The newly elected President Rouhani of Iran is well aware that his current popularity will last so long as he fulfills his promise to take concrete action to dispel current sanctions, ease pressures and turn the economy around as soon as possible. For this he has near unanimous support in Iran, including the blessings of the Supreme Leader, Ayatollah Sayyid Ali Khamenei, who has termed this turnaround as “heroic flexibility” in order to make it palatable for the ultra-conservatives in Iran. Mr. Rouhani’s moderate stance must be sustained, as the government does its best to present a new image to the international community.
An early blow to Iran’s oil industry came from President Bill Clinton
Under the previous president, government policies were founded on populism, at a great cost to Iran’s economy. President Ahmadinejad provided monetary handouts as a substitute for an increase in the price of oil which only led to further inflation. The Iranian national currency, the Rial, had its toll. In less than two years its value declined nearly 60% raising inflation from 14% to 32.3%. When Rouhani was elected to office, Iran’s oil revenues had fallen by 50%. President Rouhani’s only venue for a revival of the economy is to have the sanctions lifted, particularly in the oil and banking sectors.
Iran’s Oil and Gas
An early blow to Iran’s oil industry came from President Bill Clinton who issued an executive order banning Conoco, the giant US Corporation, to continue its billion dollar project in developing Iran’s offshore oil fields at Sirri. France’s Total tried to substitute but it too had to forfeit for lack of incentives. In 2010, Shell and Spain’s Repsol gave up their joint venture on developing Iran’s LNG (liquefied natural gas). When multiple sanctions were enforced, foreign companies found it impossible to continue and had to leave.
The situation seemed to have changed when President Rouhani entrusted Mr. Bijan Zangeneh with the most important single industry of all, Iran’s Oil and Gas. Mr. Zangeneh is often referred to as the “sheikh” minister, who has served twenty-two years of his career in high government posts including eight as oil minister. No expert can dispute his capability. Fereidun Fesharaki, the Chairman of FACTS Global Energy describes Zangeneh as the best oil minister Iran has ever had.
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Presently Iran exports no more than 1.2 million barrels a day compared to 2.5 million in 2011. Even worse is that Iran has no access to its oil revenues. Iran cannot be paid in dollars or euros. Thus the Chinese pay Iran in Yuan, the Indians in Rupees and the Turks in Lira. None of these have served Iran well. According to Michel Makinsky of the Poitiers School of Business and Management, the flooding of Iranian markets with cheap Chinese products has had devastating impact on the Iranian economy. It has forced the closure of numerous small businesses, while Iran’s bigger industries like the automobile sector is facing total bankruptcy as it is unable to import the necessary parts for lack of hard currency and a dramatic 60% fall in the value of the Iranian Rial. Other mid-sized industries like the pharmaceutical and food industries are also finding it difficult to keep afloat for lack of hard currency, essential parts and ingredients.
During his first term as oil minister under President Khatami (1997-2005), Zangeneh was able to invite numerous foreign companies to invest in Iran, raising Iran’s oil production from 3.8 to 4.2 million barrels per day. Among those actively engaged in Iran were the Anglo-Dutch Shell, Norway’s Statoil, France’s Total, Spain’s Repsol, Italy’s ENI, Malaysia’s Petronas, Russia’s Gazprom and a number of lesser companies. They came to work on Iran’s oil fields and to explore for new ones. A few were also called in to develop Iran’s gas, which constitutes the world’s largest gas field, shared with Qatar. Sadly, Iran has spent more than 40 billion dollars on developing its South Fars fields, none of which have reached completion while Qatar has been extracting LNG’s from these fields for the past 20 years.
Perhaps Iran will have to reconsider a new policy in line with Qatar’s “production sharing contract”
Zangeneh believes that Iran’s position has been compromised in OPEC, particularly under Ahmadinejad. Iran forfeited her position to Iraq as the second largest producer of OPEC. Zangeneh’s primary objective is to increase Iran’s capacity to regain Iran’s lost standing. However, he does not approve of a sudden surge in oil prices. This he believes can lead to alternative sources of energy and increase inflation. Zangeneh contends that the private sector should be encouraged and provided with the opportunity to become partners.
Iran’s Future Prospects
A possible thaw in Iran’s relations with the west has already led to a rising interest among western oil companies. Inquiries are pouring in. However, foreign companies will not find a smooth ride. Once the sanctions are lifted, Iran will have to reconsider its constitutional ban on foreign ownership of its hydrocarbon reserves. Previously Iran devised a “buyback” formula whereby it guaranteed a fixed profit margin when the oil fields reached production level. This formula, which took a long time to be negotiated, never proved very attractive. Perhaps Iran will have to reconsider a new policy in line with Qatar’s “production sharing contract” which assures profit to all parties involved.
In the most recent round of negotiations in Geneva from Nov. 7-9, the delegates practically reached a settlement on the nuclear issue. While a final settlement is desirable by all sides, Mr. Rouhani is in dire need to have the fifty billion dollars of Iran’s oil revenues in foreign banks released. This would only mark the beginning. To achieve his goals sanctions will have to be relaxed and foreign oil and gas companies will have to be invited. Only then will Iran’s economy move in the right direction.
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