Conservative Storm Brews over Iran Energy Deals

Christian Oliver, Reuters:

Iran's conservatives have already got their knives out for foreign energy projects, and are not waiting for hard-liner Mahmoud Ahmadinejad to become president before striking their first blows. READ MORE

But oil consultants said investors should not take fright yet and should wait to see whether the new president will listen to more pragmatic voices than populist conservatives.

Ahmadinejad won June's election and will take power in OPEC's no. 2 crude exporter in August. Key conservatives are already buoyed by his firm stance on not pandering to foreign investors and are opening fire on major projects.

First in their sights is a $1.2 billion deal that Iran's National Petrochemical Company (NPC) signed with Germany's Linde and Hyundai <000720.ks> of South Korea.

Analysts view this contract, to build two ethane crackers in the Gulf port of Assaluyeh, as a litmus test of whether Iran is ripe for investment.

Conservative parliamentarians complained the deal was unfairly tendered and that the job could be done just as well but far more cheaply by two Iranian bidders.

This chimes with rhetoric from Ahmadinejad, allied to parliament's vocal conservatives, who has said foreign firms will get no preferential treatment in his presidency.

Both the NPC and foreign partners argue that lower tender offers from the Iranian firms were highly unrealistic and that only foreigners have the technological know-how to do the job.

"I believe Iranian companies should join foreign partners, so technology is transferred and capabilities improved," said NPC's Managing Director Mohammad Reza Nematzadeh.

PARLIAMENTARY MUSCLE

Parliament has already shown its muscle in scuppering foreign investment deals, slashing the stake that Turkcell was allowed to take in a mobile phone operating license, potentially worth $3 billion.

Lawmakers have also attacked Shell , accusing the oil giant of "cultural imperialism" in Iran. Shell operates Iran's 200,000 barrels per day offshore Soroush and Nowruz oilfields.

Sensing danger to his country's investment-hungry energy sector, Oil Minister Bijan Zanganeh retorted that parliament had no right to interfere in the tendering of energy deals.

Iran's "buy-back" foreign investment model, repaying oversees oil firms with proceeds from output, has failed to boost output capacity above the four million barrels per day mark.

Upstream experts say Iran's crude capacity will start to sag heavily without big foreign investment, as the largest fields lose about seven percent of capacity each year.

A source involved in the ethane cracker project said the main concern from conservatives was that Iranian jobs were being lost to foreigners, in a country that needs to create a million jobs a year just to keep unemployment static.

He argued this was illogical as Iranian industry did not have the clout to create employment.

"The project does not mean flying in 6,000 foreign workers but will give 6,000 jobs to local contractors," he said.

CONSULTANTS SAY "WAIT AND SEE"

Oil consultants said Ahmadinejad could prove more pragmatic than parliamentarians once he sees the realities of having to hold onto power in a country that gets 80 percent of export earnings from hydrocarbons.

"It may be frustrating to see a company like Linde under attack now, but I advise foreign investors to hang on in there," said Mehdi Varzi, president of consultancy Varzi Energy.

"Ahmadinejad has a track record of realism, we have yet to find out if that stretches to foreign investment," he added.

Another oil consultant said he was advising his clients "not to push the panic button yet."

But foreign deals are also in danger from the hardline Guardian Council, Iran's constitutional watchdog, which said projects could not be financed from abroad.

Zanganeh replied that the expediency council, Iran's legislative arbitrator, would unravel this decree which could torpedo many oil and gas projects.

But Zanganeh's stance drew scorn from the hardline press.

Hossein Shariatmadari, appointed as editor of the Kayhan daily directly by Supreme Leader Ayatollah Ali Khamenei, said Zanganeh must have either been cutting an inside deal with the expediency council or was a "fortune-teller."

Analysts say populist conservatives had been spurred on by Ahmadinejad's pledge to free Iran's oil industry of "mafias," thinking the new president will purge the oil ministry of officials who cut deals with foreigners.

But they added that Ahmadinejad was unlikely to be in a position to be too ruthless in removing experienced officials.

"The cadre of potential managers is just not there in Iran," said a consultant who declined to be named.