Challenges to Re-Structuring Iran's Energy Industry

Abstract

Ad hoc macro policies to generate added value revenue from crude oil, in part by investing in petrochemicals, drives Iran's energy sector to mitigate the impact of US-led sanctions. Similar policies aim to offer crude oil to markets despite sanctions. Petrochemicals' quick financial returns on products that are easily exportable have not increased industrial production in the sector. Government regulation efforts are challenged by private and semi-state private enterprises, though they remain codependent on state financial instruments and industry support. As a result, Tehran needs oil and gas revenues that are harder to generate. But a lack of cohesive strategy in energy sector restructuring hampers Iran's drive to revitalize upstream production and petrochemicals, leaving the country on the margins of world trade. Iran does not have a clear commercially feasible vision in the process of this restructuring, given that it must also constantly adapt to sanctions, leading even to a failure to diversify production in petrochemical downstream sectors, while upstream industries are hit by sanctions. Revamping production and sales in the energy and petrochemical sectors has had mixed results. This abstract offers to assess the restructuring underway in Iran's energy sector on three levels: Domestic Tehran offers a fixed foreign exchange currency rate to local producers of petrochemicals to enable competition in regional markets, and return of profits at the same currency rates to reinvest in the sector. But High Consumer Price Index (CPI) measured inflation rates last year point to the petrochemical sector's decline. Another major challenge is a failure to integrate Iranian firms with foreign firms, to revamp the country's industrialization, ability to meet international operational standards and sustain revenues. In the oil sector, Iran has offered to barter oil for local goods and services, to enable sustained levels of production and robust domestic markets. But previous efforts to barter oil domestically, and offer oil stocks in the market have failed to attract investors due to uneasy local markets. Regional Iran sustained petrochemical exports to countries like Iraq and Turkey. It is also considering a Russian offer to barter Iranian oil for goods, and to sell the oil in the Caucuses. Challenges persist in Iran's ability to have access to regional markets through Russia. Efforts to develop joint oil fields with neighbors including Iraq progress but also halt due to sanctions, while Tehran insists on developing shared resources with neighbors. It also tries to export gas. International OPEC and non-OPEC agreements to increase oil production, and a subsequent Saudi offer to replace Iranian oil in markets in May 2019, led to instability in Iran's oil sector. Iran wants Russia to avoid a stance in support of US goal of zero production of Iranian oil. But Russia continues to work with the US and Saudi Arabia on oil pricing, posing a challenge for Iran that could also spell an end to its ability to impact OPEC pricing. The uncertain fate of Iran's nuclear deal and its impact on selling oil and gas to Europe and Asia has kept the country on the margins of major regional energy trends.