Foreign Direct Investments in Iran's Oil Sector

Monday, December 24, 2007

Dr. Reza Molavi
Dr. Hossein Salimi

American interests in Iran during the Cold War was episodic. Washington looked at the country through two lenses: competition with the Soviet Union and the economics of oil. Both were important considerations, but neither induced the United States to give priority to the study of Iran as such. The American desire for a strong and oil-rich partner in the Middle East led a series of U.S. administrations largely to look the other way while the opulence and corruption of the shah’s rule fed popular resentments that would eventually lead to an explosion.

The backlash came with the Islamic Revolution led by Ayatollah Khomeini in 1979. It was one of the many ironies of the period that after the revolution Saddam Hussein became “America’s man”, in the region. The Reagan administration backed him in the long and brutal war he fought against Iran, which included the use of poison gas against Kurdish villages and Iranian troops.

This article will argue the importance and imperatives of foreign direct investment (FDI) in Iran and will throw some light on the opportunities that needs to be nursed and nourished until fruition, and shall illuminate the importance of staying the course by looking favourably towards investments in Iran.

Like many other terms, ‘crisis’ is an over-used word that has become devalued by its frequent but misplaced reference to any scenario in which an unusual level of drama is played out. In its proper sense, however, it clearly refers to a pivotal moment at which a process of transition climaxes and a future is determined. Islamic Republic of Iran has often appeared to be in a state of crisis, but has nevertheless defied all predictions by somehow struggling through, just as there have been many other occasions when dramatic, rapid change has eventuated against all expectations.

Iran is OPEC’s second largest oil producer and holds 10% of the world’s proven oil reserves. It also has the world’s second largest natural gas reserves (after Russia). Iran’s economy, which relies heavily on oil export revenues was hit hard by the plunge in oil prices during 1998 and early 1999, but with the rebound in oil prices since then, and the current $53bbl prices, not only it has recovered and has expanded activities, it has registered real GDP growth of 4.5% for 2003 and 4.6% for 2004. This is the largest growth rate of any country in the region and to this end and with steady high oil prices currently, it was expected to top 4.7% growth rate for 2005-2006.

Iran’s $127 billion budget for 2004/2005 was based on a price assumption for the Iranian oil of around $19.90 per barrel. However should the current $80+bbl prices hold for the balance of this year, it is expected for Iran to build and hire many more drilling rigs in the Persian Gulf and the Caspian Sea. With ever increasing population in Iran and hence the increase in domestic consumption of highly subsidised fuel, the exports will not cover the foreign exchange requirements as the earnings will be on a decline rapidly.

Iran currently has 32 producing oil fields, of which 25 are onshore and only 7 are offshore. To keep up with the domestic demands and the foreign exchange requirements by exports, it is anticipated that the number of offshore production wells to be increased to 25 producing wells, by 2015. It is estimated that development of new offshore Persian Gulf and Caspian Sea oil fields will require investments of $8-10 billion. In early October 2003, Iran re-launched a tender for eight exploration blocks in the Persian Gulf. One area considered to have potential is located near the Strait of Hormuz. Another interesting area is offshore near Bushehr, where Iran claimed in July 2003 to have discovered three fields with potentially huge—38 billion barrels oil reserves. In May 2004, Brazil’s Petrobras signed a 3 year, $32-$34 million deal to develop the Tousan fields of the Persian Gulf.

Apart from the above, the Caspian Sea Region will see increased activities in the months and years to come. Aside from acting as a transit centre for other countries oil and natural gas exports from the Caspian Sea, Iran has potentially significant Caspian reserves of its own, although nothing has been “proven” at this point to be recoverable. Currently a 3-D seismic survey of the southern Caspian is under way.

It has been mentioned in this report that Iran enjoys the second largest proven gas reserves in the world. Iran’s largest non-associated natural gas field is South Pars. The South Pars is estimated to have 500 Trillion Cubic Feet of natural gas, of which a large fraction will be recoverable, and over 17 billion barrels of liquids. This clearly will make this the largest non-associated gas field in the world.

Iran covers the full length of the Persian Gulf which represents around 1800 kilometres of border with its Arab neighbours. With 85% of the total world energy requirements passing through this water way and the Straits of Hormuz, controlled by Iran from the nearby islands, it is imperative for Iran to develop a SAR capability for the benefit of the fishermen, shipping industry at large and commensurate with the needs, requirements and demands of the international maritime organisation (IMO). This project needs to be implemented should Iran seriously seek to attract foreign investors and FDI.

Iran’s strategic location and the ever growing needs to discover oil and attract foreign investments have never been more acute. With the domestic consumption levels rapidly on the rise and increasing to a level where in ten years, there will be no surplus oil left to export, Iran will have to develop its natural gas resources in the South Pars field and try to find oil and gas in the Caspian Sea basin.

In conclusion, I wish to argue that, with few statistics cited above, it is obvious and of paramount importance for multi-national companies and governmental agencies who are not compelled to share the jaundiced view of the American IR doctrine towards Iran, to consider in creating and maintaing a base in Iran and to develop its operations indigenously with the help of educated and talented work force that is available.

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