Oil & Gas Industry in Iran
August 26, 2014 in Journals / Articles
Most oil-rich Third World economies have had difficulty in evolving into true economically liberal societies. By owning or con-trolling twenties generated by oil, the state is able to dominate society snaking all classes and groups economically dependent on their ‘Black Gold’. Oil tends to centralize state power in the Middle East, as this commodity contributes 90% to 93% of their total foreign exchange revenue. However with the world rapidly mating new circumstances, this trend is poised for change. With the political developments within the Middle East in the recent past, it is not hard to accept the notion that by 2013 the entire Middle East region is posed to become a ‘Free Trade Zone’ (CNN, June 3, 2003).
To achieve these aspirations, it has been suggested the countries of the region will have to embrace market economy concepts and agree to move towards transparency and ‘privatization’, a word often used synonymously with the sale of assets, deregulation and decentralization. Having embarked on the journey towards economic reforms since the end of the war with Iraq (1988), the Islamic Republic of Iran will be part of the new environment. With reforms acquiring a new momentum and with privatization gaining ground, however, a point will be reached when the contentious issue of the privatization of the oil and gas industry in Iran, and the National Iranian Oil Company in particular, can he evaded no longer.
Background
Twenty four years after the victory of the 1979 Islamic Revolution, Iran is on the thresh-old of ground-breaking economic changes and adjustments. It is no hidden fact, though, that the prevailing situation is in need of an up-ward push. In 1998, fuel subsidies alone reached $11 billion per year 73% of the country’s development budget. Food subsidies. On basic commodities such as bread, rice and sugar, eat up another $2.2 billion per year. Together, these subsidies use up some 24% of the $54 billion annual budget country. The Iranian President Mohammad Khatami has come to accept market reform and advocates attracting foreign investments. The President has skillfully combined cuts to subsidies, the privatization of state firms and changes to labor laws – in short, ‘shock therapy’ to the market. President Khatami is fully committed to re-structuring the economy. His government has already approved the privatization of 538 state-owned companies through auctions and stock sales, and plans on privatizing another 2,000 (Reuters, March 11, 1999). The Iranian Parliament (Majles) has approved plans to overhaul the oil industry, and boost Iran’s sagging oil production from 3.5 million bpd (barrels per day) to 6 million bpd over the next 10 years, according to the U.S. Department of Energy. This will require at least $120 billion in capital, and for this, Iran seeks to facilitate the entry of private investors and foreign sources into its market. The discovery and development of Caspian Sea oil on Iran’s northern border is just one of the opportunities for the government to attract international interest and capital after a lengthy hiatus.
Efforts are underway through a strategic development plan, and the implementation of various petrochemical projects. To raise the production level of Iran’s petrochemical industry. Begun in 1997, the plan is divided into five phases lasting through 2013. By the end of this period, the total volume of final products is estimated to be 16.8 million metric tons per year. The value of investment will amount to $20.6 billion with total sales topping $11.8 billion (Petrochemical Industries Investment Company, July 199)). Participation by the private sector, whether in the form of investment or in launching new projects, can have a considerable impact, and for this purpose the Petrochemical Industries Investment Company (NC) has been established. As privatization became one of the main policies of the government, it led to the restructuring of the National Petrochemical Company (NPC), with plants with a capacity of less than 100,000 tons subject to transfer to the private sector. The private sector was also allowed to invest in medium-size petrochemical plants. NPC oilers bonds for the construction of petrochemical plants, and also supplies raw materials to the private sector at a 30% discount, compared to world prices. These measures could be considered as models for Iran’s oil and gas industry.
Yet, doubts remain. The sustainability of macro-economic stability, and progress in the key areas of economic policy reform, are critical for placing Iran on a maintainable growth path. For an improved private sector environment, financial sector and pricing system re-forms, Iran must rid itself of the notion that foreign investors are imperialistic. Although the Ministry of Energy has authorized the sale of 14% of the capacity of its state-owned power plants (according to the Utilipoint International Incorporated website), the National Iranian Oil Company (NIOC), remains off limits. The reluctance on the part of the people and the government of Iran regarding the is-sue of privatizing the NIOC has complex reasons which can only be understood by looking back at history.