Iran Pulse

Iran’s oil minister has big plans for likely last term

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Article Summary
Having begun yet another — and likely his last — term as Iran’s minister of petroleum, Bijan Namdar Zanganeh faces surmountable challenges in pushing the country’s energy sector into the 21st century.

Bijan Namdar Zanganeh, the most experienced minister in the Islamic Republic of Iran, has yet again been entrusted with one of the most challenging portfolios in the Hassan Rouhani administration: the Ministry of Petroleum (MoP). Experts agree that in the past four years, Zanganeh and his team have managed to rehabilitate the petroleum sector after the damaging years under former President Mahmoud Ahmadinejad’s (2005-2013) trial and error mentality and external sanctions. Now, Zanganeh and the MoP have new ambitions in the next four years, which will most probably be his final term as petroleum minister. 

In his presentation to parliament prior to his latest vote of confidence in early August, Zanganeh outlined the following plans for the non-gas subsectors in the next four years:

  • Development of shared oil fields.
  • Signing of new contracts with the goal of developing shared fields and increasing the rate of recovery from the country’s oil basins using the latest technologies and foreign investment in order to generate employment.
  • Increasing the production capacity of oil with the goal of surging or at least maintaining Iran’s share of the global trade and improving Iran’s position in OPEC with the goal of empowering Iran economically, politically and securitywise.
  • Renovating the old and degenerated segments of the oil industry.
  • Constructing an oil terminal in the Sea of Oman.
  • Completing the value chain in the petrochemical sector.
  • Shifting away from exporting crude oil and emphasizing the export of petroleum products.
  • Technological promotion in the oil sector and completion of the projects for local manufacturing of equipment.

This is an ambitious list for a four-year term, but the Iranian government will certainly manage to pursue and materialize some of these goals. Some of the objectives are driven by political stakeholders (such as the focus on shared fields), some by security considerations (such as the oil terminal in the Sea of Oman) and others by technocrats (such as the introduction of the latest technologies). At the same time, the core challenge in achieving all of the listed targets will be to attract the needed foreign investment and technology. There is no doubt that the signing of the deal with the French Total-led consortium has generated a momentum in the interest of international oil companies (IOCs) to engage the Iranian market.

Notwithstanding, the current political atmosphere and rising tensions between Tehran and Washington may compel a number of IOCs to delay their investment plans for Iran. Indeed, the petroleum sector will require more than $200 billion in investments in the next five years to achieve the mentioned goals. This, in turn, will necessitate massive foreign investment as well as the transfer of technology. What will help Iran in this process is the fact that it is one of few low-cost oil-producing countries that is offering its projects to IOCs. Low costs, as well as negligible geological risk, are benefits that could overcome the current political risks, but the government has to make sure that all other challenges faced by IOCs in Iran (such as corruption, legal uncertainties, etc.) are reduced to a minimum. Furthermore, one main bottleneck for IOCs has been the financing of projects due to the reluctance of first-tier international banks to engage the Iranian market. This means that the MoP and other Iranian authorities will have to offer suitable solutions to facilitate the financing and banking transactions related to major investments.

Iran’s understandable insistence on the maximization of local content (i.e., the obligation of IOCs to subcontract the maximum possible level of the project components to Iranian companies) will require substantive qualitative capacity building in the local industry. In some cases, the desire to deploy the latest technologies in upstream projects may clash with the utilization of local content. Consequently, the MoP and its subsidiaries need to find the right balance between foreign and local technological content. The guiding principle should be one of the stated objectives, i.e., “increasing the rate of recovery,” which will enhance Iran’s national wealth and empower the country to invest more to create needed jobs.

From a national economic perspective, the most significant objectives are those that promote local value creation, i.e., the completion of the petrochemical value chain as well as the focus on exporting petroleum products rather than crude oil. The more value is generated in Iran, the more wealth will be created and the less dependent Iran will be on the dynamics of the international crude market. However, in achieving additional value in the petroleum sector, the MoP needs to think of strategic partnerships not only with technology providers but also with other partners that can help finance projects and also offer access to international markets. In other words, the MoP needs to develop a new mindset that has to go far beyond simply producing and selling crude oil. The shift in mindset could go hand in hand with a demand from some of the stakeholders who request that younger managers be promoted in the petroleum sector. In fact, the current leadership in the petroleum sector has been around for the past three decades, and the time has come for the empowerment of younger managers.

Another technological game-changer is the growing significance of energy efficiency. The government has passed a law that authorizes the MoP to guarantee investments of up to a total of $100 billion that are designed to improve energy efficiency and save energy resources. This is also a new experience that the technocracy in MoP needs to adjust to, i.e., the realization that it may actually be cheaper to save a barrel of oil than to produce one.

There are also other challenges that Zanganeh is facing. Energy sector expert Mehdi Assali believes that adjusting the political economy of oil will be one of Zanganeh’s challenges — “deciding about production levels, how to distribute the resulting oil rent among influential stakeholders in the political sphere and policies toward foreign investment that will be needed to optimize the utilization of the country’s vast oil and gas reserves.” It is no secret that the rents emerging from the petroleum sector have corrupted significant layers of the state structure. The case of the corrupt network around jailed businessman Babak Zanjani is only one example of the shady structures and dealings around petroleum sector interests in Iran. The only viable path to reduce the potential of corruption is to introduce the highest level of transparency into the sector — a process that will require legal and political reforms.

All in all, Zanganeh and the MoP will continue to face major challenges in achieving their stated goals. However, in the absence of major political upheavals, Zanganeh is the right politician to pursue these objectives and elevate the country’s most important economic sector to new highs.

Found in: Oil and politics

Bijan Khajehpour is an economist and a managing partner at Atieh International, a Vienna-based international strategic consulting firm.

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