IRAN is stepping up efforts to reduce its reliance on the massive equipment imports that are essential for maintaining and expanding the oil, gas and petrochemical industries. Chinese and East European countries figure prominently in this effort and they are already beginning to account for the bulk of equipment imports by the Oil Ministry.

Western manufacturers caution that a shift in equipment sourcing will mean a drop in quality, but experts in Tehran says standards are not being allowed to drop below internationally accepted levels.

Iran now spends more than $2,100 million a year on imported goods and services for the hydrocarbons industry. Kala Naft, the purchasing arm of the National Iranian Oil Company (NIOC), last year accounted for $1,100 million of the total. The National Iranian Gas Company (NIGC) and the National Petrochemical Company (NPC) spent another $500 million each on imported supplies.

Since 1995, when the US first imposed unilateral sanctions designed to cripple the Iranian oil industry, Kala has opened purchasing offices in Beijing and Moscow. This is a strategic break for Kala, which has traditionally used its London office for most of its buying, supplemented by a Tehran office and smaller offices in Sharjah, Calgary, and Hamburg.

The Moscow office is still not fully manned and has only one staffer who makes occasional visits. But the Beijing office has several personnel and purchases of equipment from China are growing fast, according to industry sources in Tehran.

How successful Iran has been in moving its sourcing away from the West is not clear, but one official in Tehran estimates that 40 per cent of purchases are from China and countries of the former Eastern bloc. A few years ago such purchases would have been minimal.

China is of particular interest to Iran because Chinese companies have licenses for Western, especially US, technology. It is also alleged that they are prepared to bend the rules when licenses are in doubt. 'The Chinese oil equipment manufacturers have very good standards...and now export to the West,' says one official.

China's growing role in Iran's oil industry is evident in the presence of its companies in Tehran and at local trade fairs. At the second international oil and gas trade fair in Tehran in April 1997, for example, there were several Chinese companies, including Lanzhou Petroleum & Chemical Machinery Works. Lanzhou was also offering complete exploration, drilling and development services.

On the domestic manufacturing side, Iran's efforts to transfer technology from abroad and improve standards are centred on the state-owned Petroleum Equipment Industries Company (PEIC). Set up five years ago by the Industrial Development & Renovation Organisation (IDRO), PEIC does no manufacturing of its own. PEIC only has testing and assembly machinery and farms out manufacturing to 10 subsidiary companies, which it owns wholly or in part, and 100 subcontractors.

PEIC conducts local market research, specialising in hi-tech and high- cost equipment. 'Then we propose projects to the board of IDRO and help set up the necessary ventures,' says managing director Kaywan Ara. He estimates the value of production by firms affiliated with PEIC could eventually rise to about $250 million a year.

Local production will range from seamless pipes to valves and gaskets. Some involve joint ventures with foreign firms. In other instances complete factories have been acquired and relocated from abroad. In every case, 'We encourage maxiumum involvement of the private sector,' says Ara.

Lulehgostar-e Isfaraeen, a wholly-owned PEIC subsidiary, bought a factory in 1996 for $20 million from a Belgian firm and expects to start producing 200,000 tonnes a year of seamless pipe for casing for drilling within two years. The output should be sufficient to meet domestic demand and leave a surplus for export. Iran now spends $100 million a year on importing such pipes, Ara says.

The opportunity to buy the factory was created when the Belgian owners decided to relocate production to Romania where labour and environmental conditions were more attractive.

Another big facility, already in operation, is Gostaresh Shirsazi Company, which makes valves at a factory in Islamshahr under a joint venture of PEIC and Energoinvest of the former Yugoslavia. There are also joint ventures with the Chinese and a Ukranian group for ball valves, according to Ara. Valve imports now cost $120 million a year, but can be reduced to $20 million within three years, he says.

In Mashad, Payvandan produces $8 million worth of fittings a year, equivalent to half the value of recent imports annually. Higher output should meet 90 per cent of increased requirements of $60 million a year by the end of this decade.

An agreement was signed in early May with an unidentified Chinese company to manufacture mechanical seals. Another Chinese firm is involved in a spiral wound gasket scheme which will start producing by late 1997.

In at least one instance, a PEIC subsidiary has reverse engineered Japanese technology to produce petrol pumps. Near Tehran, Damafin will start producing air coolers for gas pumps under French license in January 1998.

Other companies not linked with PEIC have been manufacturing heavy equipment for the industry for some years. For example, Azarab, in Arak, manufactured the boilers for the grassroots Bandar Abbas oil refinery, which is to open this year. Officials claim that up to three quarters of an oil refinery can now be manufactured locally.

Other big manufacturers include Machine Sazi Arak, Tecnicon, Paysaz, Jonid Company, Sakht va Tajchizate Naft and Sadra Marine Industries.

Ara says that the hope is for local manufacturers eventually to meet 80 per cent of the industry's annual requirements of $2,000 million. When this might be possible is not clear, and the industry will remain dependent on at least some significant imports for the foreseeable future, even if Iran has succeeded in shifting the bulk of these from the West to China and Eastern Europe.

Iran's European suppliers are somewhat sceptical about the local energy industry's strategy of going shopping elsewhere. They add that Chinese technology, for example, is 10-20 years out of date. At the same time, Western firms will not be prepared to form local joint ventures, they say.

Local experts are adamant that quality is not being sacrificed. 'Quality is very important,' says Ara. 'And all projects will have ISO 9000 certification this year.'