Since the earliest days of its Islamic Republic from 1979, Iran has looked to its petrochemicals sector as being a key to its ‘resistance economy’ model - the concept of generating value-added returns by leveraging intellectual capital into significant revenue, profit, and technology-acquisition streams wherever possible. The sector has also always carried with it the advantage of occupying a legal grey area in the various sanctions regimes imposed against it over the past 40 years or so. With its long-term partner, Russia, now facing the same sort of sanctions constraints as Iran, it is no surprise that the Tehran has invited Moscow deeper into the development of its petchems business, with a view to Iran becoming the Middle East’s top producer and exporter in the sector by 2027.
More specifically, last week saw the new chief executive officer of Iran’s National Petrochemical Company (NPC), Morteza Shahmirzaei, invite Russian companies to help it exploit the further opportunities available in its petrochemicals sector. Interestingly, this invitation is not limited to Russian companies investing and working directly in the production and export of petchems products in and from Iran but also is extended for the feedstock for the petrochemicals sector, which of course includes all of Iran’s oil and gas sector as well. In precisely this vein, Shahmirzaei went on to talk about Iran’s existing resources and capabilities in those fields. “Iran sits on more than 159 billion barrels of oil reserves and about 33 trillion cubic metres of natural gas,” he said, adding that currently one billion cubic metres of gas is being produced on a daily basis in Iran and that its crude oil production capacity is about 4 million barrels per day. “Part of this output is consumed as feedstock for Iran's petrochemical industry,” he underlined. In addition, Shahmirzaei carefully highlighted to Russia the geopolitical opportunities available to it through such cooperation by dint of Iran’s vast maritime borders. Noting that Iran has access to 5,600 kilometres of coastlines in the north and south of the country, he stressed: “The existence of numerous ports on these coasts has provided and facilitated the exchange of products and activities of oil, gas, petrochemicals and other industries for the country.” In other words, there are a lot of routes that Iran has been using for 40 years plus to send anything it wants to wherever it wants without much hindrance from anyone else, and these could be open to Russia to use as well. Related: Bearish Momentum Grows, But Traders Remain Bullish On Crude
The key to Russia gaining access to all of these routes in a way that would allow it to circumvent many of the sanctions against it whilst not overtly antagonising the U.S. would be to agree to a series of deals in Iran’s petchems sector, as Shahmirzaei hinted. In stark contrast to the previous heightened sanctions era against Iran that saw their zenith from late 2011 early 2014 (in 2015, the Joint Comprehensive Plan of Action was agreed in principle) there are currently no E.U. sanctions specifically on Iran’s petrochemicals business and nor are there plans to impose them. From the U.S. perspective, it cannot currently exert jurisdiction for ‘primary’ sanctions unless U.S. persons are involved – notably U.S. banks and U.S. employees. Piggy-backing off this arrangement would clearly have advantages for Russia in terms of exporting whatever it wanted in petchems and multiple other sectors.
Even during the height of the U.S. and E.U. sanctions period against Iran from 2011 to 2014, a Washington DC-based senior lawyer with an international litigation and arbitration specialist legal firm, exclusively told OilPrice.com: “Although from a strict legal perspective Iran was only able to sell such [petchems] products to customers outside the U.S. and E.U., other channels - notably those in Asia – remained opened to exports of petchems and other products as well.” At that time, secondary sanctions were also 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. However, in practical terms, even over this period of heightened sanctions, Iran’s petchems sector continued to grow its production and revenue streams. Related: Europe’s Gas Prices Rise As Wind Speeds Fall
Prior to Russia and China agreeing on a more even split in their taking over oil and gas sector exploration and development projects in Iran when the 25-year China-Iran deal was originally agreed in 2019, Moscow was on the verge of taking over several new major oil and gas projects in the Islamic Republic. “As it became clearer in 2015 that sanctions would be rolled back [in 2015], Russia’s committed investment plans for Iran’s oil and gas sector increased to over US$50 billion and was broadened out in scope,” a senior oil and gas industry source who works closely with Iran’s Petroleum Ministry exclusively told OilPrice.com. “This was a strategic plan by Russia to position itself front and centre for when sanctions were eventually removed and contracts for field development were on the table,” he said.
This resulted in initial agreements being signed by GazpromNeft for feasibility studies for the Changouleh and Cheshmeh-Khosh oilfields, Zarubezhneft for the Aban and Paydar Gharb fields and Tatneft for the Dehloran field. These were on top of the previous memoranda of understanding (MoU) signed by Lukoil and the National Iranian Oil Company (NIOC) for studies of the Ab Teymour and Mansouri oil fields, resulting in Russian firms being assigned seven field studies, the most of any country to that point. “Even more significantly, though, was that these deals were only a part of a very wide-ranging 22-point MoU signed by Iran’s deputy petroleum minister, Amir-Hossein Zamaninia, and Russia’s deputy energy minister, Kirill Molodtsov, at the time, which included not just the studies and plans for exploration and extraction of oil but also for the transfer of gas, petrochemical swap operations, research on the supply and marketing of petrochemical products, the manufacture of oil equipment together with local Iranian engineering firms, and technology transfer in the refinery sector,” said the source.
Given that Russia now will feel less constrained by either the U.S. in developing much closer relations with Iran, and indeed will find many benefits to blurring the lines between Russian and Iranian oil, gas, petchems, and ‘other’ developments and exports and export routes, it is reasonable to assume the resumption of a Russian strategy in Iran much akin to the original one anticipated in 2015, the Iran source underlined. In the petrochemicals sector to begin with, Russia has enormous expertise in this field and has already shown a willingness to participate in such projects, having talked to the neighbouring Iraqis about taking over the development of its Nebras petrochemicals plant in the southern oil hub of Basra at several points.
This would neatly fit into Iran’s plans as, prior to the re-imposition of U.S. sanctions in 2018, two of Tehran’s key targets were to become the number one Middle Eastern producer and exporter of petchems and to become a major gasoline exporter across the region and beyond. “For Iran, the petrochemicals sector generates revenues of around 15 to 16 times more per tonne of product than crude oil and for investors, based on current contract terms, 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,” said the Iran source. “On the gasoline targets, the aim was that within two and a half years from the completion of the PGSR [Persian Gulf Star Refinery], Iran would be meeting at least 10 percent of all of Southern Europe’s gasoline and diesel needs, as it would be the top producer of gasoline in the Middle East by a big margin by that point,” he concluded.
By Simon Watkins for Oilprice.com
More Top Reads From Oilprice.com:
- EU In Talks With Alternative Suppliers As It Considers A Russian Oil Ban
- Libya May Reach Full Oil Production Within Days
- Can Lebanon Repair Its Failing Energy Sector?