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Simon Watkins

Simon Watkins

Simon Watkins is a former senior FX trader and salesman, financial journalist, and best-selling author. He was Head of Forex Institutional Sales and Trading for…

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Iran Guns For Top Position In Middle East Petrochemicals Market

  • Petrochemical sector becomes key economic pillar in Iran
  • Increasing output and revenues from its petrochemicals sector has always been key to Iran’s ‘resistance economy’ model
  • Petrochemicals have higher profitability margins than crude oil production in Iran

Now that its Guriyeh-Jask oil pipeline has been finalised, Iran’s core focus in any sanctions environment remains the ongoing development of its huge West Karoun oil fields and its supergiant South Pars non-associated gas offshore sector, and the optimisation of its already world-scale petrochemicals sector. Increasing output and revenues from its petrochemicals sector has always been key to Iran’s ‘resistance economy’ model, the concept of generating value-added returns by leveraging intellectual capital into business development wherever possible. Regardless of whether a new iteration of the Joint Comprehensive Plan of Action (JCPOA) is reached with the U.S., Iran regards the continued development of the petrochemical sector as essential to its long-term economic survival and last week announced that it aims to achieve number one position in the Middle East in the sector by 2027.  According to figures from Iran’s National Petrochemical Company (NPC), the country’s production of petrochemicals products increased from three million tonnes per year (mtpy) in 1978 to 83.5 million tonnes by March this year, although this represented a slight dip on the year earlier figure, due to the sanctions re-imposed by the U.S. after its unilateral withdrawal from the JCPOA in 2018. Iran’s Petroleum Minister, Javad Owji, said recently that the Islamic Republic’s petrochemicals exports will reach US$4.8 billion in the current Iranian calendar year (ending on 20 March 2022). Given this, Iran’s share of the Middle East’s petrochemical trade in the calendar year to March 2020 was 20.2 percent, and rose to 22.1 percent by March 2021. The next step in the petrochemical industry will cover 47 projects, which will bring the petrochemical industry revenue to US$50 billion by 2027.

The most immediate of these new projects are 10 that are planned for full launch early in 2022, which will bring Iran’s petrochemicals output comfortably up over the 100 mtpy level. One of these, the Sabalan Petrochemical Plant, was initiated earlier this year, with an annual production capacity of 1,650,000 tons of AA grade methanol worth US$400-450 million per year. Typically for many of these petrochemicals facilities in Iran – particularly those that came into being after the 25-year deal between Iran and China, analysed in depth in my new book on the global oil markets – much of the financing came from Chinese sources, either direct investment or via short-term credit facilities and longer-term loans. The feedstock required for US$400 million Sabalan Petrochemical Plant is one million tons of natural gas per year, which is supplied by Damavand Petrochemical Company from Iran’s South Pars natural gas field.  Related: Germany’s Reaction To The Energy Crisis Could Be Catastrophic

At around the same time as the Sabalan complex was started up, the Masjed Soleiman Petrochemical Plant was launched, with an annual production capacity of 1,755,000 tons of urea and ammonia. According to official statements from the NPC, it is being fed with 861 million cubic metres of natural gas per year, and is currently generating around US$268 million per year in sales revenues. Although Iran’s National Pension Fund Company has a  66.55 percent share in the plant, with other ‘private sector’ shareholders holding the rest, much of the US$850 million capital required for the complex’s build-out came from Chinese sources as well. Indeed, the main contractor of the project is China’s Wuhan Engineering Company. It is interesting to note that the ammonia unit of this complex has been licensed by Switzerland’s Casale and the urea and granulation units have been licensed by Japan’s Toyo.

This licensing highlights a key reason why the petrochemicals sector is so important for Iran, which is that the sector occupies a grey area from a legal perspective under the current U.S.-centric sanctions environment. When the previous set of major sanctions were at their height in 2011/12, Iran’s petrochemical industry was the subject of both U.S. and E.U. sanctions and the only way for it to sell such products ‘legally’ was to customers outside the U.S. and E.U. At that time, secondary sanctions were in place in the U.S. on any person worldwide that purchased, acquired, sold, transported or marketed Iranian-origin petrochemical products, or provided goods or services valued at US$250,000 or more (or US$1 million over a 12-month period) for use in Iran’s production of petrochemical products. In the E.U. there was a ban on the import, purchase or transportation of Iran-origin petrochemical products and on the export to Iran of certain equipment for use in the petrochemical industry. In stark contrast to this, there are currently no E.U. sanctions specifically on Iran’s petrochemicals sector, nor are there plans to impose them. From the U.S. perspective, it cannot exert jurisdiction for ‘primary’ sanctions unless U.S. persons are involved – notably U.S. banks and U.S. employees.

To capitalise on this grey area for foreign investment, Iran redesigned the contracts on offer for foreign firms wishing to invest specifically in its petrochemicals sector that addressed the previous situation in which investors needed to deposit as a pledge at least 130 percent of the capital investment amount required in a project. According to the NPC, the new contracts replaced this excess deposit idea with one that sees the NPC taking the role of quasi-transactional guarantor. The NPC would have a lien against future petrochemical products to be produced by petrochemical plants that are under construction. Therefore, on the one hand, this acts as a pledge for repayment of private sector loans to banks and on the other it gives an assurance to the banks through which the money is funded that repayment.

An additional boost for Iran’s petrochemicals sector development was the tacit approval given by Supreme Leader Ali Khamenei in 2020 for the incremental divestment by the government of state holdings in a range of major enterprises – including those connected to the oil and gas sector – from a total divestment of between 20 percent up to 70 percent, allowing the public (and private institutions and banks) to buy them. The resultant spike in Tehran Stock Exchange (TSE) values might appear counter-intuitive, given Iran’s parlous economic state, but can be seen instead both as a result of the extra liquidity being pumped into the system as a product of Iran printing money to deal with the rising budget deficit. It also can be seen as evidence of the pervasive view that, as things cannot become much worse, current values represent buying at the bottom of the investment cycle.

In fact, not only does the petrochemicals sector generate revenues for Iran of around 15 to 16 times more per tonne of product than crude oil but for investors, based on current contract terms, but also petrochemicals produce rates of return of 30-35 percent against 12-15 percent in the upstream segment, and petrochemical companies have often distributed relatively high dividends among shareholders. The Pars, Nouri and Shahid Tondguyan petrochemical companies were among the first petrochemical companies to list on the stock market, opening the way for more companies to do so, with at least six of them holding the extra cache of being subsidiaries of the Persian Gulf Petrochemical Industries Company (PGPIC). According to the latest data, PGPIC has about a 40 percent share of Iran’s petrochemicals market and accounts for the same proportion of Iran’s petrochemicals exports.

By Simon Watkins for Oilprice.com

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