread damage from an 8 year war with Iraq, and fiscal difficulties that hamper reconstruction.

So Rafsanjani, who became president after the 1989 death of revolutionist leader Ayatollah Khomeini, has attempted to open a range of opportunities in his country to foreign capital. Many of those opportunities are based on oil reserves estimated at some 93 billion bbl and gas reserves of 700 tcf.

But a politically and culturally powerful clergy - led by Ayatollah Ali Khomenei, successor to khomeini as revolutionary leader-remains hostile to non-Iranian, non-Islamic influences and resists efforts to open the economy. Its criticisms of the government's accommodations toward outsiders gain clout as domestic economic pressures grow.

Apparently in response to such opposition, the government has kept foreign oil companies-especially American - at some distance. Foreign service and supply companies, however, are working in Iran.

Neither the Iranian petroleum ministry nor the state-owned oil company National Iranian Oil Co. (NIOC), responded to requests for information for this article.

Iran's wary approach plays out against the backdrop of an arms buildup and allegations that the country supports international terrorists.

The U.S. this year has begun treating Iran as a regional menace. It is seeking support in Europe and among other Persian Gulf states for anti-Iranian economic measures. The effort has met with limited success but won't make petroleum negotiations any easier for American companies.

Regardless of the external pressures that may develop, the behavior that seems so contradictory to outsiders probably will continue until Iran's internal power centers come to terms over capital and workers from abroad.

BRANCH OF GOVERNMENT

As much as or more than any other state-owned enterprise in the world, Iran's petroleum industry works as an extension of the governments

Minister of Petroleum Gholamreza Aghazadeh serves as chairman of the three main companies: National Iranian OH Co. (NIOC), National Iranian Gas Co. (NIOC), and National Petrochemical Co. (NPC).

He also is managing director of NIOC. NIOC and NPC have separate managing directors.

There is no real separation of authority between the petroleum ministry and the companies; Aghazadeh is the boss. Company budgets are parts of the national budget.

Pending a reorganization to be completed in 1 1/2-2 years, NIOC handles oil and gas exploration and production, refining, and oil transportation. NIGC manages gathering, treatment and processing, transmission, distribution, and exports of gas and gas liquids. NPC handles petrochemical production, distribution, and exports.

The reorganization, which the government has approved, will create National Iranian Distribution & Refining Co. (Nidrc) as a subsidiary of NIOC. The move will separate oil and gas upstream activities from downstream oil operations.

An apparent motivation for the reorganization is a government plan to privatize the refining industry.

NIOC will retain management of upstream oil and gas operations and remain wholly owned by the government. It has other subsidiaries to handle specific functions, such as Iranian Offshore Oil Corp. and Iranian Tanker Co.

Separation of the upstream and downstream oil sectors will highlight deep subsidies of domestic petroleum products. Kerosine in Iran sells for the equivalent of 1/1., gasoline 3/1., fuel oil 0.2/1., and diesel 2/1.

The subsidies cost the energy sector an estimated $12 billion/year and the oil and gas sector alone $8 billion/year.

KEY PERSONNEL

With the oil companies so closely tied to the petroleum ministry, and with Aghazadeh as both petroleum minister and head of NIOC, other managing directors function essentially as agents of the government. Salehi Forouz is managing director of NIGC. M. Taheri Najafabadi heads NPC.

A key official in the area of relations with non-Iranian oil companies is S.M. Hosseini, adviser to the oil minister and NIOC general manager of overseas participation and international agreements.

Last January, Hosseini led a delegation that met with oil company representatives in Houston, the first such official Iranian visit to the U.S. since the Islamic Revolution of 1978-79.

At present, all international upstream agreements and negotiations cover offshore projects, which makes the head of NIOC's offshore subsidiary important to non-Iranian companies.

He is Mostafa Khoee, managing director of Iranian Offshore Oil Co. While Hosseini and Aghazadeh handle negotiations, Khoee determines operating requirements for offshore projects. As the grandson of a grand ayatollah, he holds special religious and political stature in Iran as well.

Another important NIOC official is Hamanah Vaziri, director of corporate planning, who maintains links with outside government agencies.

IRANIAN MARKETS

Whatever its difficulties attracting international capital, the Iranian petroleum industry suffers no chronic shortage of skilled technicians. NIOC has been able to rebuild war-damaged refineries and restore some of the production capacity lost since the Iranian revolution of 1978-79.

Refinery modernization is under way, although the pace is measured. Additions to refinery cracking capacities will change Iran's potential net trade position this year, according to industry estimates. The country in recent years has had to rely on imports to cover a net products deficit estimated last year at 34,000 b/d. Last year it imported gasoline, kerosine jet fuel, and diesel fuel and produced surplus fuel oil, naphtha, and other products.

Recent capacity additions will give it a net product surplus estimated at 230,000 b/d this year, mostly fuel oil. That surplus will grow to perhaps 355,000 b/d next year and 422,000 b/d by 1995, giving the Iranian refining industry significant potential for investments in upgrading capacity.

Last year's product demand amounted to 874,000 b/d. The total includes 135,000 b/d of motor gasoline, 133,000 b/d of kerosine jet fuel, 297,000 b/d of diesel, 219,000 b/d of fuel oil, and 90,000 b/d of other products.

Iranian refineries provided an estimated 120,000 b/d of motor gasoline, 75,000 b/d of kerosine jet fuel, 218,000 b/d of diesel, 329,000 b/d of fuel oil, 4,000 b/d of naphtha, and 93,000 b/d of other products. Demand growth is expected to average 4%/year through 2005, about double the worldwide rate.

CURRENT OPERATIONS

NIOC is stepping up drilling and gas injection to raise production capacity.

The petroleum ministry recently estimated production capacity at 4.3 million and said it would increase to 4..-D million b/d in a few months (OGJ, May 24, Newsletter). Iran produced nearly 6 million b/d before the Islamic revolution. The country's current quota in the Organization of Petroleum Exporting Countries is 3.34 million b/d, which the ministry says it does not intend to violate.

Crucial to production capacity additions has been a steady program of natural gas pipeline construction, which facilitates gas lift operations.

NIOC operates seven refineries with total capacity as of last Jan. 1 of slightly less than 1 million b/cd. That total includes an estimated 254,600 b/d at the Abadan refinery, 60% of which was damaged during the war with Iraq. Before the war, Abadan had crude distillation capacity of 630,000 b/d.

The company is building or planning refineries at Arak (130,000 b/d), Bandar Abbas (240,000 b/d), and Chah Bandar (300,000 b/d). The Arak facility is due on stream this year or next. Start-up of the Bandar Abbas refinery recently was reported to have been delayed by 2 years to 1995. Financing problems apparently have slowed construction.

A number of oil companies have conducted negotiations with NIOC about participating in Iranian upstream ventures. A common sticking point in those discussions is said to be allowed rates of return.

NIOC and other branches of the government in 1991 sponsored a petroleum conference in Isfahan that signalled Iran's intentions to become more active than it had been in international petroleum projects. Soon after that meeting, Iran announced it had signed a letter of intent with Japan Petroleum Exploration Co. for drilling in the Strait of Hormuz. A final agreement has not materialized.

Last September, ENI announced that it's Saipem subsidiary and Technologie Progetti Lavori SpA of Italy were beginning a development program in South Pars gas field in the Persian Gulf under an agreement with NIOC (OGJ, Sept. 21, 1992, p. 30). Saipem has completed basic engineering design and is arranging financing through export credit agencies.

Meanwhile, Iranian officials have shown strong interest in the Central Asian states of the former Soviet Union and have entered preliminary agreements for pipeline and other projects.