Experts Divided on Iran's State Oil Cos Shakeup

LONDON (Dow Jones), Nov. 5, 2009

As Iran's conservatives tighten their grip on the oil industry, the replacement of the heads of two state-owned oil companies is expected to be followed by more personnel changes.

But experts disagree about whether this will help or hinder foreign investment that has been stifled by bureaucracy and international sanctions.

One week ago, Iranian oil minister Masoud Mirkazemi announced the replacement of the heads of the national petrochemical and gas companies--the most significant changes in personnel since he took over as minister on Sept. 3.

The new appointees come from relatively obscure backgrounds. Gholamhossein Bayat, the new managing director of the National Iranian Petrochemical Co. or NIOC, previously headed a petrochemical company in Southern Iran.

Javad Owji, appointed to head the National Iranian Gas Co., was the managing director of South Zagross Oil and Gas Co. Owji, 43, replaced Azizollah Ramezani, who was 13 years his senior and had been a top manager at the Gas Company for eight years.

One week after being appointed, Owji changed the company's regional managers.

Back in 2005, Iran's President Mahmoud Ahmadinejad was voted into power partly on a vow to clean up a state-owned oil industry he accused of being corrupt. But he was unable to assert full control over top personnel changes--his first-choice candidates were rejected by lawmakers.

Following a contested reelection in June, for the first time he got approval for his preferred choice of oil minister, Mirkazemi.

Both Ahmadinejad and Mirkazemi are former members of the conservative paramilitary Islamic Revolutionary Guards Corps. A voluntary security force affiliated with the IRGC is playing a key role in a current crackdown on protests.

On Wednesday, the force reportedly suppressed an antigovernment protest which had used the 30th anniversary of the taking of hostages at the U.S. embassy in Tehran as cover.

Mirkazemi also used to run Etka, a defense ministry-affiliated company that supplies consumer goods to both the military and civilian markets.

The oil reshuffle comes amidst increased influence by the IRGC on other sectors such as, according to the Wall Street Journal, the media.

Mirkazemi has started to appoint little known provincial managers to top positions. He is justifying the reshuffle as a way to foster cooperation--and potentially foreign investment--within a state industry, which is divided between about 20 large companies.

Announcing Owji's appointment Mirkazemi said: "I expect coordination [between various sectors of the oil industry] to be more effective." He said that included improving "interaction with local and foreign investors for financing capital projects and infrastructure."

Iran is the second largest producer of crude oil in the Organization of Petroleum Exporting Countries. But it suffers from chronic underinvestment in its oil production and refining sectors; it is also the world's second-largest importer of refined products. And despite natural-gas reserves that are second only to Russia, their development has been so slow it has yet to become a net exporter.

Much of the delay is the result of the harsher implementation of international sanctions since Ahmadinejad signaled his intention to move forward with Iran's nuclear program in 2005. The West suspects the program is for military purposes, although Iran has denied this.

"I expect there will be little or no change until the sanctions issue is sorted out," said Fereidun Fesharaki, chief executive of Honolulu-based FACTS Global Energy.

But other Iran watchers say tensions with the West are not the only cause of lack of investment in the oil and gas industry. Also to blame are a deeply-entrenched bureaucracy and tough terms for foreign investors.

For instance, Iran has failed for over three years to honor a contract to deliver gas from one of its offshore fields to the United Arab Emirates. The company buying the gas, Crescent Petroleum Co. lost patience and filed for arbitration with the Paris International Chamber of Commerce in July. Though Iran says it hasn't delivered the gas because of a pricing disagreement, Crescent blames bureaucracy and technical delays on the part of Iran's state-run sector.

Iran oil watchers say that could change with the new appointments. Mohamed Ali Khatibi, the official in charge of relations with OPEC, said of the reshuffle: "it's the right policy. [The minister] is trying to inject new blood into the system."

The changes are a test run for a larger reshuffle at NIOC, and its subsidiaries, two people familiar with the ministry said this week.

Nobody was available for comment at NIOC's public relations and international affairs department. When asked, Khatibi said he didn't know of any impending changes. "For the future, nobody knows," he said.

The Iranian official said the oil ministry had undergone personnel shuffles under previous ministers and said it was not the only department where they were currently taking place.

Experts disagree on whether the fast rise of junior officials will help or hinder investment.

The new appointees "can make decisions with more confidence as they have the trust of the administration," said Fesharaki, a former energy adviser to the Iranian government.

But Mehdi Varzi, a former Iranian oil official who now runs his own consultancy, London-based Varzi Energy, said "they have no power base. The appointments are based on assumptions of loyalty."

"Things could get worse" in terms of the decision-process, he said.

Questions also remain about whether the newcomers will be able or willing to make investment conditions more palatable for foreign companies.

In Iran, foreign oil companies operate under a "buyback" system, where the government pays its partners to conduct exploration and development of a field and reimburses their costs. But unlike in many other countries, they don't have direct ownership within the field and can't book its oil reserves.

"Iran had time to bring in the right companies" when sanctions didn't have the same impact in the 1990s, Varzi said. Instead, "it wasted 10 years" because of the buyback system, he said.

Iranian oil officials said in recent weeks they had made progress in talks with Royal Dutch Shell PLC (RDSB.LN) and Repsol (REP) to invest in the giant South Pars gas field, and also signed a draft deal to develop an oil field with OAO Gazprom (GAZP.RS). Repsol and Gazprom declined to comment. Shell said "discussions are continuing as they have been for some time. No final decision has been reached."

But experts say the nationalistic ideology that drives Ahmadinejad and the Revolutionary Guard militia could also run counter to attempts to bring in more foreign investment.

"Even as Ahmadinejad consolidates control, the predominant attitude among his faction has been skepticism of the need for foreign investment and confidence that Iran can do without the West," said Ariel Ahram, an assistant professor at the School of International and Area Studies at the University of Oklahoma.

"More projects will probably be handled domestically, with firms closely tied to IRGC using foreign contractors for piecemeal components while avoiding large-scale deals with the majors," he said.  

Copyright (c) 2009 Dow Jones & Company, Inc.

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