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.
Pishevar says Iran will be playing the same role for China as Saudi Arabia played for the US when it comes to energy. “However, given Iran’s geopolitical status this tight China–Iran alliance will have bigger ramifications on the Middle East and the world than even the US–Saudi alliance had in the past,” he says.
Houman Dowlatshahi, an oil industry analyst in Tehran, says the preferential terms granted to China for the development of an important oilfield in southern Iran is a good sign of where this Asian romance could be headed. “In return for buying Iran’s LNG, China received preferential terms for development of Yadavaran oilfield, which is destined to produce 250,000 barrels a day.”
A second candidate to take up projects in Iran’s oil industry is India. In June, Tehran and New Delhi signed a 25-year deal for exports of LNG to India worth $22 billion. Discussions are under way for a big gas pipeline from Iran to India via Pakistan, a deal that would cement Iran’s new energy Ostpolitik [see Eastern approaches, this issue].
A change of guard The members of Abadgaran are young and well educated, and many served on the frontline during the 1980–88 war with Iraq. They are fiercely loyal to Iran’s supreme leader, Ayatollah Ali Khamenei, who has the last word on all matters. Abadgaran also wants a return to the core values of the 1979 Islamic revolution.
Religious conservatives now enjoy a monopoly on power, dominating parliament and controlling key bodies such as the armed forces, the judiciary and broadcast media, not to mention the incoming government.
When Ahmadinejad was sworn in as president on August 6 in the legislature, majlis speaker Qolamali Haddad-Adel promised that the law-makers would stand by the new government: “The parliament is not your rival in power, but your comrade in service,” he said.
Analysts expect the new government to work smoothly with the rest of the regime – a stark contrast to president Mohammad Khatami’s reformist administration, which for two four-year terms was locked in a constant battle with the majlis and legislative watchdog the guardian council to have its plans approved. But they also note that the new government faces the challenge of delivering to the people, whose expectations of economic improvement are higher than ever after promises made to them during the presidential election campaign.
Ahmadinejad is expected to draw several cabinet ministers from the fresh army of fellow religious conservatives. A big overhaul in the senior and middle management is on the horizon to deliver on promises of job creation for a population two-thirds of which is aged below 30. Officially, unemployment ran at 11% in the year to March 2005.
Ahmadinejad has a tradition of recruiting young managers that dates from his stint heading the Tehran municipality. One such young manager, Nader Shariatmadari, a university assistant professor and close aide to the new president, says: “It is natural that some might be concerned about possible errors the youth may commit.”
But, Shariatmadari adds: “Young people have an open mind, are capable and energetic, plus their productivity and efficiency is higher than the old.” But Shariatmadari cautioned that this did not mean Ahmadinejad was about to throw everybody overboard, saying the older generation of managers could stay on as advisers.
Oil minister Zanganeh and many of his top officials are on their way out. However, there is still uncertainty about who will replace him. Parliament rejected the nomination of Ali Saeedlou, acting Tehran mayor, and so far no-one else has been put forward.
Soon after the presidential election results were out, rumour had it that Iran’s Mr Buy-Back, Mehdi Hosseini, the National Iranian Oil Company’s deputy managing director, had resigned. That turned out to be false news, but more important to investors was whether Iran’s shaky buy-back scheme for attracting and funding foreign participants in Iran’s oil projects would be phased out too.
Atieh Group’s Khadjehpour says he does not see Iran bidding farewell to buy-backs for upstream oil and gas projects. “However, the pattern would be that more and more projects would be awarded to Iranian companies, who will then in turn be encouraged to seek partnerships with foreign companies” within an agreed buy-back framework. Analysts expect the downstream projects to provide more joint ventures between Iranian and foreign firms.
A nuclear stand-off Beyond the riddle of who will be running Iran next and how interested they are in foreign investment lies the question of how Iran’s relations with the world outside could be eclipsed by its nuclear ambitions.
Iran said in August that it would not give up its right to develop a nuclear fuel cycle, including uranium enrichment, a process that could in theory be a precursor to the development of nuclear weapons. Washington accuses Tehran of developing a covert military nuclear programme. Iran denies the charges, arguing that its growing electricity demands leave it no option but to look for new resources beyond oil.
In August, the UK, France and Germany threatened to join the US in calling for Iran’s case to be reported to the UN Security Council, which might eventually result in economic sanctions being imposed on Iran. Tehran nevertheless says it is not worried.
Oil industry analyst Dowlatshahi says: “We should not forget that China, which will be Iran’s biggest energy client, has a veto right in the Security Council.” But others consider that China might not be so certain of which way to turn if faced with the choice between the US, with which it has enormous trade ties, and Iran, its future energy provider.
Under such circumstances, argues Menanca’s Pishevar, “we will see ‘a wait and see’ attitude from Western companies and aggressive investment by Asian and also South African companies”.
Atieh Group’s Khadjehpour agrees that there might not be quick exits by those companies that have established themselves in Iran and that have projects on the go. However, he says that “deteriorating Iran–US relations will certainly act as an irritant which may reduce the appetite of newcomers to the Iranian market.”
