New Oil Disorder
Purge in Iran oil sector would
rob industry from its experienced decision-makers
August 8, 2005
Iran’s president Mahmoud Ahmadinejad
has promised to make sweeping changes in the management of
oil industry. During his presidential campaign he lambasted the
management of this sector and claimed that Iranian oil wealth
was controlled by a single powerful family.
" I will cut the hands of the mafias of power and factions
who have a grasp on our oil; I stake my life on this... People
must see their share of oil money in their daily lives," he
said during the election race. Taking him at his word, we should
therefore expect major changes in the offing for the management
of an industry which makes Iran the fourth leading exporter of
oil in the world.
The relationship with international oil companies is also
bound to alter. Ahmadinejad has remarked that “The atmosphere
ruling over our deals, production and exports is not clear. We
should clarify it.” Iranian oil being of such a monumental
importance for the country’s economic and political future,
the new president’s comments cannot be treated lightly.
Moreover, Ahmadinejad would not have made those comments
without the backing of the supreme leader, of whom he is a zealous
follower, and who has the last word on important issues.
In order to understand the implications of Ahmadinejad’s
remarks for the future of the oil industry in Iran, I needed
to talk to a person who was thoroughly familiar with the Iranian
oil sector. I reckoned that the best person who could enlighten
me on this topic was Dr. Parviz Mina, the international petroleum
consultant, a former member of the Board of Directors and Managing
Director of International Affairs of the National Iranian Oil
I had been introduced to him before and had met him on several
occasions at various Iranian events in Paris. He is a straight
arrow, well deserving his high reputation for excellence and
I called him and asked for an interview. He graciously accepted.
The following is the result thereof:
The newly elected president in Iran has promised sweeping
changes in the Iranian oil sector. He says he will eradicate
the mafias of power who have kept the oil industry in their grasp.
What do you think is the implication of these statements for
the future of the oil industry in Iran?
If Ahmadinejad sincerely believes that the Iranian
oil industry is plagued with mafia type corruption, he has no
alternative other than to get rid of the entire management. This
means that those with years of experience will be replaced by
novices who are unable to make expert decisions. After the 1979
Revolution, three echelons of management in the National Iranian
Oil Company including directors and heads of divisions and departments
This move had severe consequences for the country’s
oil industry. If Mahmoud Ahmadinejad would embark on another
purge and get rid of what he calls ‘mafias of power’ he
will deprive the oil sector of people who, irrespective of their
ethical standing have gained invaluable experience over the past
two decades. This cannot be but disastrous for the Iranian oil
The dilemma he faces is that defenestrating an experienced,
albeit corrupt management, who are the people he is going to
replace them with? Where is he going to come up with a new
team? What kind of capability could such a new management offer
deal with highly complex issues? There can be no getting away
from the fact that the oil industry requires expert knowledge
in all its various domains.
It would take a long time for the
new cadre to learn the skills and gain the requisite knowledge
and experience. In the meanwhile, one can only expect that
chaos would prevail and the power of effective decision-making
curtailed. Corruption has become endemic in the Islamic regime
and if it is to be cured, it has to be eradicated from the
very top level of the clerical establishment that governs Iran.
The present cadre has seen to it that the agreements with international
oil companies lack any semblance of transparency. How is the
new team going to deal with these recondite, shady deals? The
anarchy that would ensue can only create further uncertainty
and frighten away international investors. If such a scenario
comes to pass, we can expect a period of very costly stagnation.
The new president Mahmoud Ahmadinejad has made a promise
to distribute the oil revenue amongst the population and make
people feel its benefits in their daily lives. How in your opinion
will he be able to do such a thing? What would the impact be
of such a move on the overall national economy?
The fact of the matter is that the oil revenue which
has exceeded 500 billion dollars since the revolution has not
been properly invested in infrastructure, economic and industrial
development, betterment of social welfare and the well-being
of the Iranian population. One can expect the new president making
a move in the direction of increasing the subsidies particularly
on petroleum products. The inevitable effect of introducing such
a policy would be the skyrocketing of consumption.
a decrease in international investment that I mentioned earlier
and a reduction in production capacity, this increased internal
consumption would only erode the volume of export and thus the
national oil revenue. According to the statements by the current
oil minister, the Iranian production capacity is diminishing
by 7 to 8 percent a year while internal consumption is increasing
by 6 to 7 percent a year. If the country’s ability to export
oil is impaired, that can only translate into a lowering of the
standard of living for Iranians.
Belligerence on the issue of enriching uranium can also create
difficulties. If Europeans are not able to secure the concessions
they seek from the Islamic Republic on the nuclear programme,
the dispute would be referred to the United Nations Security
Council and the possibility of sanctions would loom larger on
the horizon. Sanctions more than in any other sector would hurt
the Iranian oil industry which relies heavily on Europe and the
United States for its technology.
The purge of the management that we discussed earlier would
rob the oil industry from its experienced decision-makers and
seasoned negotiators on the one hand, and sanctions would debilitate
the industry and contribute to economic decline and great financial
loss on the other. In other words, Ahmadinejad’s plan,
if implemented can only lead to a more equitable distribution
of poverty and economic decline.
Since the 1979 revolution two massive bureaucracies, one
in the Ministry of Oil and the other in the National Iranian
Oil Company have been growing side by side creating massive duplication
and contributing to a lack of transparency and accountability.
Do you believe that Ahmadinejad could tackle this problem?
Before the revolution there was no Ministry of Oil.
The National Iranian Oil Company as the sole agent of the government
ran the entire industry. The Islamic Republic created the Ministry
of Oil and put the NIOC under its tutelage. For fifteen years
the NIOC was left without even a managing director.
of Oil appointed seven deputies in charge of supervising the
activities of various managers in the National Oil Company. In
reality all the major decisions were made by these deputies who,
by the way had no expertise. Their only credential was commitment
to the Islamic regime and a connection to one of the country’s
centers of power. Accordingly, all the prerogative and authority
was gradually taken away from the NIOC and given to the Ministry
Ahmadinejad has said that he wants to put a stop to duplication
and introduce measures that ensure transparency. This would prove
as difficult as putting the genie back into the bottle. Bijan
Zanganeh, from the time he has been appointed as Islamic Republic’s
oil minister has created close to one hundred affiliated and
subsidiary companies. All the projects are divided between these
As an example previously all the exploration, drilling
and production efforts were concentrated under one director
in the NIOC, now there are ten to twelve companies each making
and having a finger in the pie. Before the revolution we had
in total 54,000 employees working for the Iranian oil industry,
34,000 were rank and file and 20,000 professional staff. Today
this number has reached the colossal figure of over 180,000.
What is Mahmoud Ahmadinejad planning to do with this monstrosity?
This seems like total anarchy. Were there no regulatory
provisions to prevent such an outcome?
This is just it. The haphazard decision-making was
due to having neither a statute for NIOC, nor a petroleum law
to govern the behaviour of the players and setting clear instructions
regarding various interactions. In 1957 after the nationalization
of oil, the first Petroleum Act was put together and was passed
by the parliament.
In 1974 a new law came into effect and took
into consideration the latest developments in the industry and
the relationship with international partners. Since the beginning
of the revolution, the country’s Petroleum Act as well
as NIOC statute has been discarded. The Islamic Republic has
also failed to create a statute or Petroleum Act of its own to
replace the old one. Decisions are made on the spur of the moment,
without any consistency or regard for a long term national interest.
Mr. Kamal Daneshyar the chairman of the parliament's
energy commission, anticipating "total change" in
the structure of the oil sector and "fundamental" changes
in contracts has also criticized the "buy-back" system,
under which Iran gives payment in kind to oil companies that
oilfields, as "costly and damaging to oil reserves".
Could you please elaborate on what the buy-back system first
of all is, and then tell us whether it makes economic sense for
Iran to engage in this mode of contract?
The buy-back system is an arbitrary scheme which
was designed after the revolution to circumvent constitutional
constraints on foreign investment as well as parliamentary limitations
on external debts. The Islamic regime more preoccupied with empty
slogans than genuine national interest put this system into place
in order to supposedly disallow any foreign equity and ownership.
Well, this was much revolutionary ado about nothing.
NIOC drafted a new and innovative petroleum law which was approved
by the council of ministers and enacted by the parliament. This
new law envisaged that exploration and production agreement with
foreign oil companies could only be concluded on the basis of “Risk
Service Contract” under which the contractor had no right
to the reserves discovered or to the production from the field
developed. The model agreement was so structured that it did
not contain any of the disadvantages inherent in the buy-back
system and thus safeguarded Iran’s long term interests.
Although the foreign company was acting as a contractor working
for the NIOC, it was obligated to conduct exploration operation
entirely at its own risk. If the exploration was successful
and oil was discovered, then the company was obligated to development
the oil field on behalf and under the supervision and control
of NIOC. Once commercial production was commenced, the contract
would have expired and NIOC would have taken over the entire
NIOC was in charge of the production, and for a
stipulated duration not exceeding fifteen years would sell
50 percent of the production to the aforesaid company with
so that the company would be able to recover its original
investment and gain a reasonable return on investment. This system
the most beneficial means for Iranians to harness the capacity
of their oil fields.
After the Islamic regime took over, the real objective was
the overthrow of the old system in all its aspects. Change was
instituted for the sake of change. Based on this vengeful policy
the buy-back system came into existence. Under the buy-back agreements
despite the fact that the international oil companies are not
exposed to any exploration risks and the buy-back contacts are
completely risk free involving development work in a relatively
simple environment, yet they are guaranteed a predetermined fixed
remuneration equivalent to 18 to 20 percent rate of return on
their capital investment.
The duration of the buy-back contract is very short thus aligning
the interests of the contractor and NIOC is difficult. While
the buy-back contract is a fixed rate of return contract, it
does not encourage or reward the contractor to improve project
return for the benefit of both the contractor and NIOC. After
the contractor has recovered all its costs and remuneration,
it has no interest in problems that may confront NIOC in the
later life of the project. Transfer of technology and management
skill is not encouraged under this type of contract.
Furthermore, prior to the Revolution, oil contracts were required
to be approved by parliament. The cabinet and parliament were
kept abreast of the details of the deals. Any Iranian citizen
was legally entitled to have access to the text of these contracts.
Today, Iranian members of parliament are complaining bitterly
about being kept entirely in the dark about the terms of these
All these problems are direct results of throwing out the oil
law and resorting to arbitrary decision-making. It should be
added that the existence of clear rules and regulations not only
is to the benefit of the oil producing country, but also is reassuring
for the international investor. It puts an end to uncertainty
and creates an atmosphere of reliability and trust.
R.B: Dr. Mina thank you very much for this interview.