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Thu 10 Feb 2011 12:00 AM

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Iran’s downstream recovery

Despite sanctions and domestic challenges, Iran’s petrochemicals industry is still managing to grow its global market share.

Iran’s downstream recovery
Iran’s downstream sectors suffer due to the UN sanctions.

Iran
possesses 9% of the world’s proven oil reserves and around 16% of gas, according
to figures of the Iranian Energy Ministry. This abundance of hydrocarbon reserves
has helped the country to launched massive investment in a move to monetize its
feedstock. This is in spite of the US led sanctions which have impacted
the country’s ability to become the preeminent supplier of petrochemicals, due to
the restrictions on foreign investments in the country.

Iran has invested
enormous amounts of capital to set up large downstream petrochemical industry with
value-added products, in a drive to boost profits, provide jobs to its growing population
and diversify its exports.

The petrochemicals industry in Iran dates back to 1963, with the foundation
of the National Petrochemicals Company, and the start of the first fertilizer plant.
Between 1963 and 1986 the country built up capacity to supply fertilizers, and petrochemical
products for domestic consumption. In this period, several petrochemical complexes
were built.

With the end of the Iran Iraq war, Iran began restoration efforts, which included the
reconstruction of damaged complexes due to the war during its first development
plan from 1989 to 1994, and the construction of several projects including Esfahan
and Arak petrochemical
companies, as well as completion of Bandare Emam complex. It was followed by the
development of an export orientated industry and privatization in the period from
1995 to 1999.

Since 2000, Iran
export its petrochemicals products to international markets when it privatized industry
and begun exporting and focusing on research and development centres.

Feedstock issue

In contrast to GCC neighbours, Iranian petrochemicals producers
face a feedstock problem during winter, as the Iranian government tends to reduce
ethane allocations due to the fierce weather, as it channels gas for domestic use.
This situation forces petrochemical companies to switch to liquid or other lighter
feedstocks. “We use ethane of course, but fortunately our plant runs also with other
feedstocks such as light ends, heavy aromatics and many other feedstocks,” explains
Mohammed Reza Eftekhari, head of production control and planning at Jam Petrochemical
Company. “So, when we have a shortage in winter, we can switch to other feedstocks,”
he adds.

In Late December 2010, Iranian news agency Mehr reported that
the government has decided to increase the price of gas feedstock to petrochemicals
plants to reflect the price of its exported gas and Japan’s oil-linked gas price. The new
price formula for crude oil, condensates, ethane, methane and enriched gas as feedstock
for petrochemical plants has been set in line with the country’s recent move to
scrap fuel subsidies. Gas will be supplied to local industry at 29% of the gas export
price and represents a 4% increase per year.

Iran’s
petrochemicals plants have been forced since August to switch some units to produce
gasoline due to sanctions.

Managers of petrochemicals plants in Iran, which have already
suffered in recent months from a switch to gasoline production to meet local demand,
had asked for the price of gas feedstock to be set at a rate that would allow them
to compete with regional rivals such as Saudi Arabia, where Saudi Aramco supplies
industrial giant SABIC with feedstock at $0.75/ million BTU. They have argued that
pricing feedstock at too high price would result in bankruptcy.

Domestic issues

Iran’s
petrochemical plants consume 12 billion cubic meters of gas per year, according
to Iranian energy ministry.

Deputy Oil Minister for Planning Affairs, Mohsen Khojasteh Mehr,
said that gas would be sold to petrochemicals plans at 700 rials ($0.673) per cubic
meter and that the price would rise gradually each year. “It is predicted that the
price of gas as feedstock for petrochemical plants will increase to 65% of Iran’s gas exports
basket over a ten-year period,” Khojasteh Mehr told local media in early December.

Iranian President Mahmoud Ahmadinejad has implemented a programme
for the phased removal of costly subsidies on fuel and other commodities while at
the same time raising the price of products such as gasoline, diesel and kerosene.

This has led to the fall of fuel consumption across the country.
“In the first weeks of the launch of the subsidy removal plan, energy consumption
has fallen,” says Mohammed Reza Farzin, Deputy Economy Minister of Iran. “The oil ministry
says that diesel consumption, which was at 60 million litres a day is now at 55
million litres,” Farzin adds.

Managing director of the Arya-Sasol Petrochemical Company, Abbas
Sheri Moghaddam, has called for “reasonable feedstock prices,” according to domestic
news agency. “Sufficient and reliable feedstock is needed at prices comparable with
rival countries for at least 25 years,” he told the news agency in December, asking
that the authorities help in efforts to increase production, profits and exports
of petrochemicals, a major industry in the OPEC state. Arya-Sasol uses ethane, propane,
hexane and propylene as feedstock to produce ethylene, heavy and light polyethylene
and heavy carbon cuts.

Most of Iran’s
petrochemical plants have been privatized though they still require government support
to be able turn profit.

Going global

Following the rapid growth of the petrochemical industry and
substantial increases in petrochemical production, Iran established Petrochemical Commercial
Company (PCC) in 1990, with a mission to market petrochemicals products to international
markets. The company was privatized in January 2010 with the transfer of 55% of
PCC’s shares from NPC to the private sector. The share holders plan to buy the remaining
45% stake from NPC around the first quarter 2011, although Iranian media have commented
that restrictions by the Iranian government stipulate that 20% of the company’s
shares would remain under NPC.

In June last year, the UN issued its fourth round of sanctions
against Iran.
PCC was on the list. CEO and board member of PCC, Reza Hamzehlou, said on the sideline
of ArabPlast in Dubai that his company has started
a legal process in the United States
to challenge the sanctions imposed by the US against the company. “I think if
we go to the exact wordings of the sanction on PCC, everyone will fully understand
that it’s illegal. The statement in the sanction is saying that PCC is wholly owned
by NPC. This is not correct,” said Hamzehlou.

Despite the US
sanctions, Iran’s
PCC has increased its production and gained a foothold in export markets.

Speaking in December at 13th Conference of Senior Officials of
the Oil Industry in Iran Hamzehlou said the country has overtaken Saudi Arabia. “Currently,
Iran is the first ethylene exporter to European Union, and it ranks second in terms
of selling ethylene to China,” Hamzehlou said. “Currently, Iran has taken 44% of China’s methanol market,” he added during
the event held in December in the Iranina Capital Tehran.

The official puts the value of PCC exports at $4.7 billion for
2009. The figure has hit $7.2 billion since March 2010 to December 2010, indicating
a 52% growth compared to the same period year ago, he pointed out.

The value of domestic trade of petrochemical products has hit
$28.8m from $22.2m, which shows a 32% rise.

He continues that close to 31 million tonnes of petrochemical
products were produced across the country, of which 12 million tonnes were exported
via Petrochemical Commercial Company and six million tonnes were sold inside the
country in 2010.

Hamzehlou says that 7,000 downstream companies are currently
active in the country’s petrochemical sector.

Clash of the titans

The start up of mega petrochemical production facilities in Iran and in Saudi Arabia
has intensified competition between the countries, both vying for a slice of China’s petrochemicals
market. While Iran seems to be in a weaker position because of the sanctions, it
has managed to make impressive inroads into the Chinese market with booming exports
of high density polyethylene and methanol, surging past Saudi Arabia in just a couple
of years.

But, though Iran has made headway into China and was strengthening
its position as major petrochemical supplier for Asian markets, sanctions have dented
exports to some extent but remain ahead of regional competition in terms of market
share. “Competition is very healthy for the industry in this region and we see competition
between both parties over the Turkish as they want to control and dominate the sector,”
says Sayed Rashid Husain, vice president of Al-Azzaz Establishment. “If they start
fighting among themselves it won’t be good for the Middle East
producers, so this has to change in the years to come,” Husain concludes.

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