Total set for Iranian petchem projects
Monday, Jul 31, 2017
After the landmark South Pars 11 deal, Total is set to invest billions in constructing three petchem plants. Simon Watkins reports

NewsBase Intelligence (NBI) understands that French super-major Total is set to invest around US$2 billion in the construction of three petrochemical plants in Iran.

The news follows the landmark upstream deal the company signed with Tehran for the development of Phase 11 of the supergiant South Pars non-associated natural gas field (SP11).

“For IOCs looking to become involved with the post-sanctions Iran, the onus is on full co-operation across the upstream oil and gas sectors and the downstream petchems side, plus financing, banking, technology, and personnel solutions where appropriate. In [return] for this they will get preferential access to the best of the sites that Iran has to offer,” a source who works with the Iranian Ministry of Petroleum told NBI.

The plants make perfect sense for Total, given that it will be extracting just over 57 mcm per day of natural gas from the SP11 site when it becomes fully operational within the next 40 months at most.

Over the 20-year duration of the initial SP11 contract, at least 400 bcm of gas will be produced from the phase, along with around 290 million barrels of gas condensate, 14 million tonnes of LPG, 12 million tonnes of ethane and 2 million tonnes of sulphur, with the value of these energy carriers estimated at nearly US$60 billion at current prices.

To exploit this potential fully the three plants to be constructed will have at least 2.2 million tpy of capacity for production of polymer and petrochemical products, and will comprise an ethane cracker complex, a special grade polyethylene plant and another polymer production unit.

The involvement of Total in these new plants also aligns perfectly with Iran’s three-pronged post-sanctions petchems strategy. The first is to target export growth in Asia, especially in China and India, and particularly for their growing demand for plastics, Mahmood Khaghani, former director-general of the National Iranian Oil Co. (NIOC) and director for Caspian Sea Oil and Gas Affairs in the Ministry of Petroleum, told NBI.

Indeed, global consultancy firm Ceresana projects that global demand for polypropylene will increase by at least 3.7% each year until 2021, with a corollary yearly rise in revenues of 5.3% over the same period.

The second is to create a meaningful distribution bridgehead into Europe for its wider downstream products, especially for gasoline – now that the Persian Gulf Star Refinery has come online – and for its LNG proposition, once that has been completed.

“Before sanctions forced it out in 2008, Total was in the process of developing the Pars LNG project. It is thus ideally placed to resuscitate that, and is obviously a major player in the gasoline market all the way across the value chain, and Iran has big plans in that regard as well,” he added.

Indeed, according to the source, Tehran’s plan is that within the next two years Iran will be meeting at least 10% of all of Southern Europe’s gasoline and diesel needs.

The final part of the strategy points to the wider geopolitical importance of Total’s involvement in Iran, which is that facing the prospect of increased sanctions down the line from the hostile new US administration, Iran believes that the broader the international base of investors in the country, the better.

“By involving the biggest IOCs from the major European powers in its hydrocarbons sector, Iran believes that it will make it much more difficult for [US President, Donald] Trump to ramp up sanctions further because of the backlash from the Europeans,” said the source.

“Better still is that the structure of this deal will mean that Total has a direct ownership involvement in it, alongside various Iranian elements, so to close them down would mean to curtail the interests of a major French company, which runs essentially as a state-owned enterprise and is regarded as such in Paris,” he added.

The same idea is behind the planned US$350 million investment by Royal Dutch Shell – which became the second Western IOC to sign an upstream deal last week, for South Azadegan, as exclusively revealed by NBI – in the western province of Hamedan.

The structure itself – which also addresses the previous deleterious situation in which investors needed to deposit as a pledge at least 130% of the capital investment amount required in a project in the sector – is more of a genuine partnership with the National Petrochemical Co. (NPC), which takes the role of quasi-transactional guarantor.

“The NPC will have a lien against future petrochemical products to be produced by petrochemical plants that are under construction, so, on the one hand, this will act as a pledge for repayment of private sector loans to banks and on the other it will give an assurance to the banks through which the money is funded that repayment will be made,” Christopher Cook, director of global energy consultancy Wimpole International, told NBI.

“For its part, the NPC will retain at least a 20% share in new and under-construction petrochemical plants projects,” he added.

Partnership with a major Western IOC is also vital for another guiding principle for all future international deals in the petchems sector, which is that they should be profitable on a standalone basis, as soon as possible.

“In order to attract foreign partners into the [petchems] sector, [NPC managing director] Marzieh Shahdaei said last year that the projects need to offer two particular factors; the prospect of profitability and, with that, the prospect of genuinely appealing real rates of return for partners,” Mehrdad Emadi, senior economist for risk analysis and energy derivatives markets consultancy Betamatrix, told NBI.

In this context, he added, although the average rate of return on investment for foreign companies involved in Iran is currently over 20%, the National Iranian Oil Refining and Distribution Co. (NIORDC) wants to boost this where possible and has taken steps to re-structure the fuel mix in refineries accordingly.

Specifically, fuel oil production in Iran’s refineries currently accounts for around 25% of their overall output, compared with a 12% world average and only 2% in European refineries, which is a comparative cost disadvantage for the country as the price of fuel oil is around 35% lower than that of crude oil.

In order to redress this relative imbalance, the NIORDC last year issued a recommendation that its refineries operate projects for cutting their fuel oil production in order to increase overall margins.

In the same vein, Shahdaei committed last year to keeping the formula used for determining the price of petrochemicals unchanged for at least the next 10 years, so ensuring a minimum benchmark real rate of return for foreign investors for at least that period.

“The overall aim of these new measures, as exemplified by the Total deal, is not just to effect a major expansion of Iran’s petchems sector but also to do as much as possible to ensure that it is protected against any ramping up of sanctions that might come from the current US administration. In both cases, this means direct deals with Western European IOCs, in addition to those that have been done with Asian [counterparts],” said the source.

As it now stands, Iran is in the process of negotiating US$72 billion of foreign investment into 80 projects in the sector, including 30 new ones, as envisioned in the Sixth Five-Year Plan (2016-2021). These are key to Iran’s plans to increase its overall petchem production capacity to 130 million tpy by 2020 and 180 million tpy by 2025, against a current nominal capacity of just over 60 million tpy.

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