With a passionate speech in parliament, Iranian President Hassan Rohani threw his support behind Bijan Namdar Zangeneh, showing the importance of the Oil Ministry in his economic program. President Rohani’s economic policies obviously address the weaknesses of Iran’s oil and gas sectors and recognize that the injection of new capital and the acquisition of new technology are imperatives.
Immediately after he was approved by parliament as the new oil minister, Zangeneh described an outward-looking policy for Iran’s oil and gas sectors in order to circumvent the international sanctions as part of his plan. He promised to make boosting oil production capacity to a sustainable 4 million barrels per day a top priority. The capacity plummeted dramatically to about 2.5 million barrels per day in 2013 due to the sanctions against Iran’s oil sector and banking system as well as technical deficiencies. Achieving this target will be very difficult, but Zangeneh is used to dealing with tension.
Sixteen years ago, when he began serving as Iran’s oil minister in the reformist cabinet of Mohammad Khatami, oil industry executives viewed him as a political outsider, even though he successfully resolved the problem of power shortages, which had persisted since the end of the eight-year war against Iraq. And eight years later, he was accused of running a mafia in the oil and gas sectors when he left office and principlist president Mahmoud Ahmadinejad came to power. However, Ahmadinejad never produced a list of mafia members during his eight years in office.
Zangeneh managed the Oil Ministry at a time when the average annual price of oil fluctuated between 12 and 27 dollars per barrel for six years, and he had to run the system with the least possible oil income.
Yet, he was credited with the following achievements in those days:
• Attracting a considerable number of foreign investors;
• Increasing the role of gas in the domestic energy basket;
• Increasing Iran’s capacity to manufacture petrochemical products;
• Signing the first gas export deals;
• Empowering domestic firms and enabling them to become reliable contractors in the upstream sector; and
• Circumventing the D’Amato Sanctions through effective energy diplomacy and reliable managerial decisions.
Now, in 2013, the atmosphere has changed and his return to the Oil Ministry has been welcomed by both his old associates and former critics. Most of the oil industry’s executives, experts, and contractors have responded positively to his return after disappointing mismanagement during Ahmadinejad’s eight years in office. Although this convergence in the warp and woof of the industry provides a great opportunity for him, Zangeneh also faces serious challenges that must be considered, which are described below.
1. Increase production capacity and maintain it at a sustainable level
Economically and politically, this must be his top priority. Increasing production capacity will create more income for the government and give Iran a stronger position in OPEC. In order to boost production capacity and maintain it at a sustainable level, he and his team must make every effort to discover new oil fields and to develop the current fields at the same time. However, the National Iranian Oil Company must make every effort to increase the recovery factor of oil reserves. The current world average recovery factor from oil fields is around 30 to 35 percent, but Iran is falling far short of the mark. Many Iranian experts believe that the low-quality Chinese drilling equipment used in the oil industry has had a negative impact on production capacity. Upgrading the equipment must be a priority.
2. Developing shared oil and gas fields
There are 23 large oil and gas fields shared by Iran and adjacent countries. In light of the huge investments attracted by Iraq’s oil fields, Zangeneh’s attention will be focused on the western border and the Karun River, where the Azadegan and Yadavaran oil fields are located.
The most important shared gas field is the South Pars/North Dome gas field, which is the largest non-associated natural gas field in the world. It is shared between Iran and Qatar, with Iran’s section called the South Pars gas field and Qatar’s section called the North Dome gas field. During his first stint as oil minister from 1997 to 2005, Zangeneh initiated and completed the development of five phases of the South Pars project and another five phases were more than 60 percent completed. Those phases of the South Pars project were mostly financed through a buy-back system of investments, but this system does not seem to be profitable enough to attract major international investors now. Therefore, some changes in contractual and delivery systems seem to be inevitable.
In addition, after eight years of mismanagement of the shared gas field, the Iranian people have become concerned about the issue and it has become a symbol of national empowerment. The development of the South Pars gas field has become a national demand now, and Zangeneh and his team must prove to the people that they are committed to meeting this national demand.
3. Increase gas production
Although Iran has the second largest gas reserves in the world, its gas production does not meet domestic consumption needs. The gas consumption rate will double in winter, and consequently the oil minister will face some pressure. Thus, Zangeneh and his team must devise proper plans to deal with this challenge from day one.
4. Developing a real privatization strategy
Negative economic growth and stagflation have put Iran in a situation in which privatization is a necessity for solving these problems. Over the past few decades, the Oil Ministry has become accustomed to financing, implementing, and operating mega projects by itself. But if Zangeneh wants to increase efficiency and raise the employment rate, he must usher in a new era and facilitate the growth of the private sector. Although the previous administration accelerated privatization, due to a sort of monopolization, economic experts have criticized the approaches that were taken and believe that insufficient opportunities have been provided for real private firms to benefit from oil and gas projects.
5. Expansion and empowerment of the downstream chain
Zangeneh and his former deputy oil minister, Mohammad Reza Nematzadeh, are credited with massively expanding Iran’s petrochemical industry. They increased annual revenues from the production of petrochemicals from $1 billion to $18 billion between 1997 and 2005. Nematzadeh played a significant role in the expansion of the petrochemical sector as well as in the transformation of the refining industry. Expanding downstream capabilities is considered to be a proper way to increase non-oil petroleum products’ share of the export market. Iran plans to become one of the world’s major petrochemical producers. Therefore, Zangeneh has to avoid getting involved in non-economic programs like the west ethylene pipeline and he has to concentrate on producing petrochemical products and exporting them across the Persian Gulf and the Sea of Oman. Establishing a new petrochemical hub in the southeastern port city of Chabahar would be a good measure to attract international investments and begin a new era in the development of the petrochemical industries.
6. Technology transfers to Iranian companies
In recent years, no significant advancements or improvements in technology have been achieved due to the lack of investment and prioritization. When Zangeneh commenced constructive cooperation with well-known international companies, the transfer of technology to Iranian companies was a part of the buy-back system. According to those contracts, a maximum of 49 percent of the financing of each project was permitted for foreign investors and Iranian companies were responsible for the remaining 51 percent. In light of Iran’s dire need for privatization and strong companies with talented human resources, the transfer of technology will be prioritized more than before.
7. Dealing with sanctions
Due to the lack of foreign investment and technology, Zangeneh must adopt two policies at the same time. First of all, he must capitalize on opportunities in the oil and gas sectors through skillful energy diplomacy and he must also help the Rohani administration realize its foreign policy goals. In addition, he must improve the contractual and operational structures in order to encourage European companies to engage with the Iranian energy market in a more efficient way. He and his team must address the limitations in investment, procurement, and technology transfers and boost sales of crude oil, natural gas, and petrochemical products.
8. Developing the petrochemical sector
Iranian factories are currently producing about 57 million tons of petrochemical products annually. Over the past few years, Iran devised plans for 72 petrochemical mega projects, but 32 were never implemented. In the last months of the Ahmadinejad administration, the unemployment rate was estimated to be about 12.4 percent in the first quarter of 2013. Thus, the economy must create new jobs and boost production to eradicate stagflation.
9. Reforming the petroleum industries
Zangeneh’s previous achievements were attained through the help of his strong managerial team. But over the past eight years, most of the experienced and reliable managers either retired or were dismissed. On top of that, the Oil Ministry has to find a way to convince oil sector experts to stay in the country. The petrochemical industries represent 20 percent of gross domestic product, and there are plans to greatly expand the petrochemical sector. But it will be very hard for the National Petrochemical Company to replace the experienced managers who have retired with the human resources currently available.
10. Dealing with tension from circles of power
Such tension will be a headache for Zangeneh and his team. Although Rohani convinced the parliament to trust Zangeneh, he only received 164 yes votes from the 283 MPs who voted, which is not an extremely strong mandate. Masoud Mirkazemi, a former oil minister in the Ahmadinejad administration who is now an MP and the chairman of the Majlis Energy Committee, has criticized Zangeneh over the Crescent Gas contract over the past few weeks. He has also criticized Zangeneh over his new appointments. Thus, it seems that the new oil minister and his team will have some difficulties in dealing with their predecessors. In addition, some individuals and circles of power that have benefited due to the lack of managerial and technical expertise at the highest levels of management of the Oil Ministry will most probably impose pressure on Zangeneh and his team.
It seems that all the key players in Iran’s oil industry and everyone else involved in the industry trust Bijan Namdar Zangeneh. But the question remains: Will he be able to generate positive momentum at the Oil Ministry?
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