IRAN - Gholam-Hossein Nejabat.

Deputy Oil Minister for Petrochemicals and CEO of NPC since October 2006, Nejabat on April 17 said NPC's plan to supply of petrochemicals in a free market would make the market transparent. He said NPC's profit under the plan would be around 5.69 trillion rials ($61.8m), adding: "Instead the company will take on more commitments, including payment of 25% tax and an increase in the price of feedstocks. Therefore, the plan will not raise the revenue of NPC".

Nejabat said the number of petrochemical products sold at approved prices was limited and consequently they would be offered at the world rates when the plan was put into action. (Liberalization of the petrochemicals sector has been discussed among MPs, government officials and experts for years. According to a recent decision by parliament, the government has been obliged to eliminate the rationing of petrochemicals and their subsidised prices. Fixed prices have had devastating impacts on the sector. They have been chiefly blamed for a crisis in the polymer industry. President Ahmadi-Nejad maintains that elimination of subsidies would be tantamount to creating more investment opportunities in this sector. Only one-sixth of the subsidies went to the producers. However, certain producers have warned that elimination of subsidies and limitations in supply with relaxed prices could ultimately increase prices of petrochemicals).

The petrochemicals sector has faced many problems since Nematzadeh moved to NIORDC in early 2006. MEED on May 12, 2006, focused on one problem as follows (with underlining by APS: "The mid-April [2006] cancellation of the olefins 11 ethylene project sums up the troubles affecting the [contracting] market [in Iran]... When the contract for...olefins 11...at Bandar Assaluyah was cancelled..., another nail was hammered into the coffin of Iran's projects market. Over the past two years, one project after another has fallen by the wayside". Najabat, then head of NPC's tendering arm, was partly to blame for the cancellation (see down16IranPetchmApr16-07).

MEED added: "For a country that four years ago was judged to have some of the best contracting prospects anywhere, the fall from grace has been swift and spectacular. The catalogue of woe has been growing, especially in the oil and gas sector... The malaise has perhaps been best exemplified by the olefins 11 project, which has run aground amid bitter recrimination. Its history has exposed the myriad difficulties facing international contractors attempting to do project work in Iran - the turbulent nature of domestic politics, the internal disputes in the Oil Ministry, and the international furore over Iran's nuclear programme. All this has taken place against a backdrop of rising engineering, procurement and construction (EPC) opportunities worldwide, and in particular across the Gulf, where project implementation is far swifter and smoother.

"The most intractable problem on olefins 11 and a host of other high-profile tenders has concerned the relationship between foreign and local contractors. In the summer of 2004, the then...[CEO of NPC]...Nematzadeh issued a directive laying out the framework:...local contractors could bid by themselves for any project worth less than $100 million and could lead a bidding team including foreign subcontractors on any project valued between $100 million and $200 million. Contracts worth more than $200 million were reserved for bidding groups in which the foreign partner took joint and several liability, making them financially responsible for the success of the project.

"Some local contractors and nationalist politicians were incensed by the directive. They believed that NPC was deliberately cutting Iranian companies out of work by underestimating their capabilities - in defiance of the spirit of Iran's maximisation laws. They resolved to fight the new guidelines both in the Majlis (parliament) and by bidding for projects that Nematzadeh had ruled them out of.

"Nematzadeh was unconvinced by the argument. 'There may be Iranian contractors who would claim that they can implement [olefins 11] with lower cost and shorter delivery, but experience has shown us that these contractors are just after increasing their credit line and fame', he warned in a letter to the oil minister that was leaked to the press in March (2006). 'In reality, none of these contractors have in the past met the deadlines'.

"The first projects to come under the new directive were olefins 11, olefins 8 and the much smaller Ilam olefins plant, which were all tendered at roughly the same time in early 2004. The same four groups bid for both the olefins 8 and 11 projects - two groups led by foreign companies in accordance with the tender request and two led by local contractors...

"After months of wrangling, in which bids were withdrawn, opened, resubmitted and rejected, a consortium led by Germany's Linde and including South Korea's Hyundai Engineering & Construction and the local Sazeh Consult was the only contender left with a valid bid for olefins 11. The group then proposed doubling the size of the plant to reduce costs and feed the new ethylene pipeline planned for western Iran.

"NPC started negotiations with the consortium and last May [2005] agreed on the construction of two identical crackers with a combined capacity of 2.4 million...t/y at a cost of 960 million ($1,222m). The olefins 11 contract was signed just after the presidential elections last June, apparently to forestall the possibility of a different government trying to overrule the project. In fact, the rush to sign simply raised suspicions within the incoming government of...[Ahmadi-Nejad] that olefins 11 was yet another example of the 'oil mafia' set-up that the new president accused of running the oil sector to the benefit of foreign companies. Worse was to follow. Political risk began to ratchet up as...[Ahmadi-Nejad] pushed ahead with his uncompromising stance on the nuclear issue. Inevitably, financing became more difficult to secure.

"Linde's bid, submitted in mid-2004 at the start of a rapid increase in equipment prices, was becoming less feasible by the day. Western banks ruled themselves out of any Iranian project and as the nuclear...stand-off intensified, the project began to look dead in the water, despite the Linde consortium carrying out the early engineering work.

"In January [2006], the new Oil Minister...Vaziri...shifted Nematzadeh to...NIORDC. His replacement at NPC was Asghar Ebrahimi-Asl, a staunch supporter of local companies. The inevitable then happened: the olefins 11 contract was cancelled and a new plan put forward. The number of plants planned along the western pipeline, which olefins 11 was to serve, had been increased, raising the ethylene feedstock requirement to 3.5m t/y from 2.4m t/y. Most of the downstream projects planned along the pipeline were being tendered by Petrochemical Industries Design & Management Company (Pidmco), which itself was critical of Linde's price: it compared the bid to the 270m ($343m) offered by France's Technip and the local Nargan for the 1m t/y olefins 9 plant, the contract for which came into force in late 2001.

"Ebrahimi-Asl's solution has been to revive an old idea: to build three duplicates of the olefins 9 unit. His argument is that local contractors can carry out the work, using Technip's technology, at a fraction of the cost of...olefins 11.... At the same time, the move would solve another seemingly intractable project problem. At Kharg island, Technip had completed engineering on a 500,000-t/y cracker. However, with extensive delays being encountered on the Kharg NGL project - it has just gone for another retender, the cracker risks lying idle for years waiting for the feedstock. As a result, the decision has been taken to move the Kharg cracker to Assaluyeh, which will provide the extra capacity needed for the ethylene pipeline.

"The solution is neat, but Pidmco's cost estimates seem at best ambitious - at worst fanciful. At a press conference in April, Ebrahimi-Asl said...three units of 1m t/y each could be built for a total cost of about 700m ($891m). The bid submitted by Linde and its consortium for the smaller olefins 11 project was described by Nematzadeh in his letter to the oil minister as 'the lowest possible figure. Figures of such projects in neighbouring countries were up to 50 per cent higher'. Indeed, the olefins 11 award coincided with a Linde-led team winning the $1,000m contract for the Tasnee cracker in Saudi Arabia, which is half the size of the Assaluyeh project.

"Serious damage has been done to NPC's reputation among foreign contractors, which now view the company with suspicion. Nearly all are unwilling to spend the $1-2m it costs to prepare a bid. At the same time, the delays mean that Tehran will lose months of export earnings, potentially running into hundreds of millions of dollars.

"Relations between international contractors and NPC have not been helped either by the extraordinary attack launched by Ebrahimi-Asl on the Linde consortium at April's press conference. He accused the company of raising the capacity of the plants to cheat Iranian companies out of work and boost foreign profits. 'I want to complain about Linde, who didn't behave properly towards us', he said. 'We are not your big guinea pig to increase your technology and test it with our money".

"For foreign contractors, bidding in what has become a hostile environment, such comments are unlikely to tempt them back for further work in the near future. The new management of NPC believes local companies can step up to the challenge. For its own sake, it had better be right.

On April 20, 2007, Nejabat said NPC was ready to offer stocks of its affiliated firms. NPC has 66 firms, of which 38 belong to the private sector and 28 are run by NPC. Nejabat said the list of all these 28 firms had been submitted to the Privatisation Organization. Thus NPC is becoming a pioneer in selling its companies' shares.

Supreme Leader Ayatollah Ali Khamenei issued a decree in mid-2006 to privatise state industries by amending Article 44 of the constitution, which had banned private ownership of state institutions. The Privatisation Organization is to sell off a large number of bonds of three ministries during this year (March 21, 2007-March 20-2008).