December 2009, No. 54

Petrochemical

Iran’s Petrochemical Industry Investment and Privatization Challenges

In petrochemical industry, privatization cannot be limited to transferring stocks and ownership to the private sector, but attraction of foreign investment aimed at technology transfer, research and development is more important than mere transfer of management and ownership.

Saeed Razmkhah, Oil and Petrochemical Industry Expert

Establishment of petrochemical industry in Iran dates back to about half a century ago. Numerous organizations were established in various ministries to achieve that goal, but the first organized entity established to do that was a chemical company affiliated to Ministry of Commerce. The most important thing done by that company was the establishment of a chemical fertilizer plant in Marvdasht (Fars Province) in 1959. By 1964, everything related to establishment or development of petrochemical industries, which was already done by a relevant department at the Ministry of Petroleum and various state-run organizations was transferred to the National Iranian Oil Company and that company launched a new company called National Petrochemical Company in order to make petrochemical industry fully operational.

Petrochemical industry and related industries are among strategic sectors of the company and have achieved a lot during the past two decades.

Increase in export of petrochemical products and other oil and gas products in the recent years, has been the realization of an old aspiration to increase non-oil exports and reduce dependence on oil revenues.

Out of 20 billion dollars of non-oil exports, petrochemical products and gas condensate now account for 5-7 billion dollars. Officials and experts who have paid due attention to this figures maintain that more investment should be made in production and export of petrochemical products.

Although no figure had been set as the target for the export of petrochemical products, increased price of oil during recent years has helped to increase export of Iran’s petrochemical products to 5-7 billion dollars showing that due to its unrivaled comparative advantages, the industry can be a great blessing to the Iranian economy.

The National Petrochemical Company is among few Iranian companies which has attracted foreign funds due to its international credit. Total investment attracted by the National Petrochemical Company in 2002 to 2005 has been estimated at about 7 billion dollars (5.2 billion euros).

Abundance of huge oil and gas reserves, inexpensive energy, proximity to international waters along the Persian Gulf, inexpensive workforce and high capacities of Iranian specialists to develop the National Petrochemical Company have worked to increase competitive advantages of Iranian petrochemical industries. If diplomatic apparatus and foreign policymakers pursued to attract foreign investors and companies, as they did in the past decade, the dream of founders of this revolutionary industry could come true.

Investment in petrochemical industries is increasing, especially in Saudi Arabia and other Persian Gulf littoral states. At present, investment is rising in petrochemical industry in Saudi Arabia, India’s methanol, Oman’s methanol, Indonesia’s ammonia, and Venezuela’s methanol industry. Relative advantages of the Iranian petrochemical industry have been proven from Southeast Asia to South America and this has made foreign investors and creditable companies to pay attention to Iran’s undeniable advantages. Although financial, political and economic crises may cause fluctuations in petrochemical development plans in Iran, but there is no doubt that existence of oil, with Iran having the world’s second biggest oil reserves, will turn our country into a major hub of petrochemical industry. Therefore, our policies and decisions should be made in a way as to enable us make the most of historical opportunities.

True privatization aimed at increasing efficiency and output, reduction of costs, and improvement of management is the final objective of every industry. In petrochemical industry, privatization cannot be limited to transferring stocks and ownership to the private sector, but attraction of foreign investment aimed at technology transfer, research and development is more important than mere transfer of management and ownership. Taking advantage of experiences and transfer of technical knowhow of creditable companies in order to increase engineering capabilities of the Iranian manpower can benefit the Iranian petrochemical industry more than any reduction in costs and increased efficiency as a result of privatization.

Therefore, in view of the developments in the oil and gas market and now that reduction in oil and gas reserves combined with increased cost of production and fluctuations in international market have drawn attention of investors to new advantage and opportunities, Iranian petrochemical industry which avails of the world’s second biggest gas reserves and major investment opportunities, can play an effective role in attraction of creditable foreign companies.

Studies show that we need to attract, at least, 38 billion dollars of investment in petrochemical industries during the fifth through seventh five-year development plans in order to realize the goals of the 20-Year Vision Plan according to which Iran should be number one producer of petrochemical products in the Middle East and West Asia and account for 34 percent of total petrochemical output in the region.

Unpreparedness of petrochemical plants for accepting the rules of international trade and regulation of their operations under conditions when they are procuring necessary feedstock at a rate close to international rates should be added to the list of obstacles on the way of development of the industry.

Petrochemical plants, most of which are state-run, have gotten used to inexpensive feed provided to them at unreal prices for many years and if, according to general policies of Article 44 of the Constitution, they are going to become private entities, due attention should be paid to this issue. Otherwise, sudden increase in production costs will prevent profitability and reduce output.

Since public sector entities like Social Security and pension funds and other investment institutes have been buying stocks of petrochemical plants, experts have been concerned about absence of the real private sector in any future plan for the petrochemical industry.

The National Petrochemical Company has gained international fame and should go on with development drive. Ranking 45th in the world and selection for having the world’s most successful management among other petrochemical companies has greatly increased responsibility of petrochemical industry officials.

If the stagnant state of petrochemical projects continued, national interests, engineering companies manufacturing petrochemical equipment as well as other companies involved in the implementation of petrochemical projects are sure to seriously suffer.