Bribery, Corruption And Changing Contracts: Oil Investment In Iran

The Islamic Republic (IR) of Iran’s disputed nuclear program, which was widely viewed as a concern for international security, ended on January 16.

After international sanctions were ended, the expectation was that the misbehavior of the IR would change as well, but that is yet to happen. The tyrannical Islamic regime and its few sympathizers around the world are still attempting to deceive the international community by claiming that support for the so-called “reformist” and “pragmatic” president will ultimately, among other issues, bring freedom and democracy to Iran. They try to convince the U.S. and European countries that by appeasing this regime and rewarding it with normalized relations, they will somehow change its attitude and behavior.

However, the distinction between the “moderate” president and the “fundamentalist” supreme leader in Iran is a political subterfuge used to mislead the population and perpetuate the inherent corruption of the IR governing system. This corruption will not only continue to oppress the Iranian people but will also undermine the transparency in business with foreign investors.

The crippling global sanctions on the IR, aimed at curtailing its nuclear activities, cost the country hundreds of billions of dollars in the past 10 years. According to the U.S. Energy Information Administration (EIA), oil revenue accounted for 85 percent of IR’s total export earnings. Following the additional global sanctions enforced on the Iranian oil industry in 2012, production dropped from 3.7 million barrels per day to 2.8 million barrels per day, and crude oil exports reduced from 2 million barrels per day to 1 million barrels per day. Economically, the near 40 percent inflation, the astronomical cost of living, and the 33 percent unemployment left the IR with no choice but to sit at the negotiating table and agree to the world powers’ demand to limit its nuclear activities.

The Iranian President Visited Europe

Rejuvenation of the oil industry is the prime priority, since oil revenues make up a large portion of the Islamic government’s income. Therefore, Hassan Rouhani has tried to restart trade relations with the IR’s old partners. Several European countries including Italy, Spain, and Greece had bought Iranian oil before the international sanctions were placed on the IR in 2012. Hellenic Petroleum, Greece’s largest petroleum refiner, was the first European entity to restart business with the National Iranian Oil Company (NIOC). An agreement was finalized for up to 60,000 barrels per day of Iranian oil to reach Greece.

The IR’s president visited Italy and France in January, meeting with over 100 business delegations in an attempt to promote IR’s main source of income, oil and gas, and to invite investors to Iran to renovate the country’s petroleum industry.

In Italy, the IR’s Oil Minister Bijan Namdar Zanganeh signed some rather high-profile upstream projects, totaling over $18 billion in oil and gas and infrastructure contracts. The Saipem firm, one of the largest Italian oil service companies, signed contracts to provide technical support and tools to the NIOC and its affiliated petrochemical company that operates a large petrochemical complex in the Energy Zone of the South Pars gas field.

Further, Saipem signed three memorandums of understanding, one with Razavi Oil and Gas Development Company to develop the Toos gas field in the northeast of the country, another with Persian Oil and Gas Development Company for reworking and modernizing two major Shiraz and Tabriz refineries, and lastly a contract for joint-involvement in any pipeline projects that the National Iranian Gas Company proposes. However, both Razavi and Persian oil and gas development companies are entirely affiliated with the Revolutionary Guard Corps (RGC) of the IR. Related: Can Trump Change The Direction Of U.S. Energy?

Zanganeh also signed an agreement with Total, the largest French oil company. According to Patrick Pauyanne, Total’s Chief Executive, Total imports are up to 200,000 barrels per day of oil from Iran and are paid in euros. Total plans to get further involved in the IR’s marketing of gas and oil products including petrochemicals.

Total has been active in Iranian oil and gas since 1990 with contracts to explore, produce, and import Iranian crude including Sirri A and E oil fields, as well as phase 11 of the giant South Pars gas fields. However, in 2009, the phase 11 project was taken away from Total and submitted to China National Oil Company. Then, a year later, the same contract was transferred to a domestic oil company affiliated with the RGC. Total then left Iran in 2012 when EU sanctions were imposed. Further, Zanganeh also signed an agreement to sell crude oil to the Spanish refiner Cepsa, as well as to the Swiss-based Russian company Litasco, a subsidy of the Russian Lukoil.

According to the EIA, before 2012 the European Union (EU), which was importing about 800,000 barrels per day of oil, was the second largest Iranian oil customer after Eastern Asian countries. However, now the EIA believes the European oil companies are not desperate to import Iranian oil because they simply lack certainty about the behavior of the IR and whether it will honor the sanction agreements. Furthermore, the 800,000 barrels per day of Iranian oil that were delivered to European markets before the sanctions have now been largely replaced by crude from Russia, Saudi Arabia, and Iraq.

Is Rejuvenation Of The Iranian Oil And Gas Industry Possible In A Short Time?

The IR’s Oil Minister in the past several months time and again has announced that the NIOC will increase crude production by 1 million barrels per day by the end of the current year and claims Iranian production will reach beyond 4 million barrels per day by 2017.

Iranian oil production after the Islamic revolution in 1979 never re-attained its previous peak, not because the IR did not desire production of around 6 million barrels per day, but because experienced, well-educated, and properly trained oil workers from all levels in every industry sector were arrested or terminated, and many fled the country. Additionally, the eight year-war with its neighbor Iraq and naturally poor management with roots in bribery and corruption caused a drastic drop in oil production to nearly 3.6 million barrels per day, and about 2.8 million barrels per day during sanctions years.

As it is, to achieve Zanganeh’s desired level of production will be extremely difficult. Iranian oil officials in Tehran claim the country needs at least $200 billion in foreign investment in order to reach the pre-sanctions production levels.

However, Iranian output has reached a plateau, and production has been on the wane for a long time now. The lack of proper maintenance has resulted in losing production capacity year after year since the end of the Iran-Iraq war nearly three decades ago, when NIOC was forced to cut back and shut in some production wells due to pressure drops and rising water intakes.

The sanctions more or less caused the shutdown of larger Iranian oil fields. The poor conditions of large oil fields and production wells, including surface equipment and export facilities in the Persian Gulf contributed to this shortcoming. The fact is that all Iranian oil fields, particularly mature ones including Ahwaz, Agha Jari, Gachsaran, Kupal, Shadegan, Marun, Pazanun and Naft-Safid need enhanced oil recovery and gas injection. Further, most of the new fields including Yaran, Draquian, Yadavaran and Azadegan (North and South) need a tremendous amount of work to bring to scale production. Doing all this may take years and hundreds of billions of dollars investment.

To revive the giant Iranian aging oil fields and to develop new oil fields with the capital of foreign investors and oil companies, the IR needs to practice transparency and a clean approach above all

Markets That Have Been Lost

In the early days of sanctions, after the Iran sanctions bill “Banning of Gasoline Sales to Iran” was passed in January 2010 by the U.S. Congress, the leader of the IR Ali Khamenei and then-president Ahmadinejad bragged that gasoline sanctions were a blessing. They argued that the increase in domestically refined petroleum products in Iran and the high demand for crude oil by international energy markets were two factors that indicate inefficacy of the sanctions sponsored by America. Later, when the very effective EU sanctions were added in 2012, and its market stopped importing Iranian oil, the IR threatened to punish the western world by closing the Strait of Hormuz, through which more than 17 million barrels per day of crude oil and petroleum products pass. Ahmadinejad stated that “if we cannot sell our oil, no other oil exporting country in the region can sell its oil.”

Since last July when the atomic agreement was signed between the IR and six world powers, the Oil Minister Zanganeh and NIOC authorities have stated several times that Iranian oil markets have been robbed, and their primary goal is to regain them. They insist that Saudi Arabia has taken over the Iranian oil market in East Asia and mainly China, the biggest importer of Iranian oil before sanctions. The fact is that Russian oil produced from oil fields in eastern Siberia flooded East Asia and mainly China by way of the Siberian pipeline. The IR’s Foreign Minister Javad Zarif recently claimed that Iranian oil markets in Europe had been taken over by American shale oil, but again that was Iraqi crude that was delivered to a few buyers in Southern Europe.

New Petroleum Contacts Plan

In 2004, in order to overcome the restriction in its constitution, the IR revised the “buy- back contract” model by adding a comprehensive reward element to the system, modifying the length of contracts, and announcing its readiness to negotiate the financial structure of the buyback contracts. But even these revisions did not attract any rampage of serious investors, except a few small second-hand eastern Asian oil companies.

Over a decade later, the IR emphasized that the lack of real desire to invest in the Iranian oil and gas industry by big international oil companies is due to the legal restrictions placed on investment in Iran’s oil and gas sectors by the constitution of the IR. Therefore, the problem was the buyback contract system. To pass that hurdle, the IR’s Oil Ministry has introduced the new model of contract.

Therefore, long before sanctions were lifted, the IR’s Oil Ministry announced that in order to attract foreign investors and international oil companies, the IR was planning to establish entirely new forms of contracts. For some months it was advertising and inviting oil companies to visit Iran, and discuss much easier terms and conditions of new contract forms. Although the management some foreign oil companies visited NIOC officials in Tehran, there was not much commitment except for a few.

Desperately, the IR’s Oil Ministry introduced a new model of contract last November after several revisions. The purpose has been the attraction of oil companies and investors to participate in renovation of the Iranian oil industry. NIOC in a new contract form has offered very inviting terms, such as full recovery of cost for foreign oil companies, and up to 25 year contracts. According to the NIOC, the new Petroleum Contracts plan covers 50 oil and gas projects where investment risks and price fluctuations are addressed. The Speaker of the IR’s Oil Ministry last February announced that the new contract agenda will be discussed in May in London. However, a few days ago, the NIOC’s Managing Directors and Deputy Oil Minister, Rokneddin Javadi, announced that international oil companies will be invited to Iran in July to discuss and bid for the new contracts. Although the new contract model is very juicy and clearly offers “joint venture” agreements, the mandate to have a domestic partner aboard still diminishes the appeal of the new “Petroleum Contract Plan” to major international oil companies.

Apparently, western oil companies will not invest in the Iranian oil and gas industry unless NIOC offers genuinely attractive contracts, much better than the servicing contracts that are presently the practice in Iraq.

The IR Still Has Not Cleared All Hurdles

Although the UN ended the general sanctions on the IR and opened the door for all international entities to engage in trade there, the U.S. sanctions on the IR in terms of banking to clear money and ship insurance to carry Iranian oil are still in place, and American companies are prohibited to deal with the IR. This is simply because of sanctions related to the regime’s involvement in terrorism, money laundering, and arming Hezbollah in Lebanon and Hamas in Gaza, disregarding human rights issues in Iran and recently testing nuclear-capable ballistic missiles which disregards UN Resolution 2231. These are not related to the atomic agreement and still remain.

Regardless of a few European refineries that have signed up to import Iranian crude, according to the American Cargo ship Owners Mutual Protections and Indemnity Association, even the non-American insurance companies, including Frontline which owns one of the largest oil tanker companies, are presently reluctant to insure and carry Iranian oil.

One of the most dubious issues is that the IR Oil Ministry demands the any foreign oil company that has shown interest in the upstream business in Iran must have at least one domestic company that is naturally affiliated with the IR’s RGC as a partner. That is exactly where the bribery and corruption thrives. Before 2012 and the “buy back” era, bribery was of a different style and no domestic company was required as a partner, yet foreign oil companies directly bribed the Iranian Oil Ministry. In well-publicized examples, the Total oil company in 2013 agreed to pay a $398.2 million fine to settle a Foreign Corrupt Practices Act case based on U.S. sanctions and U.S. Exchange Commission and Justice Department charges of bribery of the IR’s oil officials. According to documents presented in court, Total intermediaries in 1995 paid a $16 million bribe to the IR Oil Ministry officials for a contract to develop offshore Sirri A and E oil and gas fields. In 1997, several months after when Zanganeh, the current IR Oil Minister, was appointed oil minister by reputedly moderate and reformist President Mohammad Khatemi, Total entered a similar arrangement with the Oil Ministry. This time, company intermediaries paid a $44 million bribe to gain a contract to develop two phases of the South Pars gas field. The company was awarded a 40 percent interest in those phases of the South Pars gas field (OGJ, March 2014). Related: Solar To See Twice As Much Investment As Fossil Fuels By 2040

In another well-known case, during Zanganeh’s first term as oil minister, Statoil of Norway in 2006 acknowledged the payment of bribes in 2002 and 2003 to Oil Ministry officials to secure a development contract for part of the South Pars gas field. The company paid fines and disgorgements in the U.S. and Norway totaling $21 million and submitted to a 3-year deferred prosecution agreement (OGJ, March 2014). The same goes for the NIOC and its contract with the United Arab Emirates’ Crescent Petroleum Company to export Iranian gas to that country in 2010. However, the agreement was canceled after disclosure of corruption involved in the deal. According to the IR’s Press T.V., the case apparently is still in arbitration.

The corruption has dominated the Iranian oil industry, simply because it is a major source of income and these cases not only involve foreign oil companies paying initial bribes and being awarded contracts, but over length of the contracts the foreign oil companies would continue to kick back some of the earnings to top IR Oil Ministry officials in the form of cash deposits in their foreign bank accounts.

Amazingly, the international sanctions on IR further helped to stimulate the Islamic officials’ habit of corruption. As is the Islamic regime’s culture, besides the bribery and corruption in the RGC and the Ministry of Oil, their affiliates also have profited from bribery and corruption enormously.

Therefore, the problem of lack of interest to invest in the petroleum industry in Iran lies in the nature of the Islamic regime’s structure and ideology. Corruption thrives where governing officials consider bribery their right and part of the ruling order. When corruption thrives, political systems decay, economies struggle and dictatorship prevails. As a result, citizens of that country suffer. History has proven that dictatorial establishments in any country survive not only by executions of its critics, but also by growing corruption. Conspicuously wide ranging corruption has characterized the governing system in Iran for the past 37 years.

The civilized world should not unleash the IR’s clergies. As long as the dictator Ali Khamenei, who has been linked to an economic empire worth billions of dollars (Bloomberg, March 2016) is in charge, and the country runs under Islamic laws, there is no difference between “moderates” and “fundamentalists”. They equally do not comply with the nuclear agreement’s implementation, they breach their obligations by testing ballistic missiles, continue to support terrorism, disturb peace in the region, and systematically violate human rights in Iran.

By Mansour Kashfi for Oilprice.com

More Top Reads From Oilprice.com:

• Oil Sell Off Continues Amid Economic Uncertainty
• Conoco-Philips Pipeline Leak Threatens Wildlife Area In Alberta
• Uranium Prices Set To Double By 2018