Our future development mostly consists of gas-oriented projects.

Hossein ALIMORAD Director NPC INVESTMENT DIRECTORATE

Iran’s resilient petrochemicals sector

May 15, 2018

Hossein Alimorad, director of the NPC Investment Directorate, talks to TOGY about methanol prospects, the importance of extending the petrochemicals value chain and the sector’s future in Iran. The National Petrochemicals Company (NPC) undertakes development, policy-making and regulation of Iran’s petrochemicals sector.

• On strength under sanctions: “During sanctions, we increased our capacity from 21 million tpy to around 55 million tpy. How did we do it? This is thanks to excellent domestic engineering teams and experts who believed in us. It’s a story of success. I am proud to say that self-sufficiency in producing equipment, along with engineering and construction experience, is the main reason that some international technology owners intend to co-operate with us.”

• On methanol: “It is a good business; thanks to the advances of recent petrochemicals technology, we have many applications for methanol projects right now. If you ask investors, they are doing well and they will keep doing well for the next five years. However, according to the analysis of NPC’s market research department, we know that there is no room for any new methanol plants. If we keep introducing methanol, we will be putting a lot of pressure on the market and the price will eventually drop.”

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What is the key mandate of the NPC Investment Directorate?
The Investment Directorate is a young division in NPC; it was created about two years ago. The directorate follows two main goals: One is to promote investment in the industry by introducing opportunities and guiding investment according to the feed, and the second is to provide knowledge of and insights into the industry and create legal frameworks with foreign financial institutes.
Having an investment directorate at NPC provides a single window to facilitate and expedite the process for those who are willing to invest and take a share of this very rewarding industry in Iran.

How important is it to follow a development strategy in the petrochemical industry?
It is extremely important. For instance, five or six years ago many methanol projects were introduced to the market. We had many private investors that rushed to implement those without paying attention to international rivals’ strategy including China’s self-sufficiency strategy, existing and future markets and the target market.
At the same time, many internationally reputable rivals of our petrochemical industry, especially in the region (that is, the Persian Gulf), made huge investments in methanol production. This led to a congested market and, right now, we believe there is no room for more methanol projects in Iran, even though we have available gas feedstock.

So even though plenty of investors are eyeing methanol projects at the moment, you don’t see a bright future for it?
It is a good business; thanks to the advances of recent petrochemicals technology, we have many applications for methanol projects right now. If you ask investors, they are doing well and they will keep doing well for the next five years. However, according to the analysis of NPC’s market research department, we know that there is no room for any new methanol plants. If we keep introducing methanol, we will be putting a lot of pressure on the market and the price will eventually drop.
Therefore, the return on investment will drop along with the market. We have to prevent such a situation, so the role of strategic planning is coming up.

In that case, what is the alternative?
Investors should extend the value chain of the product and undertake the integration of methanol plants with downstream plants. That is, they should convert methanol to other derivatives that we believe will be needed as strategic products in the future.
According to market analyses, there is enough of a market for those derivatives. This is the reason why we have defined MTP [methanol-to-propylene], GTO [gas-to-olefins] and GTP or GTPP [gas-to-propylene or gas-to-polypropylene] plants in recent years. From there we can move to other derivatives.
At the moment, we are focusing on GTX [gas-to-other products/derivatives] projects. We won’t have any more gas-to-methanol plants, but will focus on gas-to-olefins and other derivatives. One of the core businesses of the Investment Directorate right now is to help get the investor familiar with the market and help them invest in strategic plants that we will need in the future.

Tell us more about involving foreign financial institutions in the industry’s development.
When we are talking about building new plants, especially in oil and gas and petrochemicals, the main question is: With what feedstock? Then: Who is the investor? Then: Where does the money come from? No plant will be built with 100% equity of the investor; the investment will always happen in co-operation with financial institutions.
In Iran, we have some limitations in this regard at the moment, so we have to put our eye on foreign financiers. This is our duty: to start negotiations with the banks, ECAs and financial institutions in order to attract them and pursue them to become involved in Iran.

What sort of requirements are faced when planning an investment in the petrochemicals sector?
When the banks and financial institutions want to get involved, the very first issue is compliance and KYC [know your customer]. There are some essential documents that are required by the banks and ECAs. For instance, an ESHIA – environment, social and health impact assessment – report shall be prepared and provided. Certain documents must be prepared by a reputable international adviser or consultant to be sure that the environmental and social impact aspects of the projects have been foreseen. If we don’t have such a document, there won’t be any financing.
This is not a new requirement but they are recently sensitive regarding ESHIA. Fortunately, we have some Iranian consultant companies that have the capability to provide such studies.

How has the petrochemicals sector developed over the past five years?
Although the sanctions period was difficult, the petrochemical sector didn’t stop activity. We made significant progress and succeeded in running the projects that were once implemented by foreign companies. The projects were of course slightly delayed since, day by day, all foreign companies left the projects.
During sanctions, we increased our capacity from 21 million tpy to around 55 million tpy. How did we do it? This is thanks to excellent domestic engineering teams and experts who believed in us. It’s a story of success. I am proud to say that self-sufficiency in producing equipment, along with engineering and construction experience, is the main reason that some international technology owners intend to co-operate with us.

 

What about after the implementation of the JCPOA?
Since the JCPOA came into effect, 10 MoUs have been signed. Four of these were signed with European companies willing to invest in Iran. Two of them are negotiating with Persian Gulf Petrochemical Industries Company (PGPIC) in order to have direct investment as a JV in Asaluyeh. I hope these negotiations are concluded within the first quarter of 2018.
Out of the other two MoUs, one has been signed with Shell. Based on this MoU, we will see if there are any possibilities to develop and promote the petrochemicals sector, especially from the technology and licensing side, as well as the direct investment of Shell in Iran for gas-to-liquids plants. This project is at the early phase of feasibility studies and we have nominated two areas in Asaluyeh.

Which Iranian petrochemical hubs will experience the most growth over the coming years?
Mokran Petrochemical Complex in Chabahar, Parsian in Asaluyeh and Qeshm Island. NPC signed three separate MoUs with their main developers to assist and expedite the development process of these areas. The main developers are: SHASTAN [Shasta] for Mokran and IMIDRO [Iranian Mines & Mining Industries Development & Renovation] for Parsian, and Qeshm Island is under control of the island authorities. They will be its main developer.

What are the investment opportunities in these hubs?
There is a variety of projects and opportunities for domestic and foreign investors. For instance, right now we are in negotiations with two foreign companies for the utility centres and industrial gases. Once we conclude a development plan for those areas, then we will need infrastructure and utilities. Great investment opportunities come from utilities such as power, water and steam.
Right now, we are getting the information from our planning department, co-ordinating with the main developer to make a master development plan (MDP) for the areas, which is required for any future investment, especially for FDI.

What should any investor interested in taking on Iranian petrochemicals projects be aware of?
From the financing point of view, if a company is going to make an investment of 1 billion, they have to prove to the government that they have 20% of this as their asset and they will incorporate it as their equity. This is a must. Unless they can provide documents ensuring that they have this 20%, the project cannot be awarded to them.
We believe the ratio of equity to loan should be logical, such as 20:80 or 30:70. This shows the project will move smoothly from a financial point of view. Investors should provide us with a financial package which shows us how they wish to finance the project.

What about finance brought by foreign entities?
Regarding financing from foreign entities, the Central Bank of Iran and the Ministry of Economic Affairs are in charge. They are responsible for negotiating and making bilateral agreements with the banks and bringing international finance facilities and credit lines based on sovereign guarantees.
Recently, fortunately, they signed EUR 8 billion with Korean Exim bank and Austria’s Oberbank, as well as a renowned Danish bank. I believe this trend will continue. All of these deals are based on sovereign guarantees.
On the other hand, we, the NPC Investment Directorate, are in close contact with banks and financial institutes in order to conclude finance facilities or credit lines to be specially dedicated to the petrochemical sector.

Iran is now pushing to finance projects through corporate guarantees. Could you give us some examples of deals achieved through this approach?
Since nine months ago, we have finalised two short-term financing contracts from a Japanese bank for financing PGPIC projects based on a corporate guarantee. Both have been affected and one of them has been completely finished, which means we have completed EUR 320 million and the other EUR 320 million is half-finished. In the near future, we may increase this to EUR 1.2 billion.
However, we will not put all of our needs in the basket of short-term finance as it increases risk of project financing. We do our best to gradually reach mid-term financing; this is my intention based on corporate guarantees.

Which entity will provide the corporate guarantee and why do you think it’s trustworthy?
I believe PGPIC is the only company that can break down the walls and move forward with this one. That is, PGPIC can acquire finance based on a corporate guarantee or structural finance. PGPIC has the capability to enter into long-term offtake agreements. First of all, according to statistics, last year PGPIC exported EUR 6 billion of petrochemicals.
Secondly, 20% of the shares in PGPIC are owned by NPC. This is an important point. When you approach any bank for financing, they look at the corporate governance. In this case, they will see that 20% is the government, which is almost like a sovereign guarantee, but because it’s a private company, it’s a corporate guarantee.
Thirdly, when you come to the issue of compliance, PGPIC has the cleanest record of complying with all of the requirements of the banks and financial institutions. That’s why right now two reputable companies are in negotiations with PGPIC. Last but not least, PGPIC today is as large as NPC was prior to privatisation The holding has 15 up-and-running production complexes and about 45% of Iran’s total petrochemical exports are by PGPIC.

Why is Iran such an attractive market for petrochemicals investments?
Iran has the resources – including sustainable resources – and the supply of feed. Right now, we are implementing gas-based projects. This means that our future development mostly consists of gas-oriented projects. Iran holds the world’s second-largest gas reserves. Therefore, this is sustainable and budget-friendly. On top of that, taxation is very attractive, as the country has many freezones.
Most important of all, we can depend on ourselves. This is an important incentive. We have reliable resources including human resources, a young generation and with the help of our young, educated experts we have achieved sophisticated technology in all fields of the oil, gas and petrochemical sectors. I see bright developments in the near future in not only the petrochemical sector, but in all industrial sectors in Iran.

What does the future hold for Iran’s petrochemicals sector?
In our future development plan as part of the 6th Development Plan, which is going to be launched after the approval of MoP [Ministry of Petroleum] in the near future, we are going to have 30 different projects in the petrochemical sector. These have already been defined and awarded to the private sector, and they will mainly take the form of investments in the aforementioned hubs: Mokran, Parsian and Qeshm.

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