Iran pressing fiscal incentives, assurances to attract investors to its petrochemical sector

Iran's petrochemical industry was established in 1963 with the start-up of the Shiraz Fertilizer Co. plant at Shiraz. A few years later, the plant was placed under the umbrella of Iran's National Petrochemical Co., at which time it began operating under the name Shiraz Petrochemical Co. The plant was expanded in 1971 and again in 1986. Shown here is the modern Shiraz complex, with capacity to produce 1.835 million tons/year of basic chemicals and fertilizers, including 540,000 tons/year of urea, 214,000 tons/year of ammonium nitrate, and 84,000 tons/year of methanol. Photo courtesy of NPC.

Among the inducements being offered are: reliable supplies of inexpensive feedstocks, an extensive infrastructure of utilities and transportation facilities, elimination of raw material import and product export duties, and tax exemptions lasting as long as 9 years.

In addition to these obvious advantages, Iran's petrochemical investment scheme offers one crucial draw: Unlike many other major oil-producing countries, Iran sets no limits on the equity interest a foreign operator can own in a plant on Iranian soil.

Iran's National Petrochemical Co. presented Iran's investment incentives package to a diverse group of potential investors at its first Iran Petrochemical Forum in April (OGJ, Apr. 26, 1999, p. 31). The meeting provided an unprecedented opportunity for petrochemical firms from all over the world to meet with NPC officials and discuss investment possibilities. Although no contracts have been signed to date, BP Amoco plc has said it is evaluating the opportunities NPC is offering. Even U.S. firm Conoco Inc., banned from investing in Iran by unilateral trade sanctions, is thought likely to be keen on the possibility.

Conoco officials have spoken out openly against the U.S. sanctions policy towards Iran, and they have expressed eagerness to re-enter the country. (Conoco had to exit from its role in the development of Sirri A and E oil fields off Iran when the U.S. instituted economic sanctions against the country in 1995.) CEO Archie Dunham said at the Middle East Petroleum & Gas Conference in Dubai in March, "We remain committed to doing business in Iran."

Conoco Senior Vice-Pres. Michael Stinson spoke at NPC's investment forum in Tehran. He sees Iran's climate for private investment as very attractive. Iran has, in Stinson's words, a "strong and clear rule of law," political stability, attractive tax and fiscal terms, ample human resources and "intellectual capital," an open economy, and institutions that promote foreign investment.

The newest of National Petrochemical Co.'s plants is the Arak Petrochemical complex in the Markazi region of western Iran. Started up in 1993, the plant produces olefins, polyolefins, acetic acid, vinyl acetate, polybutadiene rubber, ethylene glycols, 2-ethyl hexanol, herbicides, and pesticides. An ethanolamine unit is under construction. Photo courtesy of NPC.

"It is time for the U.S. government to recognize the importance of Iran in the global community and to react to the Iran of today," said Stinson. "Our policy toward Iran should be one of engagement and dialogue, not isolationism."

Industry development

Iran's petrochemical industry began in 1963 with the start-up of a small fertilizer complex at Shiraz (see photo, p. 20). NPC gradually expanded its petrochemical capacity until the onset of the Iran-Iraq war in 1980. This was done mainly on the basis of joint-venture arrangements with international companies, said Bijan N. Zangeneh, Iran's Minister of Petroleum, at the April forum.

Following the war, and in conjunction with the reconstruction and renovation of damaged plants, NPC launched an expansion program under its first 5-year development plan.

"During this period," said Zangeneh, "several new petrochemical complexes were established, and petrochemical production increased and diversified to a whole range of petrochemical products."

NPC is now in the process of implementing its second development program, which involves constructing 10 new petrochemical units, developing the Bandar Imam special petrochemical economic zone on the Persian Gulf coast, and installing a shared utility station at Bandar Imam (OGJ, May 24, 1999, p. 41). As a result of these projects, and those NPC plans under its third development stage, Iran's total petrochemical production capacity is expected to grow from 13.2 million metric tons/year in 1998 to 38.6 million tons/year by the end of 2005.

"By implementing (these) projects...our total sales will increase from $1.7 billion/year (today) to $2.5 billion/year by the end of 2001 and to $7.5 billion by 2005," Mohammad Reza Nematzadeh, Deputy Minister of Petroleum and NPC president, told attendees at the petrochemical forum. "The exports will increase from $600 million to $1 billion, then to $5 billion," he added. NPC is open to joint-venture discussions with foreign partners on any of these projects. It would also consider outside investment in some of its existing petrochemical plants.

Iran's advantages

Iran is at an exciting stage, both politically and economically. Iranian President Mohammad Khatami is pushing an agenda of reform-too rapidly in the view of some Iranians and too slowly for others. At the same time, Iran's population is growing, and its economic sophistication is advancing. This growth means greater demand, collectively and per capita, for petrochemicals.

"With 60 million population and an expanding market, Iran provides a unique potential for internal consumption of petrochemical products, as compared with other hydrocarbon-rich countries in the region," said Zangeneh. Looking outside Iran to its place in a larger region, Mehdi Navab, Deputy Minister of Economic Affairs and Finance, said, "Iran enjoys the most representative and democratic system of government within the general geographic location of the Middle East and Central Asia." Navab, who is also president of the Organization for Investment, Economic, and Technical Assistance of Iran, told forum participants: "Iran is at the center of a large market with a population of 300 million and with significant developed and (undeveloped) natural resources. Many countries in this region are undergoing preliminary stages of economic development and constitute suitable long-term markets for various products, including petrochemicals. The lower cost of transporting goods from Iran to these markets and the benefits of regional trade arrangements, such as those stipulated in the ECO (Economic Cooperation Organization), represent notable advantages."

Nematzadeh detailed other advantages of investing in petrochemicals production in Iran: the availability of oil and gas feedstocks; access to a skilled work force at competitive costs; low capital costs; easy access to European, Asian, and African markets; and adequate infrastructure facilities.

Aside from these benefits, which are available to any industry, Iran has implemented some special arrangements for the sole purpose of attracting petrochemical investments.

"An extended tax holiday is particularly an important advantage," said Navab. Under current laws, petrochemical producers enjoy a tax holiday of at least 6 years. And if the plants are in designated underdeveloped regions-such as Mahshahr, just north of Bandar Imam-the exemption extends to 9 years.

"The investors and shareholders in these projects also enjoy a similar tax exemption on their dividend income," said Navab. "In addition, even after the expiration of the tax exemption period, any income derived from exports will be exempted from tax. Given the exportable nature of petrochemical products, this represents a distinct advantage for investing in Iran." Petrochemicals investors also are exempt from paying customs tariffs and Iran's "commercial benefit" tax on plant equipment and machinery. "Full duty draw-back is available for import charges on raw materials used in exported products," Navab added.

Feedstocks

The availability of cheap and abundant petroleum feedstocks is clearly one of the biggest draws for any producer considering investment in Iran's petrochemical sector. "National Iranian Oil Co. and National Petrochemical Co. of Iran are prepared to enter into short and long-term feedstock supply agreements for petrochemical plants, on the basis of competitive prices," said Zangeneh.

Development of Iran's giant South Pars field is central to Iran's petrochemical expansion. Phases 1-3 of this project will yield about 75 MMcfd of natural gas and 120,000 b/d of condensate, and subsequent development phases will increase output further. "The abundance of basic raw materials for production of petrochemicals-such as natural gas, (crude) oil, and fuel oil-and access to these resources under long-term contractual arrangements at competitive cost are among clear and distinct advantages of the petrochemical industry in Iran," said Navab. For this reason, Iran will guarantee feedstock supplies. "We recognize the crucial importance of a guaranteed and continuous supply of feedstock for successful operation of the petrochemical complexes envisaged in our development programs," said Zangeneh. "The Ministry of Petroleum...is fully committed to provide and guarantee supply of feedstocks, including condensates, naphtha, natural gas, and NGL, for the petrochemical development programs envisioned in the third development plan. This commitment should naturally give assurance to potential international investors interested in participating in our petrochemical development scheme on a joint-venture basis.

"It is also to be mentioned that we have extensive programs for provision of the feedstock requirements of olefin complexes through ethane recovery from rich gas resources."

Legal framework

NPC has hired German investment bank Dresdner Kleinwort Benson to conduct a detailed study of Iran's petrochemical expansion and prepare a comprehensive report to be used as a guide for foreign investors. NPC International Ltd., a wholly owned subsidiary of NPC, will administer NPC's joint investments.

The Law for Attraction and Protection of Foreign Investments is the principal legal basis for foreign investment in Iran. Under this law, all foreign persons who import capital into Iran under authorization from the government are protected.

The protections provided to foreign investments against non-commercial risks under the law include:

• Right of dividend repatriation in foreign exchange.
• Right of repatriation of principal capital in foreign exchange.
• Guaranteed compensation in case of asset expropriation or nationalization.
• The same guaranteed rights as any local enterprise.

It should be noted, says Navab, that, under the provisions of this law, "foreign capital" includes cash, equipment, machinery, technology, know-how, license fees, and technical services.

Various forms of foreign investment capital also qualify for protection under the law. These include equity capital, shareholders' loans, and other foreign financial facilities used in legal partnership or contractual arrangements.

"Therefore," said Navab, "in addition to traditional direct investments, other investments under contractual arrangements such as BOT (build, operate, transfer) or buy-back mechanisms can also enjoy the coverage and support of the law."

Contract arrangements

Nematzadeh emphasized NPC's flexibility with regard to contracts, telling reporters in Tehran that the company would consider any sort of business arrangement with foreign investors. He also stressed NPC's history as a reliable business partner: "During the past 10 years, NPC has utilized medium and long-term finance facilities to execute its projects. Fortunately, as reputable banks such as Deutsche Bank and Soci?t? Generale can attest, NPC has paid, through its own revenues, all its loans in a timely manner and on schedule.

"NPC will also make use of long-term credit facilities for implementing its new projects," Nematzadeh continued. "However, in accord with the government policy, as well as that of NPC, we also intend to obtain some of our required investment through joint ventures."

NPC has experience in forming such joint ventures with foreign companies. Its petrochemical JVs have included: a fertilizer plant owned 50% by Allied Chemical, an LPG unit owned 50% by BP Amoco plc forerunner Amoco Corp., a polyvinyl chloride plant owned 26% by B.F. Goodrich, a carbon black plant owned 50% by Cabot Corp., a dioctyl phthalate-phthalic anhydride plant owned 50% by Nissho Iwai Corp.-Mitsubishi Corp., and an olefins and aromatics plant owned 50% by Mitsui Chemicals Inc.

After NPC and a private firm have agreed in principle on a project and an investment scheme, government approval is required. A cabinet decree is eventually issued for authorization of each foreign investment case, says Navab. Certain key information is reflected in every decree, including the percentage of foreign shareholding in the project, the amount and structure of foreign capital resources, the availability of foreign loans, the participation of local partners, and any other information relevant to the foreign investors' participation. This can include provisions dealing with term export licenses, repatriation rights in foreign exchange, and payments under service contracts, he says.

"Following the issuance of the cabinet decree, the foreign capital secures legal protection from the government of Iran, and the relevant foreign investor can proceed alone or in partnership with local entities to registration of a local company in Iran and commence commercial operation," said Navab. "It is to be noted that cabinet decrees are normally issued within 45 days from the time an application is placed with the investment organization."

Exchange rate

A unified exchange-rate system is not currently in place in Iran. Navab offered three reasons that this has a lesser impact on investments in the petrochemical industry compared with other sectors. First, the applicable exchange rate for movement of principal capital entering or exiting Iran is that which is "the closest to the open-market exchange rate," he said. The foreign exchange rate on the Tehran Stock Exchange fluctuates within a 10-15% margin below the open-market exchange rate, explains Navab. "In light of the government's determination to encourage non-oil exports and the fact that the Tehran Stock Exchange is the only official trading market for the foreign exchange earned through exports, it is certain that, in the future, the exchange-rate mechanism in this market will continue on a floating and real basis."

Second, Iran gives its foreign investors full rights to utilize foreign exchange generated through exports for meeting their requirements in areas such as dividend repatriation, debt service on the shareholders' loans, or other financial obligations, as well as for meeting the foreign-exchange requirements for importation of raw materials and spare parts. "The exportable nature of petrochemical products in the international markets is an advantage in this regard; therefore, petrochemical plants set up in Iran by foreign investors will have little constraints in the area of foreign exchange, given their ability to export," said Navab. "Companies producing petrochemical products can meet their foreign-exchange requirements through export earnings and meet their rial requirements either through sale of products to local markets or conversion of excess export revenues to foreign exchange on the Tehran Stock Exchange.

"It is perhaps worth highlighting that the availability of sufficient manpower in Iran in the establishment and operation of petrochemical units and the availability of a diversified range of (benefits) in Iran's economy mean that petrochemical units have considerable rial expenses. As a result, these companies are placed at a very competitive position vis-a-vis (foreign companies in other sectors) in accessing the local markets in Iran."

The third reason Iran's lack of a unified foreign-exchange rate would not be detrimental to petrochemical investors, according to Navab, is Iran's low feedstock costs.

"In accordance with the provisions of the (Islamic year) 1378 fiscal budget (March 1999-February 2000), the Ministry of Oil has been obligated to authorize investments by private local and foreign investors for production of oil, gas, and petrochemical products and to commit to making feedstocks available to these companies and to purchase their products for local consumption at international prices," said Navab. "This law places foreign investors at an exceptionally advantageous position in selling to local market demand in Iran.

"Therefore, even prior to implementing their projects, investors can ensure a degree of market access through contracts with the Ministry of Oil in Iran whereby payments will be made in accordance with international prices. In other words, relevant investors will be regarded as preferred suppliers to the Iranian markets."

Special economic zones

To take full advantage of the enticements being offered by NPC, a producer would have to choose a project in one of two special economic zones being set up by Iran.

Iran's main infrastructure development is at the Bandar Imam special petrochemical economic zone.

"Well-developed infrastructure-including water and water-treatment facilities, electricity, communication, roads, an international airport, and port facilities-are available at the Bandar Imam area," said Zangeneh. "Infrastructure development schemes are also under way at Bandar Assaluyeh-a port near South Pars (gas-condensate field)-which has also been designated as a special economic zone. Upon completion of the infrastructure development schemes, Assaluyeh will become a major industrial development zone adjacent to South Pars."

The special zone at Bandar Imam is being developed by NPC for Iranian and foreign investment, said Nematzadeh. It is a 1,700-hectare area in which land is priced at 40,000 rials/sq m for Iranian investors. To rent the land, foreign users would pay $2/sq m/year.

The Bandar Imam zone is accessible by all forms of transportation. The enormous 33-jetty Bandar Imam Khomeini port is nearby and has a special jetty for petrochemical products.

NPC projects planned for this zone are: a 180,000 ton/year paraxlene unit; a 500,000 ton/year methyl tertiary butyl ether plant; Iran's sixth and seventh olefin units, comprising a 520,000 ton/year ethylene unit plus polymer units; a major aromatics complex (Iran's third); a 350,000 ton/year purified terephthalic acid-polyethylene terephalate complex; an engineering polymers unit; a second PTA-PET unit; a 660,000 ton/year methanol unit; and central utilities.

A detailed article about the design of the sixth and seventh olefins unit starts on p. 61.

The 10,000-hectare Assaluyeh special economic zone is under construction. It will be used by processors of gas and condensate from South Pars field and by the petrochemical industry. Iran's 9th and 10th olefins units, 4th aromatics plant, and 4th methanol project will be implemented in this zone.

Multifaceted effort

Navab says that, in spite of Iran's changing economy, potential investors should seek financial support anywhere they can.

"Clearly, our efforts toward creation of a transparent legal framework and efficient process in Iran can only complement the relevant international instruments that are needed for supporting foreign investment. In our endeavor to enhance local conditions for attraction and support of foreign investments, we should not lose sight of the role and importance of relevant institutions in home countries where capital originates.

"Large international companies should, in conjunction with exchanges with relevant authorities and agencies in Iran for development of projects, pay due attention to the role of industrial country institutions, such as official export credit agencies and their investment guarantee divisions or subsidiaries. It is clear to everyone that the availability of financial and insurance instruments provided by these institutions has a decisive role in the ability of sponsors to mobilize feasibly priced capital in sufficient volume and appropriate structure and to be able to absorb investment exposures on their balance sheet.

"We believe that the political commitment by the government of the Islamic Republic of Iran for attraction and support of foreign investments, coupled with the professional and commercial judgment of investors in developing projects with acceptable and well-defined commercial risk levels, should comprise the two necessary and sufficient elements in justifying the support of official export credit agencies and investment guarantee instruments," Navab told potential investors. "Therefore, relevant institutions in industrial countries should place greater reliance on your commercial judgments, as investors, in selection and development of projects and help you capture viable investment opportunities in Iran by making relevant insurance instruments available to you."

Future

Iran is serious about reshaping its economy to take advantage of growing globalization.

Nematzadeh said, "During the past decade, (NPC's) domestic sales have increased at an annual growth rate of 23%. Estimations indicate that the same trend will prevail in the next decade."

President Khatami said late last month that Iran's exports of non-oil commodities had increased in recent months. And he predicted an additional $1 billion gain in non-oil exports in Iran's current fiscal year, ending in March 2000.

He told the Iranian News Agency, "We have to use the talents of human resources available to us in order to foster investments. Economic security is also needed."

Navab's predictions for Iran are more abstract but important, nonetheless:

"Profound economic developments in the past 2 decades have transformed the phenomenon of a global economy to an undeniable reality. In the years and decades to come, we will no longer await the eventual shape and formation of the world economy. Rather, it is certain that future developments will revolve around the stabilization and further development of country and international laws, as well as multinational commercial institutions, in serving the needs of global economic integration.

"In this global economy, we will continue to witness the perpetual movement of capital in search of efficient allocation and higher profitability. And signals such as stable and dynamic political and economic systems, transparent legal frameworks, and efficient infrastructure and communication facilities play decisive roles in attraction of capital.

"Meanwhile, we should not lose sight of the fact that, within an integrated global economy, the presence of effective and conducive factors in the host countries for attraction of international capital constitutes one side of the coin," Navab said. "The perception and policies of relevant commercial and political institutions in home countries are the other side of the coin. Only the combined presence of all factors, ranging from necessary factors in host countries to relevant instruments of capital in home countries, can materialize the prospective investments."

Having access to regional and international markets, a well-developed infrastructure, designation of Bandar Imam and Bandar Assaluyeh as special economic zones, provision of common utilities, and the existence of a favorable legal and regulatory environment for the attraction and protection of foreign investment are among the competitive advantages for investment in the Iranian petrochemical sector.