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New Iran president looks for quick gains despite sanctions

Hassan Rohani is gearing up to choose a new government, with the focus on bringing in capable hands that are comfortable dealing with IOCs

Like his counterpart in the Oval Office, Iran's new president Hassan Rohani will quickly find that the biggest challenge on taking the hot seat is managing expectations.

The sizable victory secured in the 14 June ballot, surprising many by winning on the first count - buttressed by some sharp maneuvering by former presidents Rafsanjani and Khatami, both of whom threw their collective weight behind the centrist cleric as the most viable counterweight to conservative candidates - has given Rohani a robust mandate for change.

The question is how he will use it. Absent a speedy dismantling of the stifling international sanctions regime, which has progressively eroded Iran's capacity to first secure investment to increase oil and gas production, shackled it from selling it on the open market and then hindered it from monetising those sales - he will not be in a position to deliver quick wins to the long-suffering Iranian public.

Falling production

Oil production is estimated at 3.1 million barrels a day (b/d) currently, compared to 4.36m/d averaged in 2011 (and well placed Iranians believe it is more like 2.5m-2.8m b/d). Iran's oil sales in May 2013 were just 1.1m b/d, with just a handful of buyers - mainly Asian - still in the market for remaining volumes of Iranian crude, under existing US sanctions waivers.

The dire economic impact of former president Mahmoud Ahmadinejad's policies has come home to roost; but though Rohani may enjoy a much better international image than his populist predecessor, and has made the right noises in offering "constructive interaction" with world powers to ease tensions, he may be no better placed to lift the embargo on sales of oil and invite international oil companies (IOCs) back to drill for oil and gas.

Yet doing nothing is not an option right now. And Rohani does have some tricks up his sleeve. First, as the long-term head of an influential think-tank in Tehran, the Centre for Strategic Research, Rohani has strong ties to reform-minded and pro-business figures, which may be able to play a more decisive role in managing the economic portfolio more effectively.

He expected to tap into the bank of expertise as represented by senior former energy ministers under the more liberal administrations of ex-presidents Rafsanjani and Khatami - notably Bijan Zanganeh, a former oil minister, and Mohammed Nematzadeh, a former industry minister responsible for Iran's successful petrochemicals expansion. Another name mentioned in dispatches as a possible petroleum minister is Akbar Turkan, a former head of Pars Oil and Gas Company. All these men are comfortable working with IOCs.

Says a Tehran based energy consultant: "These men have more professionalism in dealing with the Western IOCs, compared to the ministers in the Ahmadinejad presidency when the orientation was towards Asian companies. And they are more familiar with the modern technologies that Iran's petroleum sector needs."

Yet so long as sanctions remain in place and getting progressively tougher there is only so much they can do to lighten the load.

Capital flows are severely restricted and even simple technologies needed to maintain production at current levels are increasingly scarce, forcing National Iranian Oil Corporation (NIOC) to resort to riskier ways of getting capital in and moving technology around. "Even choosing or selecting powerful ministers such as Zanganeh or Nematzadeh might not work as the problem fundamentally comes down to sanctions," says Siamak Adibi, an Iran analyst at FG Energy.

None of this should imply that Rohani will not be able to register important gains, as he prepares to appoint his cabinet over the next few weeks (a process that could take most of the summer). "Individuals do matter in this structure" says one IOC representative with experience of Iran. "Having an individual who could operate through a very systemic technocracy and manage the existing production in a more efficient way would of course have a significant impact, compared to existing people who don't have a very technical approach."

Most of the NIOC rank-and-file is made of up technocrats who have made an art of keeping things afloat. Yet their work has been persistently undermined by poor decision making by the top brass. If Rohani's ministerial choices instill a more professional attitude, day-to-day operational issues - allocating budgets more rationally - may be more satisfactorily resolved.  

Experienced hands like Zanganeh and Nematzadeh should also have sufficient sway to lobby for changes that could at least lead to a modest lifting of sanctions. The existing paradigm that insists that resistance is all - as encouraged by the Supreme Leader Ali Khamenei - has clearly lost its currency in light of Rohani's victory. 

Current projects

The immediate policy priority though is to complete current projects, mainly centred around the giant South Pars scheme, in order to maintain gas production estimated to average 550 million cubic metres a day. "The main priority is to finalise the projects that are way behind schedule," says the Tehran-based consultant. "Phases 11 and 12 of South Pars are significantly behind, with the Chinese companies suspending several projects. Many of the phases were due to be finished in 2013-14 still have a long way to go."

Rohani has limited time, and few tools at his disposal to show that he can make a difference.

Up to now, Iran has only shown it is capable of survival strategies - squeezing out crude sales, deploying some cunning tanker techiques to avoid being detected, and attempting to barter its way out of trouble.

As long-standing Iranian oil adviser Mahdi Varzi tells Petroleum Economist, this will not be enough. "The sanctions knot has to be untied first. If Rohani isn't able to do that he won't have proper access to the international banking system, and he's going to find himself constrained in terms of financing major projects." 

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