IRAN: Policies scatter windfall

11 October 2004
The Islamic republic is sitting pretty, thanks to the buoyant oil market. Projected oil revenues for the year to 21 March 2005 are expected to be met as early as November 2004, creating a significant surplus to place in the Oil Stabilisation Fund (OSF), set up to neutralise the negative fiscal effects of oil price fluctuation.

The IMF has told Iran that too much of the rainy day fund has already been purloined for project work - but its warnings are unlikely to have much impact and National Iranian Oil Company (NIOC) may consider that it is well set up for future development. It will need the funds. The high prices have shown that OPEC capacity is weaker than had been thought and if the organisation is to retain its strength, more investment will be needed upstream.

However, the recent signs are that an availability of funds will be offset by political problems in attracting international oil companies (IOCs) to match government investment (see Cover Story).

Since the first half of the year, the new Majlis (parliament) has repeatedly attacked reforms aimed at improving the attractiveness of upstream investment. The fourth five-year development plan (FYDP) was to have contained very important changes at NIOC. It would also have changed the formula for exploration and development contracts, substantially reducing investment risks.


Under the latest proposals, drawn up by the reformist government of President Khatami, successful exploration activity would automatically trigger production rights, changing the present system in which companies that discover oil have to submit another tender to develop the acreage. IOCs blame that formula for their lukewarm interest in Iranian exploration compared to other projects in Central Asia and West Africa. But, such is the opposition to the proposals, they are unlikely to be steered through.

The reasons are historic. Iranian nationalism was born of energy imperialism, when the British dominated successive shahs to keep alive a contract that vastly benefited Anglo-Iranian Oil Company (AIOC). But there are modern parallels on which NIOC might like to reflect.

Half a century ago, AIOC lost out because its British owners failed to understand that geopolitics had changed and they could no longer dictate terms to the government in Tehran. The company was nationalised and, despite a UK/US sponsored coup that changed the government and effectively reversed the decision, it lost far more than could have been gained by an earlier compromise. Now NIOC stands to lose by similarly misjudging a fundamental change in energy power politics.

NIOC cannot afford to dictate unfavourable terms to IOCs, which have plenty of options open elsewhere. Analysts say that, by and large, the company recognises the fact, but other national officials have failed to understand their position. Perhaps by holding out for a few more years, Iran will once more become so important to IOCs that they cannot afford to overlook it - but at the moment it is an overplayed hand.

While NIOC remains a large and strong company, its resources are stretched - particularly by the massive demands of gas field development that have emerged in recent years. Long-term plans to double production capacity to 8 million barrels a day will require IOC participation, according to Oil Ministry officials, and that participation is under threat from the failure to institute reform.

Deputy oil minister Mahmoud Astaneh said in August that the rejection of the FYDP in the Majlis would make the target impossible and cut state revenues by $80,000 million, causing 'enormous problems in the future'. Officials have also been dissuaded from making awards by the tense political climate - so progress on key projects is likely to slow down until the May 2005 presidential elections and the selection of a new cabinet.

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