Oil &Gas

-OIPF2 Conference (Oil & Gas)

-Oil increasing income and it’s effects on Iran’s economy   

- Int .Conference On Oil and Gas Contracts

Oil Industry
Projects Financing
OIPF2nd CONFERANCE TEHRAN 2008

“Realization of pre-determined  goals that have been stipulated in the 20-Year Vision Plan within the framework of four 5-year development plans and reaching an average growth rate of 8 percent in the course of implementation of each plan sketches the outlines within which our national economy has been defined. Moving in this direction, the perspective for benefiting from foreign financial resources and demonstrating an active presence in international monetary markets, further encourages different sectors of the Iranian economy, including the oil industry, to employ different mechanisms for attracting foreign financing and concentrating on formulating proper contracts in this regard.” This point is the very essence and raison d’etre for organizing the conference on Oil Industry Projects Financing (OIPF); a move for which the first step was taken by the Enerplus Institute on 8 and 9 December 2006 by an extensive planning which consumed hundreds of hours of work at expert level at the Expediency Council Center for Strategic Studies. The institute organized the second conference on February 2-3 this year in a broader dimension as compared to the previous year event. “Our path is absolutely clear,” says former deputy oil minister and head of the strategic committee of the conference, Seyed Mehdi Hosseni. “To be standing in the first place  in the West Asian Region, as thepriority of Iran’s vision plan in the  year 1404 (2025), is the guideline for OIPF conference and for the Iranian oil industry as well. By treading this path, financing for oil, gas, petrochemical and oil products projects no doubt remains as one of the major challenges in encouraging   investment in Iran’s oil industry.” Prospects of the national economy, and subsequently targets stipulated thereby, further explain the overallmission of OIPF which examines  those targets within the following main frameworks: Latest major developments in global and Iran’s oil industry Legal-political entities and investment challenges in Iran’s oil industry Securing financial requirements of upstream and downstream projects  in Iran’s oil industry In line with this very mission and addressing the opening session in the capacity of secretary of the conference, Hosseini underlined the need for application of required mechanisms for securing financial needs at national and international levels and for expanding domestic and foreign interactions.  “This conference is a point where thoughts are met and is an arena where information are freely exchanged over the latest methods experienced in the oil industry by local and foreign companies, including contractors, consultants,  oil equipment manufacturers, representatives of international oil companies and consultant investment and financing companies,” he said.

 OIPF: Second step 

The second Conference on Oil  Industry Projects Financing was held at the conference hall of the Olympic Hotel in Tehran on 2-3 February this year. Two days of energetic and effective work with broader dimensions as compared to the previous conference, which was attended by over 500 senior directors and experts from the Iranian oil industry as well as the banking, insurance and finance and investment sectors. The conference which was held in five panels and specialized workshops with an exhibition on its sideline, was successful, to a great extent, in securing satisfaction of its organizers and its participants as well. The result of an opinion poll which was conducted at the close of the conference further proved  the success accomplishment of the conference. The assembly of prominent figures from the public and private sectors and their participation in this year  conference provided an opportunity for the formation of a pleasant composition of different outlooks and tastes. Among the keynote participants in the gathering reference could be  made to Akbar Torkan, Deputy Oil Minister for Planning, Mohammad Baqer Nowbakht, Deputy Economic Research Department of the Center for Strategic Studies at the Expediency Council, Majid Reza Davari, Managing Director and head of the board of director of Bank Tejarat Iran, Jalal Rasoulov, Managing Director of the privateowned Bank Eghtesad Novin, Ali Kardar, in  charge of the implementation of Article 44 of the Constitution (privatization at NIOC), Mansour Mo’azami, Deputy Human Resources Department of the Oil Ministry and Mahmoud Vaezi, Deputy head of Research and Foreign Policy Department of the Center for  Strategic Studies at the Expediency Council as well as a number of executive and academic figures.

Alarm for dependence of state budge on oil revenues

Deputy Economic Research Department of the Center for Strategic Studies at the Expediency Council,  Mohammad BaqerNowbakht, who is serving in one of the most sensitive economic positions, emphasized on “the oil-oriented Iranian economy which has been caused as a result of dependence on oil revenues”. He pointed to government’s severe dependence on huge oil revenues in the past two years and said: “Our presentable resources are limited; all 24 MARCH 2008 NO.93 of us are fully aware of this point.On the other hand, world demand  for absorbing valuable resources ison the rise and, as a result, we are witnessing a growing competition  at international level for gainingaccess to more energy resources which has accelerated the pace of the emergence of new global powers despite the prevailing US hegemony in the world.” Elsewhere in his remarks he added: “Impact of revenues obtained from oil as an all-embracing and universal commodity, on Iran’s economy, including on such components as the rate of hard currencies, unemployment, inflation and  production, is a direct impact which, if not managed through practice of far- ightedness and not controlled through application of delicately designed economic tools, will entail irreparable consequences.”

We will lose the market if we fail to maintain constructive interaction with the world

Elaborating on the dimensions of the 20-year Vision Plan of the Islamic Republic of Iran, deputy Research and Foreign Policy Department of the Center for Strategic Studies at the Expediency Council, Mahmoud Vaezi, pointed to practice of a proper approach at the international scene and application of reasonable and developing foreign mechanisms as being among the key components of the country’s Vision Plan. He said: “To maintain our presence in the world economic cycle, we have no other alternative than adhering to the strategy aimed at building constructive interaction with other countries and concentrating on an overall ‘development-seeking’ policy. Otherwise, we will lose all the world markets.”Citing the statistics that are available about the international energy  market, Vaezi said: “World demand for oil which amounted to 83 million barrels per day in the year 2005 will increase to 118 million bpd in 2030, showing that energy market will remain absolutely brisk in coming  years.” Elsewhere in his remarks he stressed that under such circumstances and in order to preserve its presence in this market and not fall behind its rivals, Iran should make an investment of about 120 billion dollars during the said period; half of which should be maintained through the banking system and international agencies. 

Oil Industry Development Bank

Another speaker of the second Conference on Oil Industry Projects Financing was deputy oil minister for planning Akbar Torkan who, at the first conference, had proposed the idea for the formation of the oil industry bank. This year too, hefocused his remarks on the formation of the oil industry bank and enlisted effective outcomes of the formation of such a bank in the economy of the country. Pointing to the share of oil in Iran’s GNP, Torkan said: “The share of industry and mine sector in Iran’s GNP is 11.6 percent, that of housing is 4.3 percent and of agriculture is 10.4 percent while oil sector has the  highest share in the GNP with 36.5 percent. Given such a share in the country’s GNP, should not the oil industry have a specialized bank of its own?” 25 MARCH 2008 NO.93 Further elaborating on the objective behind formation of the oil industry development bank, he said: “Formation of the oil industry  bank willincrease the capacity  of granting facilities to different sectors of the industry, facilitating and speeding up implementation of giant oil and gas projects, expanding oil-affiliated industries, including petrochemical industry, reducing broker commission, establishing specialized bodies for evaluating projects in line with granting facilities, participating in financing syndicated loans and minimizing risk of investment in oil and gas industries.” Outlining mechanisms for securing financial requirements for the formation of the bank, Torkan said: “Retirement funds within the country together with investment companies affiliated with the Oil Ministry, insurance and specialized companies and using surplus oil revenues (Foreign Exchange Reserve Fund) are among resources  to meet financial requirements ofthe bank.” However, Torkan stressed that  financial resources of the bank are not confined to the above-mentioned cases, adding that the major part of financial needs of the oil industry development bank should be maintained through international markets to the extent as such this financing method could, in its turn, enable the country’s economy to benefit from international monetary trends and financial markets. 

We have no other alternative but to privatize Iran’s oil industry Ali Kardor, in charge of
implementation of Article 44 of the  Constitution, can in fact be referred to as the state representative forthe realization of the process for privatization of Iran’s oil industry. In his speech to the conference, he outlined the situation in the world energy market, the trend that such a market would take up to the year 2030 and the process which has been taken in recent years for privatization of Iran’s oil industry. Addressing the participants in the conference, Kardor assessed the trend of privatization of the Iranian oil industry as very slow but expressed optimism over such an accomplishment in the years to come. He outlined the investment that has  been made in Iran’s oil industry in recent years (1996-2007) as follows: National Iranian Oil Company 5.70 billion dollars, National Iranian Gas Company 5.70 billion dollars, National Iranian Oil Refining and Distribution Company 3 billion dollars and National Petrochemical Company 23 billion dollars. Now the question is that out of the statistics predicted for investment in the year 1404, what percentage would be absorbed by Iran’s oil industry? Kardor estimates the total investment needed by the Iranian oil industry in the year 1404 as follows: National Iranian Oil Company 230  billion dollars, National Iranian Gas Company 130 billion dollars, National Iranian Refining and Distribution Company 20 billion dollars and National Petrochemical Company 65 billion dollars. Iran’s oil industry should find mechanisms by the application of  which the country could attract over 445 billion dollars in foreign investment.
 

Financing by Regional Islamic markets 

Majid Reza Davari, managingdirector and head of the board of director of Bank Tejarat Iran, was  another speaker of the conferencewho addressed the participants on the second day of the event. Davari who is leading one of the largest banks in the country which has not become a subject to trade sanctions yet, made reference to the prevailing bottlenecks. He said: “Iran, from legal point of view, is faced with limitations for securing its financial needs through investment in different oil and gas areas. Such legal economic and political limitations have changed the condition as such that from among common practices only financing is applicable.” Examining different ways and means of financing, he pointed to financing by Islamic markets in the region as the most proper option in this regard. Davari cited reasons which, according to him, can justify concentration on the said markets: “In recent years and following limitations imposed on capitals of the Muslims by Western countries, huge financial  resources of the Muslims have been directed towards markets in regional countries such as those in the United Arab Emirates and Malaysia.” Issuance of the “cheque bonds” was the highlight of Davari’s remarks. He said: “Resources in Islamic countries are looking for safe havens for making investment within Islamic frameworks and for this reason many institutions, even banks in European countries, are after making Islamic financing in those markets. Therefore, using tools such as cheque bonds can be highly effective in attracting such resources.”

Security in the quadrangle of “supply, demand, investment and energy market”

Jalal Rasoulov, Managing Director  of the private-owned Bank Eghtesad Novin, was among speakers who addressed the second day of the conference.Rasoulov who formerly served as managing director of Bank Keshavarzi, has proved to be among successful figures in the field of bank management in recent years. Presiding over one of the panels onthe second day of the conference, he focused his remarks on how to secure financial needs of downstream oil projects. In Rasoulov’s viewpoint, financing such projects could be realized through the following seven major options: Supporters of participants in projects Loan resources Strategic investorsProperty ownership by the private sector Trade banks and capital market Export credit and multilateral agencies Islamic financing Although securing the required financial needs through financing which is prevalently being practiced in Iran’s oil industry could manage to minimize problems facing the industry in its early stages of application, however, by the lapse of time, the change in the world trade system in general and developments in regional and national status in particular, have affected efficiency of financing. To this end, the third OIPF will seek to examine proper mechanisms with regard to the advancing national, regional and world condition.

Oil   increasing income and it's effects on Iran's economy

                                                                                               Seyed Alireza Kazemi Doulabi

Several studies represent that the  abundance of natural resources in developing countries, sometimes postpone their development process or could cause the low rate of their economical growth. When oil and gas as two high potential incomes, flow into their economy, overfilled of their capacity, become the main axle for the economical decisions and will cause high expenses of governmental use, undesirable interactions in economy which concludes deranging in market operation. These incomes directly, get injected to governmental section without considering as establishment for economical and social infrastructure and establishing necessary positions for economical development. Therefore economy leads to become more governmental and bare from private market. Certainly, this process means to sovereignty and elopement from competition and consequently dislocating of natural resources between real economical demands and just getting allocated to maintain the profits and developing the authority of government, in a way that the economy becomes submission of political decisions and oil and other natural resources stay in government’s hand as the best and impressive tools. Iran’s economy record is not far from this story and oil stays the only connection between us and the global economy and becomes the main axle for economical decisions. The inseparable connection between the annual budget on oil in accompany with the insufficient market management of natural resources made the government more powerful. Authority of governmental economy, increasing expenses and governmental uses led to some effects such as; non –  existence of balance in different steps of economy, reduplication of the private section, inflation and other harmful economical effects. Otherwise if there will be a well directed management for the proficiency of natural resources and expand it in economical and social infrastructures and granting investment facilities, gradually  exporting products with industrial value added instead of naïve selling, can survive our economy from single product and change the equation to Iran’s economy. For this case, changing all old and traditional positions which are directed to the single product economy is necessary. It is in a way that in today’s condition of global market and international economy, regimes which do have an exclusive nature or none-competitive essence, are not successful. Whilst, the governmental economy itself, is not able enough to stay in rate of global market. Therefore the allocation transfer from governmental economy to free economy and supporting the private sector and reducing governmental control was given by the economical experts as operational solutions. For instance, establishing the Foreign Exchange Reserves Account in attention to article 60 of Third Development Plan and emphasizing on the Fourth Plan is evaluated in this path, because operational experiences of governments in depending on the incomes out of oil and gas which must be used in order to spread social welfare and justice, is just supplied in government assets, expanding high government expenses, increasing demands without appropriate offer ends this process to inflation. Even, the establishing of budget organization which was to lead the oil income for improvement and development of infrastructures in the country couldn’t be able to support the government expenses with none-oil incomes. Therefore oil income went  under authority of government.

oil stays the only
connection between us
and the global economy
and becomes the main
axle for economical
decisions.

Even so, we should believe that the abundance of natural resources which is a donation becomes a disaster and all normal people, that own these fortunes have no proficiency on them. Unfortunately all the efforts done during the third and fourth development plan which were based on reducing financial pressure and physical bulk couldn’t weaken the desire for income out of oil and gas. The whole budget in proportion to GDP, which is related to the expansion of economical activities, moved up to 97.3 present. State owned companies budget increased to 2.6 times more than  the general budget. These numbers   by themselves, in spite of the intentions discussed in article 43, the government has become an entrepreneur. Increasing of governmental expenses, fast growth of liquidity, inflation and unemployment is just a combination of oil incomes with the financial policy making in governmental economy structure and none-existence of insufficient market, in case that the cash flow of the whole economy was impressed by the indisputable incomes out of natural resources. The record of governmental economy shows that the more is increased to the oil incomes, the less enjoyment of generating elements and also decreases the sense of competition in global market and this will harm the industrialization in a way that if one day, these incomes get decreased or ceased by any kind of issue, being in competition with the world market seems inaccessible. One of the main reasons by establishing the Foreign Exchange Reserves Account was to prevent the flow of excess money being entered to the financial cycle of the country more than the economical capacity. The experience by Norway can pave the way for the oil countries. This country invests the oil income in the international markets such as documents of financial market, valuable papers, loan and stocks and also enters some percentage of the  profit into the cash flow depending on economical situation. It’s been 10 years passing, since the establishment of their Foreign Exchange Reserves Account and now the reserves can be estimated 300 billion dollars. One of the important targets by this payroll  department is to save the oil income and transfer it to the next generation. Despite it is a safe backup for the risks of bad economical situation. Certainly our economy will face serious challenges if they don’t tap the opportunities. Probably, in near future the international economical interactions can negate the opportunities from the oil exporter countries. In any way our daily oil income is near 180 million dollars. This amount of income is three  times more than the income which was discussed in fourth development plan and has become the basis of pointing in economical major shifts. Thus the currency facilities are more than the one in fourth development plan, the government should chase more important targets by ordering these incomes. But what can assure the economy from oil income rush and lead it to economical expansion, is just the government loyalty to the fourth development plan and adjusting the fifth development plan, according to the policies of the article 44, which is to reduce the dependence on oil, strengthening the Foreign Exchange Reserves Account, reducing government financial pressure by economizing in expenses and shortening the government and donating the governmental stocks to real private  sectors leading the subventions to produce and develop exports of none- oil products, instead of usable subventions, investing in culture and training section, no interruption on pricing, respecting all economical rights, with the appropriate way of donating enormous agents to private sector, the direct involvement of government on the economy will fade and consequently can reduce the governmental expenses and spread infrastructural investments.
                                                                                                                                                   

International Conference on

Challenges &Opportunities of Iranian Companies in
 Oil & Gas
 

In the congress Mr. Nozari the  Iranian Oil Minister notified that, the oil industry puts all attempts to uphold the second place in OPEC and achieve the second place in gas production in the world. Right now the domestic gas consumption is near 460 million square meters which includes industrial, electricity and in-house consumptions. He also  added, the contracts in oil industry need to be reassessed and right now different teams are organized, just to have a review on them and I myself invite all private sectors to participate in this review. Kamal Daneshyar “Head of Energy commission - Parliament “ mentioned that Iran needs 600 billion dollars investing in oil and gas industry in the next 20 years. It means allocating 30 billion dollars each year. According to the fast growth rate in oil prices, it is quite predictable to have dramatic increase  in oil price for the next 10 years. At the present some 50 percent of the oil income pours into the subsidy or wastes over squandering in energy which must be used as investment. In accordance with the existing investment potentials in this section, the private sector should continue more actively.  A lot of attentions need to be paid to the general energy projects, production range, consumption and exporting must get assigned subsequently, he said. Dr. Gholamreza Manouchehri “C.E.O of Petro Pars and chairman of the  conference” pointed at strengthening the Iranian companies, in order to have participation in international  contracts. He also said that Iranian companies should not wait for any kind of bid anymore and they must make more connection instead. Iranian companies should become more specialized and have their own statements. The financial room of Iranian companies is around; 100 million dollars that we believe it must move up to 1 billion dollars and become more oriented in  comparison with foreign companies. He finally intimated the followings:  

- Iranian companies would not beable to reach beyond the qualitative and quantitative limits and have a proper growth unless they manage to enter the international markets.

- Nowadays, the quality is the most important key in any task which the company’s neglect doesn’t allow them to take part.
 

- The entrepreneurs must consider their projects in different scales and benefit them in investing so that they can absorb more  governmental budget.

- The private section point of view should insist on the win – win system.

- The contractors in private section should have adequate knowledge so that they can compete and work with the international world  trade.
 

- They should be familiar with rule of the game and reduce the existing  distant with foreign competitors.
 

- Privatization, is the one, they have to take steps for and they must activate this in oil and gas industry. 

- The private section should truly produce wealth and job vacancies. Dr. Nematzadeh, stated that, they  had faced some complications in oil and gas contracts with the national petrochemical company which different patterns of contracts were examined. There is a great different between these contracts and others  he said. They are in big and bulky sakes which can’t be compared with any other contract. He pointed to the  external and internal market demands, existence of natural resources, long reputation in oil industry, having knowledgeable experts as opportunities and vice - versa to weakness in project managing, lack of adequate mechanism for financial backup, lack of huge engineering companies, and multiplicity in making decisions as the serious  menace to this industry. He continued that the oil industry is facing the following challenges:

- The conditions of establishing robust engineering and contracting organization.
 

- Financial backup method
 

- The conditions of providing. Timebased, financial and qualitative commitments.
 

- The banking system correction circumstance to respond massive projects.
 

- Non – existence of close cooperation between internal and external contractors.
 

- Lack of knowledge and experience by engineering companies.
 

- Complications in L / C inauguration.

- Lack of consortium laws

- Lack of accepting technical and managerial obligations by engineering and contracting companies. Dr. Nematzadeh offered some
solutions as followed:
 

- Establishing the oil industry bank with the primary 15 billion dollars from the Foreign Exchange Reserves Accounts source.

- Activating the internal credits by the banking system.

- Allocating facilities to oil industry projects especially in lower levels from the Foreign Exchange Reserves Accounts up until to bank facilities.
 

- Offering Bank facilities to contractors toward the certified contracts with oil companies, by 70 percent of the contract’s value.

- Participation of private sector in refining and petrochemical projects and having financial back up fromtheir concerned foreign companies.
 

- Participation of automobile buyers in investing in refining projects.
 

- Combining small business companions.
 

- Joining small companies to bigger ones.
 

- Prepare and approve consortium laws.

Reza Abdollahi, The Head of Parliamentary Budget Commission was the next lecturer of the conference, he stated, we expect to have  8 percent promotion in order to reach the first place in economy according to the development process by the article 44. He also mentioned that, we need to have investment if we are seeking the target and having historical record and high incomes in oil and gas doesn’t mean progress, perhaps we must mark security and benefit in investing and also keeping the human resource must be the main goal. It should be admitted that despite efforts made for commissioning of the midterm development projects in the country and for gaining  valuable scientific and technological achievements and experience, it is not so easy to materialize objectives of the vision plan. Oil and Gas are still the foundation stove and care of Iran’s economy. True, spending huge amounts of foreign exchange revenues on  equipment of financial resources would make all-out development of the country possible, but this would require an annual investment of around $ 20 bl. Oil and gas sectors are still holding an outstanding position in the vision  plan and achievements gained by these sectors in the post-Islamic Revolution end era, mark a valuable asset in this respect. Under the present conditions when the country in subject to foreign threats, especially the economic and financial sanctions, the oil and gas industries should more than ever start to review their performance and identify their strong and weak points, so that objectives of the  vision plan would be met. The directives of article 44 of constitution have provided a proper atmosphere for privatization, even in the oil and gas sectors and have presented a valuable opportunity to pay special attention to, and appreciate and support the private sector. It is necessary, however, to implement the privatization project in the industry with maximum care. In fact, these in a valuable opportunity which if not used properly, could turn into serious threat against the economy.  The private sectors in Iran, especially the contracting companies, are not yet capable enough in terms of financial power, and technology to compete with international companies in implementing multibillion dollar contracts. This is while, the banking and insurance systems, which can assist the contracting companies, are not powerful enough to extend credits or guarantee such contracts. Hence, formation of developer  companies would by the ray to passing the difficult period through mobilization of all resources of companies including financial manpower, managerial, equipment and technological resources. It would also play a key role in their activity within framework of the Build, Operate and Transfer (BOT) and Build, Operate and Ownership (BOO) contracts. The strategies will also help raise competitive power of the companies against foreign companies (both on the domestic and international levels). Meanwhile, using syndicate credits  ( by having several banks finance the  projects) and accepting contracts as banking guarantees ( with respect to companies capability to implement and commission projects and repay credits) would be helpful solutions under present conditions, when economic restrictions are imposed.