Iran moves to decrease petrol shortfall with $15 billion upgrade of domestic refineries

In an exclusive interview in this week's issue of MEED (Middle East Economic Digest, out March 10 in the GCC), Mohammed Reza Nematzadeh, the recently appointed managing director of National Iranian Oil Refining & Distribution Company (NIORDC), detailed upgrades and overhauls at each of its nine refineries, as well as plans for three new grassroots refineries.

By MEED estimates, the Iranian government paid out almost $7 billion in subsidies last year to keep petrol prices cheap, encouraging Iranians to use on average 10 litres per day (l/d) - double the international average. The fear is that the figure will rise even further giving that petrol consumption is growing rapidly.

Nematzadeh said: "Unfortunately we have consumption growth of about 10 per cent a year. Our car industry now produces almost 1 million cars a year and they need more and more petrol. At the same time, the price is very cheap - less than 10 per cent of European rates - so people don't care about their consumption."

Last year, petrol imports cost the government $5 billion, set against a trade surplus of $9.6 billion for the first six months of the year. Inflated demand and inadequate domestic supply will see this situation deteriorate even further, according to analysts, until local refineries improve and raise capacity.

The NIORDIC overhaul will be largely state-funded, Nematzadeh said. "We hope to increase existing petrol production of 42 million l/d to 100 million to 120 million l/d by the end of this five-year development plan in 2010."

He also stressed that tackling consumption was as important as increasing supply. "To control consumption, we must either make the price realistic or use other means. If we do nothing, there will be a growth of 8-10 per cent in consumption, making our problems worse each year. I think we can control it but it has not yet been decided how to do so."

Under extreme conditions, Nematzadeh believes Iran could bring consumption right down to the level of domestic output, but recognises the practical limitations of such a goal.

The $15 billion refinery expansion programme is not without its challenges, including a shortage of international contractors and financing issues - foreign banks are showing increasing reluctance to lend to Iranian projects. However, higher oil prices have left the government with funds for the programme. "We have a budget of $5 billion for projects, with over $1 billion for internal investment," he said.

Nematzadeh recognises that conditions are far from ideal, but believes local contractors are now able to handle about half the projects that are planned. "We have evaluated the capacity of local contractors, engineers and management consultants (MCs) for the past five years and think they can now handle 50 per cent of the work alone. The only real shortage is qualified MCs," he explained.

More than $54 billion worth of projects in oil and gas alone are currently under way in Iran, according to MEED projects.

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