Alongside the continued development of its huge West Karoun oil fields, the completion of the supergiant South Pars non-associated gas offshore sector (including the implementation of Phase 11 operations), and the finalisation of the crude oil transfer pipeline from Guriyeh to Jask, Iran’s core focus in the current sanctions environment is to optimise the output and revenues from its already world-scale petrochemicals sector. This has always played a key role in Iran’s ‘resistance economy’ model, the concept of generating value-added returns by leveraging intellectual capital into business development wherever possible. Having now hit a number of key targets, Iran’s petchems sector is being encouraged to generate further income and capital for the Islamic Republic through listing key companies on the Tehran Stock Exchange (TSE).

In basic terms, according to a comment last week from Iran’s Deputy Minister of Petroleum for Petrochemical Affairs, Behzad Mohammadi, a total of US$11.5 billion-worth of petchems projects will be launched in Iran in the current Iranian calendar year (ending on 20 March 2021). This will add at least 25 million tons to the country’s annual production capacity, bringing it up to at least 90 million tons per year (mtpy), and within a hair’s breadth of the 100 mtpy production figure that is targeted to be achieved by the end of 2025. The first of these projects was the Miandoab Petrochemical Project which came on stream last week. At the official launch of Miandoab, Iran’s Petroleum Minister, Bijan Zanganeh, highlighted that this second major phase of the country’s petchems sector development will consist of 17 new projects in the next 12 months, which will enable a more than doubling of the value of it to Iran, from US$12 billion in 2013 (when the first major phase was pushed) to US$25 billion by the end of next calendar year, and to at least US$37 billion by March 2026.

Inaugurating the geopolitically game-changing Guriyeh-Jask oil pipeline at the same time, Zanganeh added that the Miandoab plant would be one of the major projects along the route of the flagship West Ethylene pipeline, which was approved in 2002. This will stretch 1,660 km from Assaluyeh in southern Iran to Tabriz in the northwest of the country, making it the longest ethylene line in the world. “This year, about two million tons of ethylene will be transferred through the West Ethylene pipeline… [and] Iran’s ethylene output will reach seven million tons per year by March 2021,” he underlined. Interestingly for future such developments, he added that Miandoab will operate with locally-made catalysts.

This is a first for Iran but entirely in line with its policy to become completely self-sufficient in the petchems sector to insulate itself from current and future sanctions. The process of ‘indigenising’ the production of key catalysts involved in petchems manufacture and the associated processes and technology was always a pre-requisite in the multitude of contracts signed by Iran with foreign companies after the Joint Comprehensive Plan of Action (JCPOA) was first agreed in 2015. This was made very clear just after the agreement was announced when the Deputy Petroleum Minister for International Affairs and Commerce, Amir-Hossein Zamani-Nia, in Tehran, said: “Direct investment is highly favoured by Iran’s petroleum ministry but before that, Iran’s oil industry is in need of technologies and project management.”

Also working in Iran’s favour in terms of continuing to build out its petchems sector – aside from the ongoing financial, technology, and personnel support of China and Russia – is that from a legal perspective, Iran’s petchems sector has always occupied a grey area as far as sanctions have been concerned. “When the previous set of major sanctions were at their height [2011/12], Iran’s petrochemical industry was the subject of U.S. and E.U. sanctions, and the only way for Iran to sell such products ‘legally’ was to customers outside the U.S. and E.U.,” a Washington DC-based senior lawyer with an international litigation and arbitration specialist legal firm, told OilPrice.com. At that time, secondary sanctions were in place in the U.S. on any person worldwide that purchased, acquired, sold, transported, or marketed Iranian-origin petrochemical products, or provided goods or services valued at US$250,000 or more (or US$1 million over a 12-month period) for use in Iran’s production of petrochemical products.

In the E.U. there was also a ban on the import, purchase, or transportation of Iran-origin petrochemical products, and on the export to Iran of certain equipment for use in the petrochemical industry. In stark contrast to that sanctions era, though, there are currently no E.U. sanctions specifically on Iran’s petchems sector and nor are there plans to impose them. From the U.S. perspective, it cannot currently exert jurisdiction for ‘primary’ sanctions unless U.S. persons are involved – notably U.S. banks and U.S. employees.

U.S. sanctions alone, though – mainly through the associated prohibitions on the use of U.S. dollars – have caused major financial problems for Iran, beyond what has been widely published so far. According to a senior source who works closely with Iran’s Petroleum Ministry, relayed exclusively to OilPrice.com last week, Iran’s latest economic and financial data make grim reading indeed. Although Iran is still managing to produce around 2.2 million barrels per day (bpd) of crude oil, it is only managing to export around 500,000 bpd of that amount, with the vast majority of it going to China for deeply discounted prices. Against this backdrop, and using a comparison benchmark of November 2019, Iran’s GDP growth is minus 22 per cent, unemployment in running at around 37 per cent, inflation is running away at 65 per cent, and there has been – to date over that period – around a 65 per cent depreciation in the value of the rial against a basket of core global currencies. As it stands, Iran is running a budget deficit of 80 per cent, and a trade balance of negative US$6.5 billion.

To address these shortcomings, floating petrochemical companies’ shares is considered by Iran to be as good an idea as any currently available to broaden and deepen the country’s capital pool. This is unlikely to be as hard a task as many may think as a combination of factors have served to triple the value of the benchmark TSE in the past six months. One of these reasons is that, unsurprisingly, over 60 per cent of the Iranian banking system’s non-performing loans (NPLs) are ‘category three’ by international debt repayment standards. This means that they have yet to be repaid after eight months and have little chance of being recovered, rendering many banks unsafe places to entrust their money to in the view of many Iranians.

Another reason is that there has been a pent-up demand for investable assets from Iranians still resident in the country and from those wealthy Iranians who have left the country at one point or another since the 1979 Islamic Revolution. According to various independent estimates, Dubai alone is home to around half a million Iranians who saw their bank accounts shut down under the sanctions regime and who are looking for better-than-deposit-rate bank account returns, with genuine security of funds attached. 

Additionally, a couple of months ago the tacit approval was given by Supreme Leader Ali Khamenei for the incremental divestment by the government of state holdings in a range of major enterprises, including those connected to the oil and gas sector, from a total divestment of between 20 per cent to up to 70 per cent, allowing the public (and private institutions and banks) to buy them. Although the tripling in the value of the TSE over the past few months might appear counter-intuitive, given Iran’s parlous economic state, it can be seen instead both as a consequence of the extra liquidity being pumped into the system as a product of Iran printing money to deal with the rising budget deficit and of the pervasive view that, as things cannot become much worse, current values represent buying at the bottom of the investment cycle. 

“Not only does the petchems sector generate revenues for Iran of around 15 to 16 times more per tonne of product than crude oil but for investors, based on current contract terms, petchems yields rates of return of 30 to 35 per cent against 12 to 15 per cent in the upstream segment, and petrochemical companies have often distributed relatively high dividends among shareholders,” the Iran source underlined. The Pars, Nouri and Shahid Tondguyan petrochemical companies were among the first petchems companies to list on the stock market, opening the way for more companies to do so, with at least six of them holding the extra cache of being subsidiaries of the Persian Gulf Petrochemical Industries Company (PGPIC). According to the latest data, PGPIC has about a 40 per cent share of Iran’s petchems market and accounts for the same proportion of Iran’s  petchems exports.