With US sanctions hampering the nation, Iran has its work cut out bringing petrochemical projects online and on time in order to meet a burgeoning gasoline demand.
There is an interesting dichotomy in Iran's energy industry: it is the world's third largest holder of oil and gas reserves, yet at the same time it is the second largest importer of gasoline in the world.
It seems only natural that the country should develop its downstream sector to meet rampant domestic demand, and indeed still have plenty left over for exportation.
Now Iran is faced with the prospect of the West targeting imports which have thus far avoided sanctions - the latest development forcing Iran’s hand in expanding refining capacity.
With that in mind, over the last few years, the government has been actively pursuing the development of its petrochemicals industry. To give some indication of the level of growth in the sector, in 1977 Iran had six refineries in operation with a capacity of 80,0000 bpd.
By 2006 this had reached nine, with a total capacity of 1.5million bpd and plans have been made to more than double this to 3.3 million bpd by 2012, which would make Iran the largest refiner in the GCC, overtaking Saudi Arabia.
All of this would seem viable were it not for the political situation the nation finds itself in. The country has US and UN sanctions placed on it due to its disputed nuclear programme, restricting international companies and the flow of money going into Iran. It has left the country to either seek the help of IOCs from Asia and Russia, or to develop the projects on their own.
According to EIA (Energy Information Administration) statistics, Iran is the world's second biggest importer of gasoline after the United States, consuming over 400,000 bpd in 2006, of which approximately 192,000 bpd was imported at a cost of US$5 billion.
With an average growth of 10% annually for gasoline consumption over the last six years, a growth in vehicle sales and the fact that gasoline is heavily subsidised by the government, the country is under pressure to increase refinery capacity.
In 2007 the country began to lessen subsides on gasoline, increasing the price to 42 cents per gallon. Then in July Iran introduced the NIORDC (National Iranian Oil Refining and Distributions Company) programme for gasoline rationing, which allows private cars to purchase just 26 gallons of fuel a month and taxis 211 gallons per month. Needless to say the move was met with much uproar from Iranian citizens.
Now Iran is faced with the prospect of the West targeting imports which have thus far avoided sanctions - the latest development forcing Iran's hand in expanding refining capacity. According to a Business Monitor International (BMI) report on the state of the industry in Iran, the country is being heavily hindered in its attempts to increase its capacity.
"There are considerable risks to the growth outlook, including continued economic mismanagement and the rising possibility of international sanctions. Iran's ability to reach its objectives depends on the country's ability to maintain foreign participation in the sector in order to provide technology and investment," the report states.
The funding for increasing capacity to 3.5 million bpd would take as much as $90 billion in revenue. Iran's National Petroleum Company (NPC) is planning to obtain 70% of funds from government organisations, with the remaining 30% to come from the private sector.This dislocation from the international financial sector should ensure more security for the projects, though as we have seen, the West has other cards it can play.
"Even so, it is doubtful that petrochemicals projects will achieve the necessary finance. Any downturn in oil prices at a time of tightened sanctions could lead to the postponement of projects, and increased external risk has created problems not only for investment, but also for trade with an increasing number of commercial banks becoming wary of facilitating trades in Iranian petrochemicals," claims the report.
Despite this, Iran forges ahead with its lofty ambitions in the sector. According to Aminollah Eskandari, director of refinery affairs at NIORDC, Iran is investing more than any other GCC country in the refining sector, and has seven new refineries planned for the coming years.
There will be a major announcement made soon by the Iranian government saying that they are going to spend more than US$30 billion on new refineries and refinery expansion projects. -Seyed Tafreshi, ODCChammed Ayoub, operations leader and region.
"Given the economic growth of big consumers such as India and China, oil producing countries have made huge investments in oil refining," Iran's Irna quotes Eskandari as saying.
More news reports from Iran have stated that investment is being made and that refineries will be coming online within the time frame. A refinery in the Khuzestan region has received approval for 80% investment from foreign investors, $2.8 billion of the $3.5 billion required.
The contractor, Zali, said that the refinery would be built within three years, processing ultra heavy oil from the Azadegan and Yadavaran oilfields, and that foreign investors were selected to bring foreign currency into the country.
Meanwhile Irna has reported that most of the refineries will come onstream by 2012 and that all of the oil produced at the country's Hormuz refinery, which has a 300,000 bpd capacity, will be exported. The Bandar Abbas and Khuzestan refineries will also be used for exporting products.
As for petrochemical projects, in July Iran announced the opening of the Jam petrochemical complex in the Pars Special Economic Energy Zone in the Assaluyeh region of southern Iran. The country, along with Sasol, invested $1.3 billion in the olefins complex to bring 1 million tonnes per annum (tpa) of ethylene into production.
The Jam complex is the tenth olefin project in the area, and is Iran's largest olefins plant with a final production capacity of 1.32 million tpa of high-density polyethylene and associated products.
More recently NPC announced it was downscaling number 12 of the olefins project in Assalouyeh. The project was to produce 1.8 million tpa of ethylene and 900 000 tpa of propylene, as well as polyethylene and polypropylene.
Mohammad Hassan Peyvandi, NPC's director for planning and development cited declining margins for polymers as the reason for reduction in capacity, in addition to a diversified product slate.
"There will be an announcement made soon by the Iranian government saying that they are going to spend more than $30 billion for new refineries and refinery expansions. We are currently working on a 60 000 bpd refinery in South Pars, where we have completed the basic engineering for, endorsed by the Italian company involved in the joint venture," says Seyed Tafreshi, international affairs director, Oil Design and Construction Company (ODCC).
ODCC are an Iranian EPC contractor which was formed by merging a branch of National Iranian Oil Engineering and Construction Company (NIOE&C) and an affiliated company. The company is involved in many upstream and downstream projects in Iran as well as in Turkmenistan.
"Our challenge is the sanctions placed on us, but we have had sanctions before, during the eight year war between Iran and Iraq, and we had very good progress across all industries during this time," says Tafreshi.We have the experts and the technology to improve our industries but material prices do tend to rise and therefore project price and completion times go up.
He goes on to add that there are now many manufacturing companies and equipment suppliers in Iran supplying the industry, although high levels of technology can only be found outside the country, which is a problem.
"There are a lot of projects we are busy with in Iran that we need a lot of equipment for, and if we have to supply them from outside the country we will face problems. But we will do everything in our power to complete the projects on time," says Tafreshi.
We have very strong potential and excellent resources, but delivering on time is one problem. Infrastructure is also a problem - many sites need proper maintenance and upgrading. - Mohsen Khademi, KTCamm.
"Most importantly for the country is production of gasoline, as consumption is still well above production rates. Given the information for the proposed refineries when completed, the gasoline production will be nearly double the consumption, so we will be able to export the product."
Improved relations with the West and in particular the US - something that has fresh hope thanks to the election of Barack Obama - would go a long way to ensure that capacity increases are met.
"We understand that we are working in an area where there are many problems, but we need to learn to trust each other. From my point of view, the Europeans have been co-operative and have good relations with Iran, and we believe that US relations will improve in the coming years. The world is a family and we should learn to all live and work together," a positive Tafreshi concludes.
Another company which is facing difficulties in obtaining advanced equipment and technology is KTC, another Iranian EPC contractor. Not only that, but many of the highly skilled engineers employed in the country often leave the country for pastures greener after gaining the necessary experience.
"We cannot get highly advanced products or technologies here because of the sanction, so the companies in Iran try to work with Europeans and the Japanese, and any other countries that can help," says Mohsen Khademi, media manager, Kerman Tablo Corporation (KTC).
"We have very good engineers here, the only problem is when our engineers get sufficient experience, they tend to leave the country - we have a great deal of skilled engineers who have traveled abroad."
The company has recently won projects in Turkmenistan and is opening a factory in Ras Al Khaimah, but has been forced to delay projects due to restrictive sanctions.
"Because of the political situation sometimes we are behind schedule on the projects. We have very strong potential and excellent resources, but delivering it on time is one problem. Infrastructure is also a problem - many sites need proper maintenance and upgrading. The country should be opened to other companies to help upgrade the ageing infrastructure," states Khademi.
Investment is what is needed, and investment is what the oil ministry is actively seeking. Speaking only recently, Iran's Oil Minister, Gholamhossein Nozari was adamant that the country's refining developments offer a tremendous opportunity for foreign joint ventures to reap financial rewards and for the implementation of major projects, which rely on indigenous expertise, that would greatly benefit the nation.
With an estimated $25 billion of funding still urgently needed if development plans are to be completed, Iran will be hoping things begin to develop quickly.For all the latest energy and oil news from the UAE and Gulf countries, follow us on Twitter and Linkedin, like us on Facebook and subscribe to our YouTube page, which is updated daily.
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