By Behnam Gholipour
December 4, 2021
In late September, the International Court of Arbitration in Paris awarded Dana Gas, a subsidiary of the Emirati company Crescent Petroleum, $607.5 million over a decades-long dispute with Iran’s National Iranian Oil Company (NIOC).
The deal, signed in 2001 by Bijan Namdar Zangeneh, the oil minister under President Khatami, was unilaterally terminated by the Ahmadinejad administration in 2005 just as deliveries were due to start. After the ruling Zanganeh came under renewed attack for having signed an allegedly “corrupt” contract against Iran’s national interests.
This event and the controversy surrounding it brought to the fore Iran’s multiple disputes with foreign contractors over development of its oil and gas fields. Over the past 40 years the Islamic Republic has worked with a multitude of international firms in this sector, and suffered from the legal and financial fallout when things went wrong.
But few studies have been conducted into the way these projects were handled, or the impact of the disputes on the Iranian economy. This comes as little surprise given state control of both media and academic output in Iran; the government’s foreign policy priorities are prioritized above forensic examination of past problems, or the lessons that might be learned.
Iranian Oil and Gas: What’s at Stake
With more than 157 trillion barrels of known oil reserves, Iran is the fourth oil-richest country in the world and ranks second in terms of gas reserves, with close to 34 trillion cubic meters so far discovered within its borders. But it has also been reported that 90 percent of oil and gas development projects in Iran – both with domestic contractors, and foreign ones – are presently suffering delays.
Iran’s petrochemical industry has also failed to benefit from technological advances at the same rate as other countries. The consequence of this, and the failure exploit fields optimally and on time, has been massive financial loss to the country. For example, the cumulative loss to Iran from unfinished development projects in the Azadegan Oil Field, which covers an area of 39 square kilometers along the Iran-Iraq border, is estimated to stand at more $40 billion.
In a new study entitled Historical Analysis of the Causes of Delay in Oil Industry Projects, published in the fall issue of the Iranian quarterly Journal of Management Improvement, the author tried to analyze the root causes of these blockages. By means of a case study, it focused on the Pars Special Economic Energy Zone (PSEEZ): a 100-square-kilometer parcel of land at Asaluyeh on the coast of the Persian Gulf, which includes clusters of different plants marked out and built in phases.
Period I: Active Participation of International Contractors (1998-2006)
The study identified four periods in the industrial development process at PSEEZ between 1998 and 2021. Work began in 1998 with a contract granted to the French multinational oil and gas company Total (TotalEnergies) to build the Phase 1 and 2 gas refineries.
The initial goal was to increase the level of gas extraction from South Pars in the Persian Gulf, the world’s largest natural gas field, owned jointly by Iran and Qatar. This was to be achieved by employing the know-how and logistical capabilities of European and Asian contractors.
At this time, according to study, the development process was “outward-facing” one. Managers and experts who participated in the study said they blamed the government institutions that had a role in formulating the contracts for the subsequent failure to bring in new technologies.
Period II: Extensive International Sanctions (2006-2015)
In the mid-2000s, after Mahmoud Ahmadinejad took over the presidency of Iran and European and Asian countries joined the US in imposing sanctions on Iran’s nuclear program, restrictions fell on Iran’s acquisition of spare parts, equipment and industrial technology. This affected the petrochemical sector especially badly, at a time when policymakers were only just beginning to take its strategic importance seriously.
In a bid to combat this, three separate contracts were awarded to Iranian firms for the development of five gas refineries: Phases 12, 15, 16, 17 and 18 respectively. The study’s interviewees said during this time, a nexus of factors at every level of governance – from managerial incompetence to the political makeup of the Oil Ministry and, of course, sanctions – played a role in delaying development.
Period III: The Lifting of Sanctions (2015 to 2018)
The JCPOA was signed during Hassan Rouhani’s tenure, prompting both hope and misgivings for those involved in the Iranian oil industry. The government hoped it could use new investment from abroad to finance development projects and increase oil revenues, while the private sector remained circumspect, recalling the hold-ups of Period I and fearing over-reliance on international contractors.
The study participants broadly agreed there had been a failure to use the opportunity provided by the JCPOA to strategically develop the oil industry over those three years. Control systems, compressors, pumps and other equipment, they said, could have been procured while the Oil Ministry had a chance to develop sites like South Pars. Instead, the focus had been on ramping up exports.
4th Period: Post-JCPOA and the Return of Sanctions
Since 2018, the reimposition of sanctions after the US withdrawal from the nuclear deal, coupled with mismanagement by Iranian oil officials, have led Iran’s petrochemical industry to stagnate further. Experts who spoke to the study’s author also pointed to the massive exodus of skilled workers to other countries as a reason for further delays to work on South Park.
The Losses Incurred by Delays
The same Iranian academic study has tried to estimate the financial losses sustained by Iran due to delays to oil and gas projects in the Pars zone alone. Overall, the author surmised, the figure likely stands at at least US$3.6 trillion.
Based on Pars Oil and Gas Company’s data bank, the chart provides a comprehensive summary of losses incurred due to delays in completing some 24 separate gas refinery projects – from the late 1990s through to the present day. The average delay in projects involving foreign contractors has been 24 months, and 65 when Iranian firms were used. The study asserted that each one-year delay resulted in a cumulative loss of five billion dollars.
Iran’s oil industry requires both enormous financial investment and a holistic approach to achieve its strategic and technological goals. Thus far it has not been provided with either. The study’s participants noted that Tehran’s failure to finance projects was matched by the failure to find and retain expert manpower, for a multitude of reasons.
This pattern has been picked up on by other researchers in the past. Another study published by the same journal in 2017 noted that the final phases of petrochemical projects in Iran, especially those at South Pars Gas Field, tend to drag on the most: often for several years each. The parties, it asserted, also often continue to fight one another even after the projects are complete.