Iran Petchem Incentives

Iran’s top rank in terms of hydrocarbon reserves has placed the country at the center of attention in the world. The widespread growth and development of energy-related technologies, ranging from exploration to refining and processing of oil and gas in Iran on one hand, and the country’s history and civilization as well as its geostrategic and geopolitical position on the other, have bestowed valuable benedictions on Iran to become the sole energy hub in the future.

Undoubtedly, the most important competitive advantage for investment and the development of petrochemical industries in Iran would be access to feedstock like natural gas, ethane, naphtha and condensate in big volumes and at competitive prices.

The capacity of gas treatment and transmission industries in Iran currently stands at around 750 mcm/d, which will soon reach 1,000 mcm/d. Furthermore, access to ethane as petrochemical feedstock is instrumental in boosting Iran’s competitive status for the production of petrochemicals.

With the completion of development phases of the giant offshore South Pars gas field, i.e. full development of phases 12-27, some 650,000 b/d of gas condensate and 6.7 million tons a year of liquefied petroleum gas (including propane and butane) and 4 million tons a year of ethane would be recoverable. This ethane will be fully served to the petrochemical industry.

In addition to easy access to feedstock, Iran enjoys other advantages in the petrochemical industry. The big and growing market in the country for petrochemicals, easy access to skilled and specialized workforce, extended communications infrastructure, sharing borders with 15 countries including Central Asia and South Caucasus, establishment of special economic petrochemical zones with political stability guarantees and pro-investment laws, offering incentives like tax exemptions to investors and the existence of a chain of active units of petrochemical industries. All these advantages can play a prominent role in the development of upstream and downstream industries.

Furthermore, the National Development Fund of Iran (NDFI) is also another important incentive for potential investors.

Iran is currently one of the most secure countries in the Middle East for domestic and foreign investment in the petrochemical sector. This security pertains to the infrastructure, return of investment, higher rate of return, growing demand in the region and knowledge-based structure.

In Iran, where political stability and security are prevailing, domestic and foreign investors are active. But, terrorist groups are freely operating around Iran, and they scare away any foreign investment.

Low net costs, security and rapidity of transfer are the most important concerns of investors for the transit of commodities. These parameters exist in Iran from north to south and from east to west of the country.

The economic dynamism along Iranian borders bears proof to this fact. Energy exchange, swap of oil, gas and electricity, exchange of commodities between Iran and Turkey, Azerbaijan, Turkmenistan, Iraq, Pakistan, Afghanistan, Caspian Sea littoral states and Persian Gulf Arab sheikhdoms, and the start point of a future gas pipeline stretching from Iran to China via Pakistan and India, are indicative of the fulfillment of requirements for transit of commodities in Iran. Iran targets 15 million tons a year of good transit. This figure is likely to be achieved as international sanctions have been lifted, trade transactions are on the rise and foreign companies are coming back to Iran.

An advantage which foreign delegates always highlight in their remarks for investment in Iran, is the existence of skilled manpower in different engineering, construction and contracting sectors. That gives Iran a big advantage over its rivals. Every three to four years, around 4,000 students graduate from universities and they are ready to work.

Long-Term Feedstock Pricing Formula

By working out a gas feedstock pricing formula for petrochemical plants for long term, Iran has practically given the green light to domestic and foreign investors willing to finance projects in the country. The prices set for the gas feedstock remain in force for at least 10 years. Up to that time, 21% of Iran’s 1.4 bcm gas output would have been converted to petrochemicals.

Today, in case long-term feedstock prices are set, investors would be able to make a more realistic assessment of projects they would be willing to finance in Iran. Setting gas price for petrochemical units for the long term would let investors, producers and industrialists of petrochemical sector to have a clear price range for coming years and therefore they would not be worried about price fluctuations in the market.

In order to meet the expectations of potential investors in Iran, three principles must be taken into consideration; First, setting long-term price to be more attractive than in rival countries; Second, establishment of infrastructure by the government; and Third, sustainable rules and regulations.

Iran Petchem Thirsty for Investment

Iran currently needs $33 billion in investment to finance petrochemical projects for a total output of 55 million tons. That would earn the country $26 billion in revenues a year. There are also 15 petrochemical projects under construction, which are all prioritized. These projects would become operational in four years and are expected to add 10 million tons to the country’s petrochemical production capacity.

With the finalization of financing for 7 methanol projects in Assaluyeh, some 10 million tons of methanol would hit global markets. Before this, the country’s petrochemical development has been mainly in the ethylene sector because due to the abundance of ethane, most products became ethylene-based and downstream industries had the chance to grow. But in order to accelerate the growth of these industries, propylene production must be facilitated. Propylene generates and feeds an extended chain of downstream industries. Therefore, Iran eyes propylene-to-methanol projects so that it would not slash the methanol price while propylene production would help improve downstream industries in the country.

According to National Petrochemical Company (NPC)’s projections, Iran plans to bring the capacity of petrochemical production to 180 million tons a year in ten years’ time from now. That would promote Iran to the first rank of petrochemical industry in the region.

Completion of 60 incomplete projects with 10-90% progress could raise the current production capacity of petrochemicals to 120 million tons a year. Furthermore, by implementing 36 new projects which need $41 billion in investment, the annual production capacity will go beyond 180 million tons.

Financing so many petrochemical projects is not possible merely by domestic resources; therefore, foreign investment must be involved.

Senior NPC officials have stressed the point that banks in Iran would not be able to provide so much investment for the petrochemical industry. They have welcomed the entry of banks and financial institutes into this value-generating industry. In the wake of the lifting of international sanctions on Iran, the country has held talks with foreign companies and voiced its readiness to cooperate with leading countries. Several European countries with a record of working in Iran have expressed readiness to return to Iran’s petrochemical sector.

Maximum use of the existing petrochemical production capacity is one of strategies envisaged in the 6th Five-Year Economic Development Plan (2015-2020). The industry can complete the value chain, but the presence of private sectors and particularly foreign investors must be increased by facilitating conditions for their presence.

No new investment has been made in Iran’s petrochemical sector over the past one decade. Therefore, this industry is now thirsty for foreign investment and technology. Foreign parties are well aware of potentialities and big profits of this industry for them. Germany’s BASF ad Linde, France’s Axens, South Korea’s Hyundai, Britain’s Shell and South Africa’s Sasol are set to benefit from post-sanctions period in Iran to resume work in Iran’s petrochemical projects in the near future. They know quite well that the rate of return for depositing money in banks is around 1% in their countries, while their investment in Iran’s petrochemical projects would produce at least a 20% rate of return.

Some 62 incomplete and new projects in Iran are like 62 sources of investment attraction. Implementation of these projects would let Iran’s petrochemical sector make up for losses it has incurred during years of sanctions. New petrochemical projects, worth $75 billion, have been envisaged in Iran. Most of them must be financed by foreign countries, particularly China.

Wood Mackenzie, a global leader in commercial intelligence for energy, predicts Iran can attract $70 billion for petrochemical projects under some conditions.

Afsar Hussain, an expert in Wood Mackenzie's EMEARC Refining and Chemicals research team specializing in olefins and polyolefins, has said Iran has ambitious plans to expand its petrochemical industry, including a large number of projects in planning and construction phases.

"We believe Iran can attract $70billion worth of investments, but only over a prolonged period that confirms it is an attractive investment opportunity. By comparison, the US shale gas revolution attracted over 200 projects worth over $130 billion within a decade of its emergence," Hussain said.

European investors are eying Iran but still acting cautiously as the imposed sanctions removal is yet to occur. Nonetheless, there has been news of Chinese and Indian investors looking at a number of these projects. Hussain said Iran is clearly another viable location in terms of low cost gas-based feedstock in the world other than the Middle East players which, except for Qatar, have limited supplies of low-cost ethane available, as well as the US with their shale gas-based developments.

Asked about the prospects of Iran's petrochemical exports, the Wood Mackenzie expert said Iran is taking steps to boost exports but their first priority is to increase production.

"As a result of sanctions, assets have lower than Middle East average production rates because of limited access to international technology/catalysts, difficulty in delivering feedstock and trade embargos limiting potential markets. We expect Iran to increase its production slowly. Hence, it will provide a boost to exports, but the process will be slow at first and is heavily reliant on sanctions removal," he said.

Iran exported about $15 billion worth of petrochemicals in 2011, before western sanctions were imposed. It has revived the export volume since 2014 due to elimination of petrochemical-related sanctions in November 2013. According to a report by Iran Customs Administration last week, Iran exported $10 billion worth of petrochemicals during the first eight months of the current year, unchanged in value, but increased almost 40% in volume.

Given the fall in the value of petrochemical products, Hussain said, "Petrochemical prices generally plummet due to lower oil prices. However, we didn't witness the sharp falls in petrochemical prices the same way as oil, as demand for petrochemicals remained strong and supply outages supported prices."

Downstream Sector Rivaling Upstream Industry

The advantages of development of downstream petrochemical industries are no secret to anyone. These advantages push investors towards these industries. The rate of return on investment is around 10 to 15% in the upstream sector and around 35% in the downstream sector. One million tons of raw petrochemicals is valued at $300 million. But if these raw products are converted into artificial products the country would be earning $670 million in revenues.

After petrochemical feedstock prices increased in 2014 many operating petrochemical plants in Iran expressed their interest in developing value chain around their complexes and they started negotiations with foreign developing companies.

Many agreements have so far been signed. One of them is the EPCF-type contract between a consortium comprising an Iranian entity and South Korea’s Pields for a pentane project in Assaluyeh. It seems that Iranian negotiators have realized the significance of value-added in the downstream petrochemical industries more than ever.

Foreign investors seeking cooperation with Iran are active in a variety of sectors. For instance, the Japanese are willing to invest in centralized utility, olefin and ammoniac projects, the Indians seek investment in urea units, South Koreans favor investment in fuel and aromatic units, while Europeans prefer GTTP and basic units.

Due to political overture in Iran in the aftermath of the country’s historic nuclear accord with the West in 2015, major European firms are interested in basic and downstream petrochemical sectors in Iran. That proves the significance of this industry for European companies.

At present, the competitive advantage of petrochemical products particularly in the downstream sector in return for the sale of oil and gas has pushed this group of industries into the focal point. Given the significant role of these industries in social and economic development and given the country’s potentialities, the petrochemical industry must be taken into consideration more than ever as it serves domestic and foreign industries.

Marzieh Shahdaei, CEO of NPC, has said that the presence of foreign companies in Iran’s petrochemical industries hinges upon the completion of petrochemical chain, noting that downstream petrochemical industries are welcomed both in Iran and abroad.

With the development of upstream and mid-stream petrochemical industries in recent years, important steps have been taken for the completion of the value chain of this industry; however, selling raw materials continues to be the main advantage of this industry. Official estimates indicate that 70% of the value-added of petrochemical industry materializes in downstream industries, while it has not been developed along with upstream industries.

 By Javad Asghari

Courtesy of Iran Petroleum Monthly