Post-Sanctions Iran’s Petchem Industry
A nuclear accord reached on July 14 between Iran and P 5+1 group – the United States, France, Britain, Germany, Russia and China – was a victory for diplomacy of endurance and patience pursued by Iranians. After more than a decade of intensive negotiations with ups and downs, this agreement has revived hopes that Iran, rich in hydrocarbon reserves, would build a new alliance with the West. This nuclear agreement is win-win deal for Iran and the West. It provides an opportunity for interaction between Iran and the West through business and investment for the development of oil, gas and petrochemical industries.
Everyone is now making efforts for development in light of this atmosphere of tranquility. Iran’s Ministry of Petroleum, as a wing of Iran’s diplomacy, is accelerating a move that started two years ago.
Iran’s petroleum minister, Bijan Zangeneh, recently hosted a 60-member delegation of German businessmen headed by the country’s minister of economy. Delegations from other companies are also in the line to travel to Iran. Many foreign companies have already started negotiations and their visits are planned in the coming months. A high-ranking Iranian economic delegation recently attended “Iran-EU conference, Trade and Investment” forum in Vienna from July 23 to July 25.
Iranian and foreign analysts and oil managers are willing to know the prospect of Iran’s petroleum industry, particularly its petrochemical sector, after the lifting of the sanctions as European industrialists have always eyed Iran’s petrochemical products.
Iran’s petrochemical industry has been on the receiving end of the sanctions and restrictions, and it has hence been affected by both oil supply and demand market.
Iranian and foreign analysts believe that the signature of Iran’s nuclear deal and the planned termination of provisions of sanctions in the coming months would result in the renovation and development of petrochemical facilities and boost petrochemical output in the long-term.
These days, diplomats from Iran and the six global powers are determined to finalize the nuclear deal and implement it because the historic agreement would create myriad opportunities for investment in Iran, which would be beneficial to their own industries.
Iran’s petrochemical industry is among industries which would see significant changes in case it receives foreign investment.
In the wake of the nuclear deal with the P5+1 group, Iran is now ready to improve its petrochemical sector. However, businessmen would not be expecting any specific changes after Iran rejoins the world petrochemical trading market.
Chief executives of European oil majors like Royal/Dutch Shell and Italy’s Eni have voiced their interest in traveling to Iran to examine opportunities of investment. Tehran is also to hold Iran Petrochemical Forum (IPF).
Iran’s annual petrochemical production capacity currently stands at 60 million tons, 17 million tons of which is exported. The representatives of international companies based in Dubai have long been seeking to sign contracts with petrochemical producers in the region. That is why they have been regularly visiting Iran. Some of these companies have even established representative office in Tehran in order to start work immediately after the nuclear deal is implemented.
A merchant based in Dubai has said that representatives of Iranian petrochemical companies have been visiting Dubai over the past six months in order to make the necessary preparations for post-sanctions business.
Iran privatized some sectors of its petrochemical industry from 2011 to 2013 and representatives from newly established companies regularly attend international conferences in search of footholds in markets.
One of the biggest companies closely watching Iranian trade include Chinese giant Sinopec, a source at the company told Platts in April.
"Chinese companies have shown an interest in investing in Iran and we may see strong investments in the country once the sanctions are eased," van-Zeller Neto said.
Banking - the biggest impediment to the trading of Iranian petrochemicals since sanctions targeting the industry came into effect at the end of 2011 - has also shown signs of loosening up recently but stumbling blocks remain.
Iranian banks have challenged legally their placement on the list of sanctioned entities, and in January an EU court annulled an asset freeze imposed by the European bloc on Tehran-based Bank Tejarat.
Iran's central bank has also been reported to be in talks with financial institutions across the world to ensure smooth financial transactions, if a deal falls in place.
"Iranian trade will see a major change once the banks begin to open letters of credit for Iranian cargoes," an Indian trader said.
Tehran-based Iran Mercantile Exchange, which claims to have trading members from across the world, has listed several physically backed petrochemicals futures contracts for polymers and aromatics.
The exchange said 342,656 mt of various commodities with a total value of $180 million were traded on its platform recently.
Hassan I. Ahmed, partner and head of research at petrochemical advisory firm Alembic Global Advisors, sees a maximum of 1 mt/y of additional petrochemicals volume being exported out of Iran if sanctions are lifted.
"Apart from methanol exports, we do not see enough of a capacity buffer in other products to raise Iranian petrochemicals exports meaningfully from current levels," he said.
Iran's nameplate methanol production capacity is 5 mt/y and it exports about 43% of its products. Iran’s petrochemical production capacity is expected to see a significant growth over the coming ten years. Many of half-complete projects are to be revived after the removal of the sanctions and Iran would transfer in state-of-the-art technology.
Iran will be raising its polyethylene production capacity by at least two million tons in ten years. It is even possible for Iran to bring this enhancement to three million tons a year. Iran is currently producing 3.7 million tons of polyethylene per day.
Given the existence of 33.6 tcm of gas in Iran, the country’s petrochemical industry would need to acquire modern technologies, have access to financial resources and win toehold in world markets. The latest assessments show that Iran needs to attract around $70 billion for its upstream and downstream industries. To that effect, 30% of the required financial resources would go to downstream industries particularly polymers and more specifically polypropylene.
Doubtlessly, the most important competitive advantage for investment in and development of petrochemical industries in Iran is access to feedstock like natural gas, ethane, and naphtha and gas condensate in large volumes and at competitive price. At present, the capacity of gas processing and transmission in the country is estimated at 600 mcm/d, which would soon reach 1,000 mcm/d. Moreover, access to ethane as feedstock for petrochemical plants would be instrumental in strengthening Iran’s position as a producer of petrochemicals.
With the completion of phases of South Pars gas field and the startup of Phases 12-27 of this supergiant reservoir, Iran would be producing 650,000 b/d of gas condensate, 6.7 million tons a day of liquefied petroleum gas (LPG) (including propane and butane) and 4 million tons a year of ethane. Ethane will be completely serving petrochemical industry in Iran and other products would be either consumed domestically or exported.
In addition to easy access to feedstock for petrochemical plants, Iran enjoys other competitive advantages which could not be ignored. Iran’s growing domestic petrochemical market, access to specialized and skilled manpower, communications infrastructure, geographical position, sharing border with 15 countries particularly Central Asia and South Caucasus, special economic petrochemical zones, political stability, favorable investment laws, special investment facilities including tax exemptions and active petrochemical chains can all contribute to the development of downstream and upstream industries. Another positive point with Iran is its National Development Fund of Iran (NDFI) which would be interesting to potential investors.
In a report, Platts magazine said ground has been prepared to facilitate resumption of petrochemicals exports out of Iran “but traders do not expect Iranian products to impact the global petrochemicals scene for some time.”
"Iran has turned into a key priority for anyone involved in Middle East petrochemicals trade," said Eduardo van-Zeller Neto, Dubai-based Partner and Head of Oil and Chemicals, Middle East, at Roland Berger Strategy Consultants.
"Iran's methanol exports capacity may get raised once Kaveh methanol project comes online by end-2015 or early 2016," van-Zeller Neto said. Iran's Kaveh Methanol Company is building a 2.6 mt/y methanol plant at Bandar Dayyer.
Iranian petrochemicals production capacity is expected to rise sharply over the next 10 years, with the pace of expansion expected to gather momentum should sanctions be lifted as the introduction of new technology and the import of catalysts speeds up the construction of new plants.
According to a Platts analysis, Iranian annual polyethylene production capacity will rise by at least 2 mt over the next 10 years.
This figure could well reach 3 mt if the business environment stays favorable. Current Iranian PE capacity is about 3.7 mt/y.
The head of National Petrochemical Company has said the company is paving the ground for welcoming investors into the country’s petrochemical industry once the sanctions are removed.
“Very good schemes have been developed to endorse investors into the country’s in the petrochemical sector for Iran to see a giant leap in its petrochemical industry,” Abbas Sha'ri-Moqaddam, who is also deputy petroleum minister in petrochemical affairs, said, adding, “We invite all Iranian and foreign investors to step in and fund petrochemical projects.”
He said many leading countries in the petrochemical industry are prepared to return to Iran given the promising political outlook for Iran by the sanctions relief.
“We are prepared to endorse investors in all petrochemical development projects,” said the official.
He said setting long-term feedstock prices as well as providing petrochemical infrastructure and stabilizing regulations are the key levers to attracting foreign investors in the petrochemical sector, rather than the removal of sanctions.
He said there are 120 half-finished developmental petrochemical projects across the country of which 67 are prioritized by NPC for financing and operation.
Sha'ri-Moqaddam said Iran’s petrochemical sector needs around $70 billion in investment, adding that the sector would have to attract $7 billion a year over the coming ten years.
Gov’t Support
Over the past decade, preparation of required infrastructure for investment in the petrochemical sector has been slowed down due to the sanctions. The administration of President Hassan Rouhani has intensified its efforts to improve the conditions of petrochemical industry. If we review the events of the past several months we would notice many activities related to the petrochemical industry. In fact, the petrochemical industry will have a significant role in more profitability and boosting Iran’s position in regional economic ties. This industry needs more attention in light of powerful rivals.
Petrochemical industry could be looked as a tool for generating revenues as well as a tool for job creation and welfare in impoverished regions. The government’s focus on expansion of the infrastructure could be a sign of sympathy for this attitude. Given the specific circumstances of Iran with regard to energy commodities and hydrocarbon reservoirs, paying more attention to the petrochemical industry would be an important and strategic decision. In cooperation with the private sector, the government is currently preparing the required infrastructure in different coastal zones of the Persian Gulf and the Sea of Oman for domestic and foreign investment in the petrochemical industry. Iran’s petrochemical industry has always been cohesive enough to welcome domestic and foreign investment in the past decades.
Drawing up a roadmap for the petrochemical industry in the past one year has been a sign of planning and preparation for investment in and development of this industry. Foreign business delegations from different countries have been visiting Iran to explore opportunities for investment in light of the planned removal of international sanctions.
Iran’s petrochemical industry enjoys unique advantages and that is why many refer to Iran as the future paradise of petrochemical industry.
Big gas reservoirs and abundant feedstock, access to water resources in southern coasts and location on marine transport routes are among advantages for Iran to become an attractive place for potential investors in the petrochemical industry.
These advantages can make Iran a major petrochemical hub in the future and attract investors.
Mohammad-Hassan Peyvandi, deputy head of NPC, said: “Iran is the country which has all tools, capacities and resources for a profitable and active petrochemical industry. No other country in the world has all these advantages altogether.”
He said Iran enjoys a “new and unique” opportunity which is coveted by the entire world.
An improvement of Iran’s relations at international level and attraction of more investment would promise a better future for the petrochemical industry, said Peyvandi.