10 May 2007 - 19:10
  • News Code: 104283

TEHRAN -- Recently, Sharif University of Technology held a conference on international finance of infrastructural projects in Iran.

Speaking at the conference, the managing director of Pars Oil and Gas Company told participants that the proven oil reserves of the world was reported to stand at more than 1,200 billion barrels in 2002 out of which about 750 billion barrels existed in the Middle East which accounts for 61.9 percent of the world"s oil reserves.

Akbar Torkan pointed out that Saudi Arabia, Iran, Kuwait, and United Arab Emirates account for nearly 55 percent of the world"s oil reserves. The Middle East also boasts 72 percent of proven gas reserves of the world with Iran and Qatar enjoying more that 50,000 billion cubic meters gas reserves. Iran, alone accounts for 17 percent of the world"s proven gas reserves.

Torkan then analyzed the political situation in the five Middle Eastern countries that together make up 55 percent of the world"s oil reserves. Since all countries in the region, except Iran, are somehow or another under the influence of Western countries, other countries have accorded Iran support out of the concern about domination of the United States and Britain over the world"s oil reserves. He pointed out to the occupation of Iraq by the United States and the influence of U.S and Britain over countries such as Saudi Arabia, Kuwait and the UAE as supplying evidence to his claim. Thus, support for Iran does not emanate from sympathy; rather it comes from countries that "do not want to see a single country take control of independent oil reserves of the world."

Referring to the government"s policy on oil reserves, he said, "Our policy is to build an economic system on the basis of oil, but the government"s budget should not depend on oil revenues. Oil, is the main impetus behind the attraction of foreign investment. But we must not extract and use it up."

At present, we are ahead of the Fourth Economic Development Plan in terms of foreign exchange revenues resulting from non-oil exports and agriculture but lag behind in terms of other economic indexes.

In this light, the Fourth Economic Development Plan has envisaged that 80 billion dollars should be invested in the oil industry, 57 billion dollars of which should be supplied through foreign investment (including 21 billion dollars through finance) while 23 billion dollars should be supplied domestically. According to Torkan, 24 billion dollar will be invested in South Pars region out of the total 57 billion dollars. Moreover, "10 billion dollars will be invested in oil and gas projects in South Pars region during the Fifth Economic Development Plan." The managing director of Pars Oil and Gas Company added that South Pars region accounts for 8 percent of the world"s proven gas reserves, adding that a total of more than 30 billion dollars worth of oil projects is being carried out throughout the country.

"There are certain risks for foreign investment in the oil industry that cannot be controlled by us. For example, the psychological repercussions of a possible oil embargo on Iran in the course of the nuclear crisis have cost us dearly and we are facing major problems for the attraction of foreign capital," he said.

 

Torkan added that Iran is also having difficulties for attracting finance facilities. "Up to last year, there were discussions about finance scheme being religiously permissible or not. Not that permits have been issued, no foreign investors is ready to finance our projects." He also pointed out some domestic barriers mentioning that the implementation of projects through financial schemes "requires that 85 percent of needed parts and equipment should be bought from the country of origin, while this is against the policy enforced inside the country requiring that 51 percent of all projects should be carried out using domestic capabilities and resources."

The managing director of Pars Oil and Gas Company stated that financial methods used to fund oil industry projects are based on either finance scheme, or buyback. "Given the said problems, we must find new ways for funding oil industry projects. At present, there are three specialized banks in the country, including Bank of Industry and Mine, Bank Maskan (Housing Bank), and Bank Keshavarzi (Agriculture Bank), but there is no such bank for the oil industry. Shares of industries and mines, agriculture, and housing sectors of gross domestic product stood at 11.3 percent, 10.4 percent, and 4.1 percent, respectively, in 2005, but share of oil sector stood at 27.9 percent," he noted.

Torkan went on to note that an oil industry development bank should be established. He pointed out that Iran has previously deposited money in foreign banks and has been rebuffed by them when it has asked for finance. Furthermore, the interest paid on that money is less than the floating rate. The establishment of an oil industry development bank will provide a greater benefit to the country. The bank can participate in shaping a finance syndicate to take part in funding international oil and gas projects. Such an act will reduce "the investment risk of Iran"s oil and gas sector and will provide good support for oil industry contractors."

 

The Costs of Buyback

 

Majid Qasemi, the managing director of Passargad Bank, told the conference that finance was a good method for funding projects provided it was used in the correct manner. He mentioned that funding projects through buyback is not a good method because it"s very costly. Referring to finance scheme, the official noted that the measurement of risk and its management is very important in finance and since the final cost of a buyback deal is very high, it is not a good option.

"The financer should be assured about the implementation of a plan and environmental issues play a major role in this regard," he said. Qasemi stated that negotiations on finance have not been successful thus far due to economic sanctions, adding, "Financers consider preferential interest rates on the basis of the risk of projects."

 

Ongoing Conflicts

 

The deputy chairman of the Industries Development and Renovation Organization for Economic Affairs discussed challenges regarding international financing of major projects and its conflict with the law which stipulates that 51 percent of all projects should be implemented through domestic capabilities.

Davoud Mesgarian said that the law has not made clear how the domestic part of industrial projects is to be funded.

 

"General credits of oil-rich countries are based on oil revenues and this will be ensued with a major challenge because investment in infrastructural sectors has become a habit in such countries," he said. The official noted that subsidized prices are common in oil-rich countries and oil accounts for the bulk of financial resources.

"In such countries, reducing subsidies will cause major social problems while continued payment of subsidies will increase demand. Therefore, energy consumption growth will not match the country"s economic growth rate," he said. Referring to a 10 percent rise in annual power consumption against 5-6 percent economic growth rate in Iran, Mesgarian stated that the reliance on oil revenues will expand liquidity and inflationary pressures and will lead to forceful stabilization of prices and subsequent increase in demand.

Therefore, there is a dire need for more investment in the oil industry in order to boost governmental coffers. Taking the most advantage of domestic capabilities is "the government"s policy, which is expected to result in foreign exchange saving, reduced reliance on borrowing, increased technological abilities, and presence of companies in international markets," according to Mesgarian. The deputy chairman of the Industries Development and Renovation Organization for Economic Affairs further noted that the law for making the most of domestic potentials was approved in 1996 but was notified in 2002.

"The law is silent about how to provide needed credits for domestic economic sectors. The reason is lack of consolidated policies and a policymaking supervisor. According to this law, we want to give more latitude to domestic companies, but this is not consistent with the attraction of inexpensive foreign capital," he said.

Mesgarian stated that permits for selling 500 million euros of Islamic bonds had been issued by the last year"s Budget Act, but the current year"s budget has not pointed to it. "Releasing such bonds would require determining credit rating of companies that release them and that should be done by independent international institutes," he said.

The official added that granting commercial and short-term loans is a factor that increases the cost of plans. "The Ministry of Economic Affairs and Finance is reluctant about issuing letters of guarantee to domestic executives and this leads to delays in the implementation of projects," he said. He also considered the different parity of foreign exchange used for finance as a main economic challenge faced by Iran.

"Borrowing from other countries will waste government"s budget, if the borrowed money is not used for production of commodities that are not exported," he said. The official noted that reducing the risk of investment for domestic contractors is a prerequisite for eliminating delays in the implementation of industrial development projects in the country.

 

 

News Code 104283

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