State owned companies are not cost-effective

TEHRAN Jan 03 (Shana)–In an exclusive interview with Shana, the chairman of energy committee of Expediency Council Mohammad Chegini suggested that Petroleum Ministry should replace selling crude oil with oil products by developing oil refining sector. He is of the opinion that the state should avoid intervention in the economy and make more room for participation of the private sector in oil refining activities which in turn will result in generating value-added.
SHANA: The Petroleum Ministry was the first ministry in the country which drafted necessary documents relating to implementation of the Economy of Resistance principles and sent it to parliament. You know that oil industry has been the main source of income in the annual budgets of the country. Meanwhile reducing reliance on oil revenue has been the main target of all Iranian administrations. Despite this, achieving the goal has not been easy. In your opinion, what are the main challenges of oil industry in its drive to achieve the Economy of Resistance targets including cutting reliance on oil revenue and avoidance of selling raw materials and in this case crude oil?

Chegini: Economy of Resistance policies are related to all sectors and subsidiaries of oil industry. For example in the upstream sector we can talk about improving recovery rate and in downstream we are dealing with developing oil refineries and petrochemical industry and at the same time converting raw materials to products so that it generates value-add. When we talk about energy intensity we should also consider power plants and boosting efficiency in the four main pillars of the economy including construction, transportation, industry and agriculture sectors.

In oil industry, I think Petroleum Ministry has taken positive steps including initiatives for building gas condensate refineries by participation of private sector but at the same time I think these plans are not comprehensive in view of developing oil refineries and we have relatively lost time even though Petroleum Ministry has taken some steps forward. But in my view the most important challenge of the country in oil sector is nothing except developing refining capacity at home.

SHANA: Under the article 44 of the constitution, the government is not authorized to establish oil refineries. Furthermore, the experience of building oil refineries during the recent years showed that upgrading and using new technologies, as one of the main reasons behind handing over building oil refineries to the private sector, failed to materialize. Regarding these facts, how is it possible for the government to raise refining capacity and at the same time pave the way for participation of private sector in building oil refineries?

Chegini: Look, if the government decides to reduce intervention to minimum and play a strong role in monitoring and policy-making it will be able to achieve the goal. You should take into account that the main problem with oil refining is that the price of crude oil is announced by the government in a non-transparent way and with too much delay. An enterprise could succeed economically only when it is aware of the process of the producing an item and its mechanism. If you intervene too much and change the prices frequently, it is evident that investors will lose their incentive and courage for investment. The main point in development of refining industry is the fact that you should make oil refining sector transparent. Therefore, the government should not assume itself as the owner of oil refineries and a sovereign entity but just entity that paves the way for investment by people.

Why do people buy gold and foreign exchange and hold it as reserves? Because they think it is profitable. The same is the case in the refining industry, so the government should prepare the ground for profitability and facilitate investment in the sector.

The government should assure the people that they will have a good return. But what the government now does is that it hands over part of the production to the private sector while keeping distribution in his own hand. That is clear that this kind of ceding refining activities to the private sector will not succeed. The same is true in the power sector. We have handed over power plants to the private sector but the companies which generate electricity should take the money for generating electricity from the government. This is while if the government had handed over distribution companies to private sector as well, we would not have faced such problems. We face the same kind of problems in distribution of oil products.

There is no doubt that the government should be less interventionist. But when we discuss privatization of the refining sector, the experience of the past years shows us that these activities were transferred to quasi-governmental sectors instead of the private sector and this led to failure in achieving the environmental targets because those who took charge were obsessed with just short-term interests. Even president Rouhani criticized this kind of transfers and opposed with some similar initiatives.

Anyway, this situation should be changed. I believe this kind of privatization, despite its deficiencies, is better than a full control of the government on the issue. When you have trilateral relations between the sovereignty, producer and consumer you can find the shortages over the course of interaction between them. But when the government controls everything it ignores its deficiencies far from who is the president and run the administration.

When oil refineries are transferred to the private sector, the national interest of the country is expected to be taken into consideration. There is no doubt that profitability is very important in making investment but in some cases the interests of the government and the private sector may be in contradiction with each other. In these cases, private sector may not pay attention, for example in the refining sector, to upgrading and using new technologies or may ignore to produce qualified products because it is obsessed with just big profits in the short term.

SHANA: I think privatization in oil refining sector is different from privatization in other sectors. Because if they produce low quality gasoline for example the Petroleum Minister is expected to be accountable to people and the parliament. Despite this, do you believe the government should avoid interference and transfer all the responsibilities to private sector?

Chegini: I think we have not defined the responsibilities of the private sector clearly. If we had done this and if we had set the necessary standards, I am sure that the imperatives of a healthy business could direct them toward upgrading the quality of their products.

For example, if we announce that we will pay higher prices for more qualified products or we will consider other rewards for improving the quality of the products and for instance considering discount in delivery of crude oil to oil refineries, in this case I think they will have more incentives to move toward updating their performance because it could increase their profits.

Similarly, if we announce environmental rules very transparent and set a time-frame for adapting these criteria we will achieve our desirable results. Otherwise we won’t be able to solve all the problems overnight. In my opinion, we should state all our demands in a comprehensive package so that private sector knows everything including procedures relating to its interaction with the state to issues like settling the price of feedstock. These decisions will make the relations between state and private sector transparent.

SHANA: While oil prices are in decline, do you think building oil refineries still enjoy profit margin?

Chegini: Tumbling oil prices have increased profit margins for a number of oil refineries. If you look at the American model of oil refineries, you see that when in 2012, the price of WTI edged down in comparison to Brent crude, their oil refineries margin rose nearly by 35 dollars. This is while the oil refineries could be profitable even with one of two dollars margins. Generally, the U.S oil refining activities are profitable far from rising and falling oil prices. The U.S oil refineries with 18 million barrels throughput per day are matched with low oil prices. Oil industry in the U.S moves toward development of upstream and non-conventional resources whenever prices are high and moves toward development of downstream activities when it sees the prices plummeting.

SHANA: If we assume that the refining industry will remain profitable despite falling oil prices as you believe, Iran’s economy and the country’s oil industry are facing with the problem of shortage of financial resources so that it hinders implementation of the projects. In these circumstances, how can we persuade the private sector to do investment?

Chegini: We should not be concerned about funding the projects. The first paragraph of the Economy of Resistance principles shows the way we should move in. Under those directions, the government is not tasked to do economic activities but the people and entrepreneurs should participate actively in economic activities. One good example is Petroleum Ministry’s call for building 8 gas condensate refineries. It is a good example I think. Petroleum Ministry introduced the projects and announced 30 percent return for the investments. You saw that many applicants expressed their readiness for participation in the projects. This shows that with correct planning private sector will show its interest for taking part in assuming responsibly in implementation of the projects.

Call for taking part in gas flare projects is another example. I hereby want to thank Petroleum Minister Bijan Zanganeh for public announcement of the projects. I am certain that a great number of investors will express their willingness for participation in the projects. There are ]IRR6.000bn or IRR7.000bn of liquidity in the society and we should think out ways we can push these resources toward investment in oil industry projects with the goal of generating value-added.

I want to say that ceding economic activities to people could cure all the economic pains the country faces. The state should accept to deal with policy-making and monitoring while transferring economic activities to people so that all of them could take part in healthy economic activities.

If we plan to avoid selling crude oil we should to create 2.2 million barrels of oil per day refining capacity up to the end of sixth economic development plan in 2020. To achieve the target, Petroleum Ministry could introduce larger refining projects, larger than Siraf gas condensate refining projects.

Here I want to mention that we should not direct the people how they should invest their money. The people are well aware of the environment they want to do business in it. Without manipulation and avoidance of interference, the people know how to participate in economic activities. Totally the initiatives taken by Mr. Zanganeh are positive but he is expected to accelerate the move because in my view building large and small oil refineries is the expression of putting an end to selling crude oil.



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