Saturday, June 11, 2005

The Peninsula On-line: Akbar Hashemi Rafsanjani may be Big Oil's best bet for Iran's next president

The Peninsula On-line: Qatar's leading English Daily: "Rafsanjani seen luring more foreign cash to Iran oil
Web posted at: 6/11/2005 2:17:3
Source ::: Reuters
DUBAI: Akbar Hashemi Rafsanjani may be Big Oil's best bet for Iran's next president, as his pragmatic approach may open more doors to foreign investment and ease tensions with Washington.

But even a cunning operator like Rafsanjani-who is leading opinion polls ahead of the June 17 elections-will have his work cut out in the murky world of Iranian energy, rife with political infighting.

"Rafsanjani will make a big push for capital to expand Iran's oil production as well as its political clout-but that won't happen overnight," said a Western oil executive.

In the era of reformist President Mohammad Khatami, Iran had an uphill struggle notching up 500,000 barrels per day (bpd) of new crude oil production with foreign cash.

But despite the slow pace of Iranian decision-making and the absence of US technology and firms due to Washington's unilateral sanctions, Iran used billions of dollars from abroad to boost oil capacity to 4.2 million bpd from 3.7 million.

Iran has been producing around 4 million bpd for the past year.

To accelerate the Islamic Republic's production drive, Rafsanjani, who served as president in 1989-97 and initiated the opening to foreign investment in oil in 1995, will probably try to curb infighting and mend fences with the United States, whose cutting-edge technology is badly needed.

"We're even hearing whispers that Iran might modify its buy-back model into some type of production-sharing agreement," said a Western oil company source.

Long-term production-sharing deals are favoured by the oil industry because they guarantee a healthy profit margin, even with low world oil prices. At the same time, the producer country can retain control over mineral ownership.

But there are now limits to such deals under Iran's constitution.

Western critics of Iran's buy-backs, where foreign firms are repaid with proceeds from oil output, say they are an impediment to outside investment. They complain of being unable to book reserves and want longer-term, more flexible arrangements. Conservative Iranian politicians, distrustful of foreign capital, say the deals smack of colonialism.

Fast enough opening?

Whatever the model, rapid investment is critical in a country that aims to boost output capacity to 5.3 million bpd by 2009 from 4.2 million while some of its ageing oilfields are registering annual output declines of up to 300,000 bpd.

"Iran's energy sector is in a mess," said former Iranian diplomat Mehdi Varzi, president of Varzi Energy. "It needs fundamental reform and I'm not sure it will get it."

Since opening its vast oil and gas riches to the outside world, Iran has signed investment deals worth about $15bn – not nearly enough to stimulate a sector that has stagnated since the 1979 Islamic revolution.

Multinationals are now hoping for access to Iran's prized Yadavaran and Azadegan oilfields, but executives want state-run National Iranian Oil Co (NIOC) to sweeten commercial terms.

"If Iran does not get a massive amount of foreign investment to boost development, they will be lucky to sustain production of 3.5 million to 4 million barrels a day after a few years," said Varzi.

But Iran's oil development is at breakneck pace compared to its natural gas sector, the world's second biggest after Russia.

For Iran's next president, revamping the oil and gas industry may prove a bigger challenge than foreign diplomacy.

"There are too many off-shoots of NIOC and there is no clear chain of command," said Varzi. "Iran needs to revise the nature of its foreign investment deals and clip the wings of NIOC."

That might be easier said than done.

"There is an entrenched elite of political appointees who arrived after the revolution – and how does one correct that?" said Manouchehr Takin of the Centre for Global Energy Studies.

"Reforms started a few years ago and should continue. The change will have to be gradual, regardless of who becomes president."

Despite criticism of its foreign investment drive Iran is currently the only Middle East producer with abundant untapped oil reserves that has opened its oil sector to foreign cash.

Economic and social liberalisation is likely to continue under Rafsanjani or leading reformist candidate Mostafa Moin.

But progress could be temporarily stalled if Rafsanjani's closest challenger, hardliner Mohammad Baqer Qalibaf, wins.

"A right wing conservative might remove a few top people here and there and look at the buy-back process again," said Takin. "There might be a delay of six months to a year to review things – more as a public relations exercise." "