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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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Russia To Aid Iran In Major Sanctions-Skirting Energy Megaprojects

Alongside the continued development of its huge West Karoun oil fields, the completion of the supergiant South Pars non-associated gas offshore sector (including the implementation of Phase 11 operations), and the finalisation of the crude oil transfer pipeline from Guriyeh to Jask, Iran’s core focus in the current sanctions environment is to optimise the output and revenues from its already world-scale petrochemicals sector. This has always played a key role in Iran’s ‘resistance economy’ model - the concept of generating value-added returns by leveraging intellectual capital into business development wherever possible. In the last week or so, Iran has launched another three major petchems projects and discussed further co-operation with Russia in the sector.  

In sanctions terms, Iran’s petchems sector has always occupied a somewhat grey area from the legal perspective. “When the previous set of major sanctions were at their height [2011/12], Iran’s petrochemical industry was the subject of U.S. and E.U. sanctions, and the only way for Iran to sell such products ‘legally’ was to customers outside the U.S. and E.U.,” a Washington DC-based senior lawyer with an international litigation and arbitration specialist legal firm, told OilPrice.com. 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 the previous sanctions era, there are currently no E.U. sanctions specifically on Iran’s petchems sector 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.

Given this backdrop, then, Iran has aggressively developed its petchems sector over the years towards the goal of producing at least 100 million tons per year (mtpy) by the original target year of 2025. Last week, though, Iran’s Petroleum Minister, Bijan Zanganeh, stated that the country’s petrochemical production capacity would reach the 100 mtpy figure three years early – in 2022 – by which time the sector would be generating at least US$25 billion per year. He added that plans were also underway to increase the yearly revenues from petchems to at least US$37 billion per year by the end of 2026, while production at that point would be around 133 mtpy. Even more specifically, according to a comment last week from the chief executive officer of Iran’s National Petrochemical Company (NPC), Behzad Mohammadi, so far this Iranian calendar year (ending on 20 March 2021), nine petrochemical projects have come online in Iran and eight others are expected to become operational by the end of the year. These new projects, he added, will lift the total production capacity of the Islamic Republic’s petchems industry from around 66 mtpy to at least 77 mtpy by 20 March 2021. Related: Will Batteries Kill Off Traditional Power Plants?


Three of these major projects were officially inaugurated last week alone, specifically the olefin and sulphur recovery units of Ilam Petrochemical Plant (IPP), the potassium sulphate unit of Urmia Petrochemical Plant (UPP), and the Hegmataneh Petrochemical Plant (HPP). The new units at IPP have come on stream with a total annual production capacity of 750,000 mtpy and an investment of €866 million, with the IPP’s chief executive officer, Hassan Najafi-Semnani, stating last week that with the inauguration of the olefin unit, the feedstock of the heavy polyethylene unit (which links in to the game-changing West Ethylene Pipeline) will be supplied from this unit. He added that overall the unit is designed to yield 458,000 mtpy of ethylene, 124,000 mtpy of propylene, 132,000 mtpy of pyrolysis gasoline, and 33,000 mtpy of liquid fuel. Interestingly in the context of the aforementioned grey area in which petchems sits in sanctions law, the sulphur recovery unit is licensed by France’s Axens (albeit built by Iran’s Energy Industries Engineering and Design).

This licensing (and later indigenisation) of equipment, processes, and technology by Iran from foreign suppliers has long been a feature of co-operation and contracts on offer from Tehran and has been focussed on expanding its exports of four key products - ethylene, polyethylene (PE), monoethylene glycol (MEG), and methanol. Each of these is in high demand from China, especially the ethylene products, and Iran has a natural advantage in the production of these, as its natural gas is unusually rich in ethane, and the government has kept the price of ethane low. So, ethylene production costs based on ethane feedstock in Iran are comparable to the lowest cost ethylene producers of Saudi Arabia, the U.S., and Canada, at a time when demand for polypropylene and polyethylene - the two most utilised plastics products in the world - from China is expected to increase by around five percent per year for the next five years at least. Related: The Worst Performing Energy Stocks Of 2020

This view on licensing and indigenisation was re-iterated after the signing of the Joint Comprehensive Plan of Action deal by then-Deputy Petroleum Minister for International Affairs and Commerce, Amir-Hossein Zamani-Nia, who said: “Direct investment is highly favoured by Iran’s petroleum ministry but before that, Iran’s [hydrocarbons] industry is in need of technologies and project management.” The Urmia Petrochemical Plant, meanwhile, is a subsidiary of the Iranian Investment Petrochemical Group and the Persian Gulf Petrochemical Industries Company (PGPIC) and is the first producer of medical-grade granulation powder and PVC in the country, with an annual capacity of 45,000 tons. Finally, the licence to establish the HPP was issued by the NPC in September 2002 but was only able to secure the full financing required to begin full operations in the past few months and, again, the technical side of the plant came from Italy’s IGS (although built by the NPC).

Aside from the ongoing direct and indirect help for its petchems’ expansion programme coming from Western European companies, the tension between Tehran and Moscow that grew after the disastrous ‘renegotiation’ of Iran’s share in Caspian hydrocarbons revenues (and Russia making way for China’s burgeoning interests in Iran) appears to have diminished again, opening the way for a re-emergence of earlier in-principle agreements between the two countries, which includes boosting the petchems sector. Just over a week ago, Iran’s Zanganeh met with Russia’s Energy Minister, Alexander Novak, with both reiterating the need for deepening cooperation between the two countries in various fields, especially energy. For Russia, this has always centred on gas and related petchems, with oil figuring closely after those, following a series of memoranda of understanding (MoUs) signed in 2017.

These were initially centred on verbal promises made between former National Iranian Oil Company managing director, Ali Kardor, and Gazprom’s chief executive officer, Alexei Miller, that Russian state gas giant would replace Linde on the Iran’s planned mega-liquefied natural gas complex as a natural adjunct to the range of gas exploration and development projects to be undertaken by Russia in the Kish, North Pars, and the Farzad fields to begin with. Repayment of the finances for developing these projects were to have been made by selling the produced natural gas via Gazprom-controlled pipelines or in LNG produced from Gazprom-financed LNG plants or the petchems products that were produced from the gas. The key to all of this, though, is that Russia has always wanted a much more definitive say on where Iranian gas goes in the future as its volume begins to grow because if Iranian gas started to make its way in size into Europe then it would undermine Russia’s power over the continent that is based on the ability to turn off the gas taps. Additionally, Russia and Iran acting together in the gas sector would significantly influence global pricing, which is a idea in line with the original concept behind the ‘Gas Troika’ (often termed ‘Gas OPEC’) of Russia, Iran, and Qatar.

By Simon Watkins for Oilprice.com

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  • Mamdouh Salameh on December 29 2020 said:
    In a nutshell, the author is telling us two things. The first is that Iran’s petrochemical production capacity and exports are growing fast despite US sanctions. Iran’s capacity is projected to hit 100 mtpy in 2020 and by 2026 Iran could be earning some $37 bn from its petrochemical exports.

    The second thing is that Russia will be helping Iran boost its petrochemical industry further in major sanction-skirting megaprojects.

    However, Russia has been extending much greater sanction-busting help to Iran through barter trade in which Russia provides Iran with machinery and other sophisticated industrial equipment in return for crude oil which Russia then sells around the world as its own.

    Nothing pleases President Putin that demonstrating to the Americans that he hasn’t only managed to nullify their sanctions against his country but he is doing his best to help Iran and Venezuela evade US sanctions.

    As for Iran’s future gas and LNG affecting Russia’s dominant position in the EU’s gas market, this isn’t going to happen not only because Russia already accounts for 40% of the EU gas market and also a big chunk of the LNG market through Novatek exports to the EU but also because Iran will take years before starting to export its piped gas and LNG to the EU. Russia's share of the EU gas market could rise further with the completion of both the Turk Stream and the Nord Stream 2.

    Moreover, Russia has a powerful trump card in the world’s largest gas/LNG market, namely China through its Power of Siberia 1 gas pipeline and the proposed Power of Siberia 2. It will be Putin’s decision whether he sells gas and LNG to the EU or shift the bulk of his exports to China.

    Dr Mamdouh G Salameh
    International Oil Economist
    Visiting Professor of Energy Economics at ESCP Europe Business School, London

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