By Sayeh Sabz, Mianeh
A recent study in Iran has shown that the country is in dire need of investment in its energy industry, without which it may suffer grave consequences. A leading official think-tank affiliated to Iran's parliament, the Majlis Research Centre, issued a report in October 2009 saying that Iran needed at least 4.5 billion US dollars of investment in its energy industry.
Otherwise, it added, in the worst-case scenario Iran would have to stop oil exports in eight years. Whether realistic or not, the report gives a stern warning to Iranian officials that their nightmare of diminishing oil income may be about to come true in a country where 85 per cent of the annual budget is funded by such revenues.
Although President Mahmoud Ahmadinejad uses every opportunity to defend and praise his economic policies, Iran's ailing economy has even led the president's allies, including conservative members of parliament, to harshly criticise the government and even suggest the possibility of impeaching the president, according to Aftab-e Yazd daily on December 7. But how did Iran end up here?
A combination of bureaucracy, wrong foreign policies, sanctions and corruption have brought Iran's energy industry to its knees, making it hard for foreign investors. The roller-coaster of bureaucracy in Iran, bottlenecks that a contract has to go through before being signed, inconsistency and officials' indecisiveness are just parts of the diseased contract system in Iran. Politics plays its own key role in what contract should be awarded to which favoured company.
When Ahmadinejad took power four years ago, foreign investment, particularly by European-based international oil companies, was on the rise. Under the previous reformist administration of Mohammad Khatami, the French oil giant Total, then TotalFinaElf, defied United States sanctions and became the first of many European and foreign companies to come to rescue Iran's war-hit oilfields.
Although not a big investment boom, the positive trend promised to maintain a flourishing energy industry to allow Iran to retain its position as the second largest Organisation of the Petroleum Exporting Countries, OPEC, producer. But with the major shift of policy in Iran's foreign relations and economy under Ahmadinejad's hardline administration, Iran may find it hard to keep on the same track.
Ahmadinejad's "look to the east" policy brought about rather sudden changes and, in less than four years, the country's energy sector has become a playground for Russian and Chinese oil companies while their western counterparts are growing cautious over investment.
However, it would be untrue to say that Iran had suddenly turned to Chinese companies with the arrival of Ahmadinejad. Indeed, less than a year before he came to power, the country signed a major memorandum of understanding with Beijing promising investments of up to 100 billion dollars by Chinese firms in Iran.
In line with the memorandum, China's Sinopec was awarded a multi-billion-dollar deal in November 2009 to develop Iran's Yadavaran oil field.
The presence of Chinese firms in Iran's oil and gas industry has significantly increased in recent years. Russian, Turkish, Indian and Belarus companies have also joined the European firms that were already in Iran prior to Ahmadinejad's arrival.
In 2005, after a long chase for a major oil contract, British Petroleum ended its Iran programme citing the high risks attached to investment there, such as US sanctions. The company was followed by British Gas and, most recently, by Brazilian Petrobras and Norwegian StatoilHydro.
Alongside the policy shift by the Iranian government, its bureaucracy and oil apparatus have caused the country to suffer considerably. Whether western or eastern, oil companies will have to go back and forth in a maze of Iranian departments, ministries and the parliament in order to kick-start a project. And even then, they are not safe from contractual hiccups, as could be the case with any other country.
But sometimes the stalling does not come from the Iranian government; indecision by European firms in the face of increasing global pressure and sanctions can cost them lucrative contracts. The most recent example was the elimination in December 2009 of France's Total from South Pars gas field's Phase 11 development, which Tehran said was being delayed "excessively". Total and Iranian officials had been discussing the corporate development of Phase 11 and production of liquefied natural gas from produced gas since 2004. After almost five years, the contract was eventually awarded to another contract-hungry Chinese firm, China National Petroleum Corporation, CNPC, and Total has been told that it would be "welcome" to cooperate with the Chinese side if interested.
It is too early to decide whether the Iranian romance with the east has been affected by both China's and Russia's vote against Iran at the United Nations nuclear agency in late November and Russia's failure to deliver on time the Bushehr nuclear power plants and S300 missiles to Iran. So far, Tehran has not taken a strong position against the two countries, with Ahmadinejad describing Russia's vote against his country as a "mistake".
What is clear, however, is that the Iranian government is in dire need of investment, whether foreign or domestic, in its oil and gas industry.
But under current pressures and sanctions and with Ahmadinejad facing a legitimacy crisis after the June 2009 presidential elections, the prospect of further western investment in Iran becomes less and less likely. Whether Iran's change in its foreign policy will pay off and whether it will efficiently manage its dwindling energy resources, dilapidated oil industry and increasing energy demand in the near future remains to be seen.
About the author: Sayeh Sabz is the pseudonym or an Iranian journalist in Britain.
About Mianeh: Mianeh is a new independent web-based initiative run as a project by the Institute for War & Peace Reporting (iwpr.net) the award-winning non-profit media development organisation that works across the globe to platform local voices and promote international learning and engagement. Mianeh aims to be an open space for ideas, news and debate where writers in Iran can reach out to each other as well as to those outside the country who are interested in learning more about the vibrant and dynamic society that is Iran today.
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