Without doubt Petropars Ltd. is the most famous of Iran's aspiring managing contractor firms, whose recognition comes as much from the political controversies as it does from its technical capability. Most international oil companies active in Iran openly admit that Petropars is among the better choices as a potential local partner in projects. Naftiran Intertrade Company (NICO), the financial arm of NIOC, intends to buy the company. If this outcome is achieved, one of the main weaknesses of Petropars would be overcome, making it even more attractive as a local partner for foreign oil companies. This month, Iran Energy Focus talks candidly with Petropars president Akbar Torkan about the successes and controversies surrounding this firm.

Iran Energy Focus: Mr. Torkan, many experts believe that Petropars could help to eliminate Iran's need for foreign oil firms in upstream projects while also bringing down total project costs for the country. What is your evaluation of Petropars' activities? What are your strengths and weaknesses?

Petropars: Well, I will have to correct the first part of your question. We do not at all mean to cut the hands of foreign companies from upstream industries. We believe that those who are more qualified should be in the market. And also, we never claim to have no need for foreign help. Working with the world's leading companies would give us the opportunity to improve our technology as well.

But for the second part of your question, I should say yes, Petropars created a rivalry that eventually led to a price break. With Petropars in the competition, prices fall and this is to the benefit of the NIOC.

IEF: How do you assess Petropars? What are your key strengths as a company?

Petropars: Petropars' main expertise is in project management. This is why we do not participate in the ancillary activities of the oil and gas sector but instead outsource these projects. That is, we offer only project management and do not enter other activities, which might even be very beneficial, including drilling, pipe layout, jackets construction, topside construction, and other similar activities. We try to use professional contractors in these cases, just as an architect employs different experts to construct a building. So, we are in fact the general contractor and we enjoy the cooperation of our contractors in technical and specific services.

IEF: You said you are strong in project management. What is your weakness?

Petropars: We do what we are experts in. We never step into a job for which we do not have the know-how. We believe that construction of facilities, cabling, piping, and similar jobs are specific tasks and need their own know-how. But the rule that we follow is to use Iranian forces and contractors in our projects in order to improve the Iranian content as much as possible. We believe that we do have the ability to open the way for Iranians in the oil and gas industry and to improve their presence to the maximum level.

To make it clearer, consider the fact that Iran's GDP was Rls590,000 billion ($73.75 billion) last year. Considering that Iran has a 16 million-strong labour force, that means every Rls40 million ($5,000) counts for one Iranian worker. That is, on average, each Iranian has a $5,000 added value. So, if, for example, a project worth $5 million were brought to the country, some 1,000 job opportunities would be created. We have over $12 billion of projects carried out in Iran every year, if we manage to localize half of the amount, we would be able to create at least a million job opportunities, a figure even higher than the projections in the Third Five-Year Development Plan.

But the question is how to localize the jobs. One of the policies we as an Iranian general contractor could adopt is to hand over the projects to Iranian contractors as much as possible. And if that is impossible to achieve, to hand it to a joint-venture of an Iranian and foreign company, such as what we did in [South Pars] phase 1 refinery; Iranian Industrial Development & Renovation Organisation (IDRO) and Korean Dailem are carrying out the project.

Of course, our main aim as an oil company is not specifically job creation, but this can be a final effect of what we do. We aim to carry out projects within the specified time and budget and with the appropriate quality. And in this line, we try our best to use Iranian forces.

Of course with the current facilities available in Iran, this job is very difficult. Iran's banking system, customs regulations, and insurance are in fact barriers in the way of Iranian investors. We have to overcome all these barriers. We don't mean that the officials in charge are responsible for the shortcomings, but we believe that we have to cooperate with each other to remove these problems.

IEF: Petropars is legally registered in the British Virgin Islands, meaning you are legally considered a foreign company. As such, do you still have problems with the Iranian banking sector, or can you circumvent them? Of course, the courts apparently asked you to re-register inside the country. From what we understand Petropars did register an office in Kish, but is yet to dissolve its UK offices. What is the latest status on that?

Petropars: No, we do not have the same banking problems. As long as the domestic facilities are so poor, we would keep our mother office in Virgin Islands, UK, and will move to Iran if the problems are settled. We registered Petropars Iran in Kish Island very recently and will move to our Kish branch as soon as we find the ground prepared for the transfer.

IEF: Mr. Torkan, we have heard that Naftiran Intertrade Company (NICO) is in the process of purchasing shares of Petropars from the pension funds of the NIOC and IDRO. What is the current status of that takeover?

Petropars: It is in the stage of legal registration, meaning that the shareholders of Petropars have already signed agreements with NICO to hand over the company and we are going through the formalities.

IEF: When do you think the handover will be complete?

Petropars: Within the next two weeks.

IEF: What would be the effects of the purchase on Petropars?

Petropars: As you may know, oil upstream projects are conducted in terms of buy-back deals and the contractor should have its own capital when it enters a buy-back deal. Since NICO has a very good financial capacity, it can provide us with enough capital and support us financially.

IEF: How about the structural changes within your company?

Petropars: There would be no structural change. Only shareholders of the company will change, nothing else.

IEF: Talking to foreign oil companies, we have noticed that you are regarded as a powerful technical company. But they refer to two main areas of concern with respect to Petropars as a potential local partner: first the financial shortcomings of the company; second and the political attacks on it. Do you believe that NICO's purchase will end the financial concerns?

Petropars: Yes, surely NICO's arrival will remove the financial problems. NICO's initial capital is $700 million and it has billions of dollars of assets. NICO will improve us and allow us to play a bigger role. Foreign companies will also be confident to cooperate with us when they see we have strong financial capacity. For them, a company without financial capacity cannot cover the risks.

IEF: And with respect to the political risks we mentioned, we would like to ask you about the revival of the Petropars case in courts and newspapers. The State Inspectorate Organisation (SIO) has accused Petropars of financial misdoing, and apparently the case is open for 11 Petropars staff.

Petropars: You should ask those who are trying to promote their own wares! [A few months ago] the President formed a committee on the Supreme Leader's order to follow up all the allegations levelled against Petropars in the SIO report. The committee reported that Petropars had not committed any violations and that the charges were baseless. But our friends in the judiciary are again trying to promote their own wares.

IEF: Could you please explain more about what you mean when you say the judiciary is "trying to promote its own wares"?

Petropars: Well, the judiciary is very interested to show that it is acting against financial corruption and in line with the Leadership's command. It wants to show that it is active and qualified enough to probe the issue.

As I said before, the judiciary is not competent to identify corruption, and that is why the Petropars case was handed over to a committee of the heads of three branches of the government. They cannot tell what corruption is. And as far as I am concerned, their managerial capabilities lack professional credibility.

The SIO, which is under the judiciary, considers its main task to be the exposure of crime. But from a management point of view, inspection means feedback. Feedback is very different from exposure of crime. Feedback aims at reforms and improvement of the system. That is, each system has an input, output, and a feedback. The feedback helps to have a proper output and controls the system. And the highest level of control is management controlling.

Management controlling aims at improving the system. But since the SIO is run by the judiciary, it supposes that "exposure to crime" is its duty. They don't have an approach to improve the system, but rather look at everything as if they want to find a crime. Therefore they lack a professional approach to different issues. If you look back at the performance of SIO in the past years, you will find out that this organisation has only annoyed managers, has never given a feedback to improve the system, has lacked professionalism and, on the whole, has caused losses to the system. Now the gentlemen [SIO directors] are trying to present their performance as positive.

We believe that restricting Petropars will not change this malperformance into a positive thing. Petropars' case is very clear, and the committee that the president appointed consisted of the highest ranking officials, including the head of the State Auditory Organisation, former and current ministers, the presidential advisor, and the Presidential Office legal director. These people have investigated the case and submitted their written report to the president. We cannot understand why our friends there [in SIO] have raised the case again. And the only reason I can find is that they want to promote their own wares.

IEF: Another big question debated by analysts is the timing of the revival of the Petropars case. In other words, why now? Three main theories tend to be floated: some believe that the case aims to derail NICO's purchasing Petropars' shares; some say it is a reaction to Petroleum Minister Zanganeh's recent statements against what he called the mafia active in the oil sector; yet others claim it is part and parcel of the campaign against President Khatami and his recent twin bills aimed to increase his authority. What in your opinion could be behind the revival of the case at this time?

Petropars: I don't know, I really don't know which one of these theories is at the root of the revival.

IEF: Do you think a combination of all three factors could be at play?

Petropars: I don't know. What I can understand is that Petropars' presence is a benefit to the country, and barring the company is acting against the national interest.

IEF: Do you think that the political attacks will affect NICO's purchase?

Petropars: No, we do our own business. We are not supposed to restrict ourselves with these things. If we wanted to care about these matters, our project [South Pars phase 1] couldn't have 98 per cent physical progress now.

IEF: Talking about South Pars phase 1, one point that the SIO brings up is that since it is a buy-back project, it should benefit only from the sale of commodities produced by that field. But we see that a surplus of Sirri oil revenue is allocated to the project's development. Could you elaborate on that issue, please?

Petropars: In the 1376 Budget Law (Iranian year corresponding with 1997-98) we were permitted to use this revenue. Prior to that, the buy-back formula suggested that each deal would be reimbursed from its own productions. But later, in order to cover the risk, they allowed a company to invest in something and use the production of another project in certain projects.

French TotalFinaElf (TFE) has invested in Sirri A & E, and a part of the field's revenue is paid to TFE as reimbursement. In the budget law, a part was added that a surplus of the revenues could be spent on [South Pars] phase 1 development.

At one time [in the late 1990s], oil prices plunged and the revenue from the Sirri fields could hardly be enough for TFE's reimbursement and there was no surplus. So, at the beginning of our work, we asked Standard Charter Bank to grant us a loan of $350 million. Later, oil prices surged. The surplus revenue of Sirri A & E went to the NIOC bank account, which received LIBID interest on the money. On the other hand, we were paying LIBOR plus some points interest to Standard Charter. So, NIOC decided to give us the money to settle our loan with that bank so that we would no longer pay the interest. I should add that this was to the NIOC's own benefit and made no difference to us, since under the buy-back contract Petropars would be reimbursed for interest paid up to a ceiling of $80 million.

IEF: Is Petropars the only company that the NIOC allowed to benefit as such, or can you think of other cases?

Petropars: The NIGC was given a similar opportunity, but I don't know if there has been any other.

IEF: Going back to the plans to purchase Petropars, once NICO completes its purchase you will be one of, if not the most powerful, Iranian oil company in both technical and financial fronts. Many foreign firms may therefore want to take you on as a partner in Iranian oil and gas projects. What type of foreign companies is Petropars trying to attract as partners?

Petropars: Although we have gained good experience during our current projects, we believe that there is still a lot to learn and that we can improve ourselves through partnership with foreign companies. This is true not only for us but also for those Iranian companies that want to be active in the oil and gas industry.

Therefore, we never consider ourselves independent of foreign cooperation. Improving ourselves through cooperation with foreign companies is among our policy objectives, because Petropars is currently in a very poor position to take its share in the global market. Malaysia, for example, does not enjoy a high position in oil and gas industry compared to Iran. But Petronas is a powerful and capable oil company. Of course, Petronas is not our model company, but we are far behind it. So, we have to learn so many things and go through many procedures to improve ourselves.

IEF: But you may know as well that foreign companies have their own shortcomings. If you talk to them, some may say they look for an Iranian partner that is strong in a certain technical field that they lack, or some might look for an influential partner in terms of local connections and contacts, etcetera. What are your key expectations from a foreign partner?

Petropars: We are working with Agip in phases 4 and 5 of South Pars and we are satisfied with the job. We are also working with Statoil in phases 6, 7, and 8, and we are again satisfied with the cooperation and their understanding.

We were working with Enterprise, but with Shell's takeover of the company, they withdrew from partnership with us. We believe that Shell is a leading company and working with Shell can upgrade us as well. So we look forward to working with Royal Dutch Shell. We also would like to work with TotalFinaElf.

We also work with Korean companies, but the fact is that we are looking for leading partners and first-rate companies. If we are supposed to learn something we prefer to learn it from the first-rate companies. We think we do not have the time to work with second-rate companies. We have to reach a world level, and it requires us to work with leading foreign partners.

IEF: You mentioned that you welcome participation with foreign companies to make Petropars a competitive and capable company on the global level. Where do you see Petropars in a ten-year span?

Petropars: Our goal is to become a leading oil company, but we are far from that goal. Our technology, turn over, management, and assets are far from the global level. We have to go a long way to achieve all that, and I believe that the Islamic Republic of Iran was 20 years late in establishing Petropars.

We need to move ahead step by step and accumulate know-how and expertise. We have to improve our management and also discover and attract the best forces in the country to work in Petropars. So, as you see, we have to go a long way to reach the leading companies.

IEF: You mean you do not believe Petropars will be on par with a company like Malaysia's Petronas in the next ten years?

Petropars: We will be more than Petronas in the next ten years.

IEF: We certainly hope so. Thank you very much for your time.