IRAN - Incentives On Offer To Foreign Investors.

NPC executives say the US Iran-Libya Sanctions Act (ILSA) does not apply to

petrochemical projects. NPC Chairman Nematzadeh has made the following points

in listing the incentives on offer to foreign investors:

The pre-1979 (pre-revolution) investment laws for the petrochemical sector are

still applicable in Iran. (The 1980 constitution strictly forbids the granting

of concessions or equity in the hydrocarbon sector's upstream branch. However,

it allows privatisation of plants or new projects in the downstream branch,

including the refineries (see DT 14). The constitution makes no mention of

petrochemicals, which opens the matter of foreign equity or control to interpretation and parliamentary debate. This is what Nematzadeh means by

saying the pre-1979 laws are still applicable).

Special Economic Zones (SEZ) are being established in Iran. In SEZs, foreign

investors are being offered eight to ten-year tax holidays and no restructions

on the volume of projects they will export. Foreign investors in SEZs will be

allowed equity for up to 49%. Foreign equity for up to 99% will have to be

approved by parliament. The first SEZ was set up in late 1997 near the Bandar

Khomeini (or Bandar Imam) petrochemical complex on the northern Gulf coast,

where there are good infrastructure and major sources of cheap feedstocks.

               PETROCHEMICAL INVESTMENT PLAN TO 2010
                      ('000 t/y, US$ million)

Phase One To 2002

(A)                            (B)
MTBE              660          Benzene           106
Methanol          660          Paraxylene        257
HDPE              140          PET               450
LLDPE             170          Urea              660
Polystyrene        90          LAB                50
PET               295          TDI                75
Polycarbonate      25          MDI                25
Epoxy Resins       10          Aniline            71
SBR                40          Sub-total       1,694
Ethylene glycol   225          Cost            1,400
Paraxylene        160
Sub-total       2,475          Total Capacity  4,169
Cost           $1,900          Phase One Cost $3,300

Phase Two To 2010

(A)                            (B)
Polypropylene     300          PVC                   300
Acrylonitrile     115          Alphaolefins          132
Caprolactam       100          LLDPE                 320
Methanol          464          HDPE                  120
Acetic acid       360          Ethylene glycol       410
HDPE              200          Polyol                170
LLDPE             205          Polystyrene           320
Agrochemicals       3.75       Benzene               404
MTBE              516          Dioctyl phthalate     100
MMA               120          Phthalic anhydride     53
Sub-total       2,383.75       PET                   416
Cost            $2,000         Vinyl acetate         100
(C)                            2-ethyl hexanol        85
Ammonia           370          Acrylonitrile          85
Urea              660          SBR                    85
LLDPE             360          ABS                    50
HDPE              140          Paraxylene            240
PVC               300          Sodium tripolyphosp.  415
LAB                75          Dicalcium phosphate    50
MDI                25          Caprolactam           100
TDI                45          Sub-total           3,956
Epoxy resins       30          Cost               $4,100
Polypropylene     200
Phenol            150
Acetone            92
2-ethyl hexanol   100
Methanol          660
Sub-total       3,177
Cost           $2,600
Total Capacity  9,516.75
Phase Two Cost $8,700
GRAND TOTAL CAPACITY*          13,685.75
PHASES ONE & TWO COSTS          $12,000

* There are 7.3m t/y of other products to make up a total of 21m t/y. These products would raise total output capacity in each stage as follows: Phase 1 (A) - 2.9m t/y; Phase 1 (B) - 3.6m t/y; Phase 2 (A) - 5.5m t/y; Phase 2 (B) - 5.3m t/y; and Phase 2 (C) - 3.8m t/y. Source: National Petrochemical Company (NPC). In the free zones, foreign investors can have 100% ownership and control, get long tax holidays with no restrictions on imports and exports, plus cheap gas feedstocks. The most suitable for petrochemical ventures is the Qeshm island free zone, officially called the Qashm Free Area. The current president of the Qeshm Free Area Authority (QFAA) is Morteza Alviri, who took over from Dr. Ali Sham Ardekani in 1994. Qeshm has two non-associated gas fields and one of them is very large. Qeshm island, bigger than Bahrain, is trategically located near the Strait of Hormuz. Although the Bandar Khomeini SEZ is more convenient for ethylene crackers or other industries based on ethane from associated gas - from NPC's standpoint because associated gas yields 15% ethane, on average, whereas non-associated gas contains 3-5.5% ethane - this could be of no major concern if foreign companies get any ethane from National Iranian Gas Co. (NIGC) at a low price. But this matter has to be discussed extensively with NIGC, which does not have adequate gas separation facilities near Qeshm. Qeshm in the late 1980s was to be the site for a major petrochemical complex to be built by a Japanese group including Mitsui and Kobe Steel . The project did not materialise, and it is worth investigating why. Partnership with NPC or with an Iranian company is possible. The terms and equity percentage for the foreign company would vary according to the importance of the project and the importance of the foreign company to Iran. But it is not likely that parliament will allow a foreign company to own more than 49% in any type of project outside SEZs and free zones. A production sharing arrangement is possible. But this is not really an incentive. Nematzadeh and his aides have not provided a definitive model for production sharing terms. Buy-back arrangements, the only formula open for E&P deals with foreign companies, are on offer for foreign companies to build petrochemical ventures. But the buy-back contract (BBC) is not an incentive. The BBC is a financing arrangement whereby the foreign firm funds the project and gets repaid in products from the project's output, plus a profit margin. This formula is not popular among foreign companies, although Total and several other oil companies have accepted it for their E&P deals to develop existing fields. "New legislation is being considered by the Majlis (parliament) to further facilitate the foreign investment procedures", Nematzadeh has added. This will have to be explained by the NPC executives in Tehran. Usually, the executives seem to be too optimistic about getting new legislation from parliament, which is dominated by conservative hardliners who do not like partnerships with Western companies. The 1997-2010 plan and the above mentioned incentives were discussed by Namatzadeh and his aides during two dedicated NPC conferences held in London on Nov. 10 and 12, 1997. The first conference on Nov. 10, organised by NPC's London-based overseas subsidiary, was attended by about 200 delegates from a wide variety of Western and Asian companies. The second conference was organised with the help of the Financial Times and the attendance was smaller.