THE NEW WAY

Iran 2017 | ENERGY | FOCUS: PETROCHEMICALS

Iran sits on top of the world's second-largest proven natural gas reserves, and the world's fourth-largest proven oil reserves. Yet, the petrochemical industry is where the action really happens.

The lifting of barriers to trade has opened the door for Iran to increase oil and gas production and enhance the exports of its raw materials. Its hydrocarbon reserves have largely been untapped and are likely President Rouhani's strongest card in reserving a front-row seat in the theater of international trade. Theoretically, Iran's reserves are sufficient for it to single-handedly serve the global demand for oil and gas for years. Yet, Tehran's policymakers have something else in mind.

More than half of Iran's population is under the age of 35 and with youth unemployment standing above 30%, Iran struggles to keep up with the yearly entry of 1.2 million people into the labor market. President Rouhani has made job creation his top economic priority and extending the value chain of Iran's commodities production has emerged as one of his key policies. By curbing the export of raw materials, the country can use its resources to develop industries that add value and strengthen its position as a producer of finished goods. This will create jobs, increase export revenues, and give impetus to other sectors, such as cosmetics and pharmaceuticals, which need specialty chemicals.

The viability and competitiveness of the petrochemical industries largely depend on their access to feedstock, the material that fuels the industrial process. Iran's natural gas is rich in ethane, an important feedstock. This translates into low production costs, particularly for ethylene and polyethylene, two of the world's most widely used chemicals. Worldwide, petrochemical feedstocks are mainly based on crude oil and natural gas. Iran's petrochemical industry mainly uses natural gas, which constitutes two competitive advantages to most other petrochemical producers. First, natural gas is cheaper than crude oil, and Iran produces it at relatively low costs. Second, most petrochemical producing countries, especially in the Middle East, have relatively limited access to natural gas.

Despite its advantageous position, there exist some challenges, too. Lower oil prices in recent years have made it harder to gain competitive advantage from feedstock alone. Next to this, even though Iran possesses such vast natural gas reserves, it is no stranger to shortages. Being the world's third-largest gas consumer, domestic demand is huge, especially in the winter. After years of sanctions, both Iran's natural gas and petrochemical production capacities are still a long way from their potential. To substantially increase their output, natural gas and petrochemical capacities will need serious investments.

The key for Iran's petrochemical industry to grow and flourish lies in financing. Investments in the natural gas production and infrastructure are needed to secure the constant supply of low-cost feedstock. A lack of funds forms the main constraint on the development of new projects. Yet, there is no reason for pessimism. Iran's total petrochemical production capacity rose 15% to 64.1 million tons per year during President Rouhani's first term. Petrochemical exports even grew by 28% to over 20 million tons, bringing in around USD15 billion. Marzieh Shahdaei, Deputy Petroleum Minister for Petrochemical Affairs, has indicated that Iran plans to process 72 million tons of petrochemicals by the end of the current Iranian year in March 2018. She projects output to double by 2022, bringing Iran's share in the global petrochemical production to over 5%.

Iran will need investments worth USD23 billion to complete the 30 projects that form the axis of its petrochemical strategy under its Sixth Development Plan (2016-2021), and the interest is there. HE Dr. Amir Hossein Zamani Nia, Deputy Petroleum Minister for International Affairs, expects an influx of USD10 billion in foreign investments in petrochemical projects in the current Iranian year. The 13th Iran Petrochemical Forum, held in April 2017, attracted an unprecedented number of international participants, representing 74 foreign companies, among them heavyweights such as Royal Dutch Shell and Total. With foreign investors and Iran's government dedicated to its success, Iran's petrochemical industry has everything it needs to take off.