In today’s competitive markets, the attraction of foreign direct investment is of paramount importance. Yet, achieving that objective requires countries to take specific steps towards establishing the safeguards and measures required for an investor-friendly environment. As such, one of the key challenges the Iranian refinery sector is faced with is the ability to attract international investment. In order to successfully draw the necessary funds needed for developing and expanding refinery capacity in the coming years and moving to meet the demand needs of both the domestic and international market, the Iranian petroleum sector strives to create an investor-friendly environment with specific safeguards designed to comfort and ensure investors as a whole.

Dr. Mahmoud Reza Firoozmand, Centre for Energy, Petroleum and Mineral Law and Policy, University of Dundee, UK

In a paper titled " An Ideal Legal Framework For Attracting Foreign Investment into the Iranian Refining Sector: A Law and Policy Analysis," Dr. Mahmoud Reza Firoozmand discussed the major challenges facing the industry in attracting investments and the initiatives undertaken in order to facilitate a friendly environment for investors. In his presentation, Dr. Firoozmand, PhD, Centre for Energy, Petroleum and Mineral Law and Policy, University of Dundee, UK, set out to "shed some light on different aspects of these legal arrangements, their underpinning policies and their relevance to the attraction of foreign investments into the downstream sector of the Iranian petroleum industry." He addressed the main topic of the paper after providing a comprehensive overview of the numerous challenges faced by the Iranian refining sector.

The Iranian refining sector is rooted in the history of the development of the country’s oil industry. By the late 1960s, Iran had undertaken major refining projects both within and outside the country, notably in India and South Africa, and had rapidly moved to become a leading player in the global refining sector. These developments were hindered with the victory of the Islamic Revolution in 1979 and the onset of the imposed Iran-Iraq war in 1980. Today, the country is on the tract of repairing the damage done to its refining capacity throughout the upheavals of war and revolution. In order to make up for lost time, "Iran now needs 2.5 million bpd refining capacity, a target which requires an investment of up to 17 billion dollars." Accomplishing this goal will both meet the domestic demand for oil and will also provide a new source of revenue for the government.

The achievement of these goals is dependent on large inflows of foreign investment into the country. A number of considerations mainly of an economic nature decrease the appetite for investing in the oil refining industry, especially the fact that similar to other downstream infrastructure projects, the refining sector requires a large amount of irretrievable investments. There is also the high rate of expenditure related to the refining sector. As Firoozmand explains, "approximately 10 to 15 thousand US dollar is needed to create one barrel per day of refined oil product. That means to build a refinery with 100.000 barrel per day of capacity; we talk about an investment of up to 1.5 billion US dollar." There is also a need to continuously upgrade the equipment and installations used in the refining sector with technologies being modernized every ten years. Moreover, given the long-term nature of investments in the refining sector, there is a higher risk related to investing in this sector. Social, political, and economic stability is of utmost importance and for these reasons, the majority of refining industries have been nearly wholly government-owned or financed.

There are also specific factors determining investment within Iran which Firoozmand highlighted in his presentation. According Article 122 of Iran’s third Economic, Cultural and Social Development Plan, private investors are allowed to make investment in the refining industry and the involvement of domestic private investment could well serve the general goals of privatization. Yet, the private sector in Iran is not as mature as required to participate in gigantic projects, or take risks associated with this group of projects and is not able to provide "competitive technologies" that can benefit the overall sector. Thus, it does not have the scope and capacity of major multinational companies working in the field. Another scenario is the direct involvement of foreign companies within the Iranian sector which is also made possible by the current laws and provisions. Article 3 of Iran’s Foreign Investment Promotion and Protection Act states that: "Foreign Investments may be admitted under the following two categories: a) foreign direct investment (FDI) in areas where the activity of the private sector is permitted." Moreover, Article 122 third Economic, Cultural and Social Development Plan authorizes the Ministry of Petroleum to allow foreign companies to play an important role in domestic projects. Thus, the law provides a very clear groundwork for foreign investment to be undertaken within Iran.

Yet, as Firoozmand predicts, there is a high risk associated with investing in Iran which prevents foreign companies to undertake major projects. These include questions surrounding social and political stability and the overall economic make-up of the country with its emphasis on state-planned activities. In such a situation, the formation of joint partnerships between the Iranian government and specific multi-national companies may provide the most suitable alternative scenario. However, Iran lacks the "sufficient legal institutions for formation and providing legal protections for such partnerships." It also needs to move fast to create an investor-friendly environment if it wishes to be able to compete with other countries in attracting foreign capital.

There is also the concern regarding "legal stability and environment security." Investors will only transfer their capital resources into an environment which is deemed to be safe and stable. In this light, Iran has adopted a number of initiatives that are designed to lure investors into the country, including the Iran Foreign Investment Promotion and Protection Act of 2002. It has also moved to single out specific organizations within the state bureaucracy that are charged with the goal of promoting foreign investment into the country and facilitating such investments. Iran has also been working to provide legal incentives to investors that are active within the field. Such incentives include exemption from custom duties and ownership of needed land. The country is also moving to provide legal guarantees for investors.

In conclusion, Firoozmand mentioned that there is a "growing consensus" within the country that a greater number of foreign investors need to be drawn into the country and that appropriate action should be taken by both the executive and the legislative branches of government in order to facilitate a welcoming environment for investors. The speaker also called for greater transparency in attracting investments into the country. Following these recommendations will provide a suitable opportunity for investors to play a bigger role within the Iranian refining sector.

According to the 2006 Middle East Economic Survey, a total of $395 billion will be invested within the region in the 2007-2011 periods. The breakdown of these investments show a great deal of money will be spent on downstream projects such as well as power production. Zaki also mentioned that there are a number of countries within the region that are competing with Iran for capital attraction. He mentioned that it is important for Iran to understand its potential and for it to take action to fulfill that potential. With nearly 12 percent of global oil reserves, Iran only produces 5 percent of the global daily output. Moreover, Iran has nearly 15 percent of global gas reserves and only produces 3 percent of the global daily gas output. Major foreign credit institutions have not been active within the Iranian market and this can also be an attractive factor for investors moving to take advantage of first-time advantage.

With high oil prices, "there is a high rate of liquidity within the region with a lot of money looking into sectors to invest." The Persian Gulf countries have enjoyed high oil revenues and are expected to invest that money within the energy sector in the coming years. Zaki then moved to examine the attractiveness of a specific country and whether or not it is investor-friendly. There are a number of tangible factors that impact this, including geography, capital cost within the country, and political and economic stability. "Investors don’t like surprises," mentioned Zaki. There is also a very economic consideration behind every investment taking place since investors are looking to increase the return on their money. He mentioned that investors are looking for good governance, financial responsibility, and transparency.