September 2008, Nos. 48&49

Special Report: Iranian Oil Industry Turns 100

Kazem Vaziri Hamaneh

Oil prices are soaring high and new records are set every day. How do you see long-term prospects of international oil prices?

We better first have a look at energy consumption model and factors behind the changes. Global oil demand stood at 85.7 million barrels per day in 2007 and is expected to hit 87 million barrels per day by 2008. In 2007, non-OPEC oil producing countries supplied about 53.8 million barrels per day oil to the market while the figure has reached 55.3 million barrels per day in 2008. OPEC’s share of the market stood at 31.9 million barrels per day in 2007 and has reached 31.8 million barrels per day in 2008. That is, production share of the Organization of Petroleum Exporting Countries has remained almost unchanged. Another important development was increased energy storage by the Organization for Economic Cooperation and Development OECD) countries, which reached its peak at 53 million barrels.

It has greatly increased. The world economic growth rate stood at 4.9 percent in 2007 and is predicted to hit 3.9 percent in 2008. Another point is that the number of contracts signed by oil market speculators in March 2008 has been estimated at 88,300 contracts. The figure showed an increase of about 33,300 contracts compared to February. The number of contracts in March 2007 stood at 48,800; that is, contracts signed in March 2008 were double those signed in March 2007.

We do not use dollar in our transactions anymore. We sell our oil in return for various currencies.

I mean, the money has moved toward the oil market. Although oil prices in international markets have increased, its real value according to base price of 2001 is lower than the nominal price. The parity of the dollar against euro, yen, pound, and franc respectively fell by 5.3 percent, 6 percent, 2 percent, and 7.31 percent in March.

No. The fall occurred in a single month. OPEC oil was sold for 90.64 dollars per barrel in February, but it was sold for 99.3 dollars per barrel in March. When calculated on the basis of fixed dollar parity in 2001, those figures would be translated into 57.42 dollars per barrel and 60.43 dollars per barrel.

We do not use dollar in our transactions anymore. We sell our oil in return for various currencies. The main factors which have caused oil prices to rise are not high demand, shortage of oil in the market, or inadequate supply by OPEC and non-OPEC producers. The supply is even higher than last year while economic growth in the world has lowered. Normally, the world should demand less oil, but the supply is still increasing. Both supply and demand are rising. This is not a phenomenon which could be justified in accordance to economic rules. Other factors are also influential. Therefore, providing a serious future forecast is well-nigh impossible.

It means that since European countries know that prices may rise tomorrow, therefore, they are increasing their reserve today. Their economic situation is stable and their economic growth rate has not been downward. Economic situation of countries and the balance between supply and demand was another factor based on which situation of oil markets could have been predicted in the past. If a country ceased production, since demand was fixed or growing, the price would have increased. On the other hand, if supply increased, prices would have fallen. However, at present, both demand and supply are high. Economic growth rate has fallen, and prices are rising. Perhaps increased reserves and speculation have affected price growth. Also, based on the existing studies, the economic situation in the United States and devaluation of the dollar has inflicted as much as 77 billion dollars in losses to European countries and the United States, along, has suffered about 1,000 billion dollars in losses. This shows that increased oil prices cannot be simply attributed to speculation, increased reserves, or devaluation of the dollar. Other factors are in work to keep prices rising. It should be noted that increased oil prices are not totally in favor of oil producing countries. Producing countries are apparently selling oil at 30 percent higher than previous prices, but the value of Iranian oil installations which are imported; have in some cases increased 2.5 times.

Yes.

Apparently, all these facts are true. There is another point that you have not referred to. When oil prices are high, production of non-hydrocarbon fuel or new energies increase and countries try to replace them for hydrocarbon fuels. On the other hand, energy storage has become common. These two factors in addition to their impact on demand had reduced prices. However, during the past two years, both prices and reserves have increased. This shows that insecurity is on the horizon. Perhaps I am pessimistic, but I think that the situation is worrisome. I think they are causing problems to meet their own economic interests. I think that they are playing with world economy and part of market developments are due to speculations. They have a lot of money and use it for speculation at international oil markets.

I don’t think that rationing is a good solution in the 21^st century. When they introduced smart cards, I told them that this was not a basic solution, which can be implemented at all times. I don’t know. This has not been done in any part of the world. But we were ordered by the parliament to do so. I abide by the law. We did our best and implemented the plan after a delay of one month. Rationing led to no major problem, unless in the first night. Rationing is one issue, but reducing consumption is another. From the viewpoint of consumption decrease, the plan was successful. Last year, rationing reduced consumption by 20 percent and this was a great achievement.

It has reduced consumption. We have a mechanized system after 1960s which shows annual consumption figures for every province and for every city. Even consumption of every gas station is clear. Part of the consumption reduction is due to reduced smuggling. Part of it pertains to phasing out dilapidated cars and another part can be attributed to increased number of public transportation vehicles. Consumption reduction has been very good, but I do not agree with the method through which it has been established.

What they do in other parts of the world?

Bolstering public transportation, improving consumption, and correcting prices are good options. If all cars in our country consume four liters of gasoline per 100 kilometers, people would not consume more than 100 liters per month even in the absence of rationing. The problem is that domestically produced cars use 17-18 liters gasoline per 100 km. On the other hand, we try to solve problems by giving subsidies. According to the latest estimate that has been announced by Mr. (Akbar) Torkan (deputy oil minister) in an interview with a newspaper, was the figure on hydrocarbon fuels subsidy, which amounts to 88 billion dollars a year. We can do many things with that money. At the same time, payment of that subsidy has caused many problems including air pollution and various diseases.

I cannot give you accurate figures right now, but all indexes which were mentioned by the first vice president, Dr. (Parviz) Davoudi, after my speech, were quite telltale. All indexes had improved compared to the past. In a farewell ceremony, they usually do not appreciate the performance of a deposed minister, but the realities could not be denied. I had already released a report on those achievements and the performance of Ministry of Petroleum was much better than I expected.

The figures were positive when I left the ministry.

I talked about agreements and the capital which had been imported into the country.

The best reason was “difference in tastes”. The president used that phrase too.

Let’s stay away from details.

Such trivial matters do not lead to such serious differences between president and a minister as to lead to deposition. We had differences on how to manage the oil industry. When he told me that he wanted to change me, I told him he could do as he wished. When they told me, I expressed hope that this would be in the benefit of the Islamic Republic of Iran.

Yes. One hundred percent!

Not in the sense that is now discussed in the society. During two years in office, I said on many occasions that it was possible for a few people to join hands in any organization to meet their interests. For example, they may decide to give a project to a certain company and be paid in return. But this cannot be called mafia. This is corruption. It may be found at all state-run organizations. If somebody claimed that it does not exist, I’d prove that it does. Corruption may be everywhere from the presidential office to any ministry. Anywhere money abounds, possibility for corruption is higher. But I don’t accept that there is an organized current which is guided by one or few people. After the Islamic Revolution, all pre-revolution managers were removed from their posts and only 3-4 percent of them have remained. Most of them are now retired. Once I jokingly said, “Perhaps I am the last of my kind and when I go, mafia will leave the oil industry.”

There is corruption. We filed some corruption cases with judicial authorities. We also reinstituted internal mechanism of the Ministry of Petroleum to fight corruption. However, there is much difference between a single case of corruption with one or few persons as beneficiary, and the whole structure of a state-run body. I don’t think that there is a structural mafia in the Ministry of Petroleum.

The companies which have been established by the statute are four executive companies and one holding company. The National Iranian Oil Company is an international company and the third international company in the world. If capitals of other companies are taken out of the National Iranian Oil Company, its ranking would have fallen. To prevent this, we reached the conclusion that operations should be separated from decision-making company. Therefore, we decided to have a new company for exploration and production of oil and gas to take over oil exploration and other upstream operations from the National Iranian Oil Company. The National Iranian Oil Company was set to be a holding company with four subsidiary companies which would be active in the field of gas, petrochemicals, refining and distribution, as well as exploration and production of oil and gas. Those companies have been mentioned in the statute in order to keep their assets inside the National Iranian Oil Company.

Various factors are taken into consideration including financial turnover, assets, installations, reserves, investment and similar issues.

International standing of the National Iranian Oil Company will be promoted. It will become a specialized company and a new oil and gas exploration and production company will be established to take charge of upstream operations.

Yes. We must start gas exports. We have the world’s second largest gas reserves.

Both. We want to and we must do it. Europe needs gas and its gas market is monopolized by Russia. They like to end that monopoly. We must claim our share of that market. Both sides of the equation should progress hand in hand. Apart from signing contracts, saving on gas consumption should be practiced. If the current consumption trend continued, there would be no more gas for exports within the next 10 years. Consumption is high in all economic sectors while output is illogical. Compared to any country, gas consumption in Iran is both excessive and uneconomical. If consumption is improved, 50 percent of the gas which is consumed now will be stored to be exported. We have needed potentials. From the time of (Reza) Aqazadeh (former minister of petroleum), I had discussed this. My master’s degree thesis was about role of subsidies in energy consumption which I forwarded to the then officials of the ministry. Since that time, everybody knows that this form of energy consumption will lead the country to its doom.

Yes. We are lagging behind, but we are moving ahead. There have been plans for the oil sector before the revolution; both five-year plans and long-term plans. Oil has never been without a plan, even for a single year.

The contract was signed before the freeze.

At present, Iran is facing political problems due to pressures from the United States. All countries are under pressure. Mr. Putin signed sanctions order against Iran during his last day as the Russian president. However, Switzerland needs gas. We are bound to sell it. The path crosses through Turkey. An agreement has been already signed with Turkey. All legal conditions have been met, but you cannot predict whether another state institution will intervene and end the agreement or not. However, you cannot stop the work due to such vague factors.