By Amir Paivar
WHEN IRAN'S conservatives held their first meeting to choose their joint candidate for this year's presidential election, one of the five nominees was absent. He had sent a letter to the gathering saying he was too busy with work at Tehran municipality to attend electoral meetings.
Nevertheless, the 48-year-old Tehran mayor, Mahmoud Ahmadinejad, dubbed "the man of people", won the election and in August was sworn in as the Islamic Republic's sixth president. He represents a new breed of young conservatives called Developers of Islamic Iran (Abadgaran), who have been coming to the fore first in local councils; then in the majlis, Iran's parliament; and now at the centre of government.
Iran's new president has a simple formula when it comes to foreign investment: locals first. In his first press conference after June's landslide victory, he confidently said that in all areas, including oil, priority would be given to local investors. But the path to this end is not an easy one. Iran's bludgeoned economy, particularly its oil sector, is desperate for capital and know-how.
More than 80% of Iran's export revenues come from sales of crude oil, but the production capacity of the largest fields is falling by 7% each year. Analysts say Iran needs $15 billion of investment in the oil sector every year to preserve its position as Opec's second-largest exporter.
Spurred on by the victory of their candidate, Abadgaran's young conservatives, who have dominated the majlis since the February 2004 elections, have already taken aim at some foreign deals, saying locals could do the job just as well but at a lower cost.
To start with, majlis deputies have one big petrochemicals project in their targets – a $1.2 billion construction contract awarded in July to Germany's Linde and Hyundai of South Korea by National Petrochemical Company. The legislators' concern centres on the fact that the petrochemical company spurned a first tender won by an Iranian consortium that bid with a far lower price.
Majlis deputy Ahmad Tavakkoli, Abadgaran's economic mastermind and the man who has already engineered objections to two previous big foreign investment deals, says: "As long as Iranians can carry out a project, we would definitely prefer to give them the contract, even if it would sometimes cost us more." Ahmadinejad's close ally in the majlis believes this approach will encourage Iranians to develop local technology and help companies grow and handle bigger projects.
But Iran's oil ministry is sceptical about this approach. Minister Bijan Namdar Zanganeh says domestic companies lack know-how and are not yet ready for big projects, while the sector is desperate for quick fixes.
"If you become sick and don't have the medicine, would you wait to make it yourself and risk your life or would you go to someone who already has it?" Zanganeh said in July after signing a $1 billion contract with Italy's ENI for development of the Darkhuain oilfield in southwestern Iran.
Zanganeh, one of the only ministers of the outgoing cabinet who publicly supported Ahmadinejad's rival in the presidential elections, says he would have brought US companies to Iran's oil industry if he could "in order to use their experience".
Previous deals under review
Now Ahmadinejad's allies in the majlis, some of who are poised to become ministers in the new government, say they will review all deals that were made under Zanganeh. But what can they do to stop the foreign deals? A lot, past experience suggests.
Only two days after Iran granted a $3 billion mobile phone network contract to a consortium led by Turkish mobile provider Turkcell in February 2004, the new breed of young conservatives swept to power in the majlis.
Soon after, they drafted legislation that forced the government to seek parliamentary approval for the deal, the biggest foreign investment in Iran since the 1979 Islamic revolution, arguing that the handover of key infrastructure to foreigners was a big security risk.
Then they halted the contract, revised it and slashed the foreign consortium's stake to 49% from 70%. Turkcell said it would withdraw from the project, but it did not.
It took a year-long tug-of-war before Turkcell eventually gave in to the new terms and signed the revised contract. Turkcell ceded 21% of its stake in the juicy deal to Iranian banks only a week after Ahmadinejad was elected.
Bijan Khadjehpour, chairman of Atieh Group, which mainly focuses on offering consultancy to foreign companies investing in Iran, says Turkcell was a good example that "the dominant belief among the constituents of the Abadgaran coalition is that major industrial and economic projects should be controlled by the Iranian parties".
Analysts say that big foreign players in the oil sector, faced with sanctions in the far larger US market if they participate in Iran, might be losing their appetite for the Islamic Republic. BP said last year that it was no longer interested in Iranian projects. Halliburton and General Electric have both wrapped up small projects in Iran, saying that they would not go in for further deals.
Royal Dutch Shell, which officially handed over a 190,000 barrel a day development of an Iranian oilfield in July, says it faces the risk of US sanctions as a result of its work in Iran.
US majors are even more wary. "Obviously no US company would be willing to violate the embargo rules, which might get tighter based on the current pending legislation in Washington," says the managing director of a UK investment group.
Shervin Pishevar, president of the Menanca Investment Group in Washington, which advises Fortune 2000 companies on investment in the Middle East, says: "Under Ahmadinejad, Chinese investment will continue to prosper and grow at record levels. Chinese investment provides mutually beneficial geopolitical benefits to Iran and China beyond the economic."
Iran, which posted economic growth of 4.8% in the year to March, is courting Asia's booming economies and signed a $70 billion 30-year liquefied natural gas (LNG) export deal with China's Sinopec last year. Analysts say that at present rates of growth, by 2020 China will be consuming as much crude as Opec can produce.