Reforming Iran's Oil Industry

Ghaida Ghantous and Barbara Lewis of Reuters report that Tehran may be reconsidering the buy-back system ("Foreign Cash Still Flows to Iran's Oilfields," 23 April 2006):

The so-called buy-back investment model, where foreign firms are repaid with proceeds from oil output, has drawn criticism. Western oil executives say risks far outweigh rewards, while some Iranian politicians remain distrustful of foreign capital.

Tehran has said it was reviewing its buy back contracts to make investment in its fields more alluring.

"We have received all the views and we're doing it and I think we're very close to a conclusion," Vaziri said without elaborating.

No doubt that whether or not the current contracts with foreign oil companies, as well as the buy-back system in general, are really in the Iranian people's interest must be looked into.

But, before getting there, the most urgently needed reform of Iran's oil industry is transparency.

Parviz Mina, a former member of the Board of Directors and Managing Director of International Affairs of the National Iranian Oil Company, pointed out last August in an interview conducted by Reza Bayegan that "Iranian members of parliament are complaining bitterly about being kept entirely in the dark about the terms of these contracts" ("New Oil Disorder," Iranian.com, 8 August 2005). When the books are closed to the public, no reform is possible, and that's what needs to change first and foremost.

Then, a reformer has to go after the structure that creates corruption, as Mina elaborates:

[After the revolution of 1979, t]he Minister of Oil appointed seven deputies in charge of supervising the activities of various managers in the National Oil Company. In reality all the major decisions were made by these deputies who, by the way had no expertise. Their only credential was commitment to the Islamic regime and a connection to one of the country's centers of power. Accordingly, all the prerogative and authority was gradually taken away from the NIOC and given to the Ministry of Oil.

Ahmadinejad has said that he wants to put a stop to duplication and introduce measures that ensure transparency. This would prove as difficult as putting the genie back into the bottle. Bijan Zanganeh, from the time he has been appointed as Islamic Republic's oil minister has created close to one hundred affiliated and subsidiary companies. All the projects are divided between these companies.

As an example previously all the exploration, drilling and production efforts were concentrated under one director in the NIOC, now there are ten to twelve companies each making decisions and having a finger in the pie. Before the revolution we had in total 54,000 employees working for the Iranian oil industry, 34,000 were rank and file and 20,000 professional staff. Today this number has reached the colossal figure of over 180,000. What is Mahmoud Ahmadinejad planning to do with this monstrosity? ("New Oil Disorder," Iranian.com, 8 August 2005)

Such a structural reform is an extraordinarily difficult task, but unless that gets done, trying to negotiate with foreign companies more lucrative contracts than the current ones will likely prove futile, since surplus rents will get consumed by the mullah–bazaari nexus, not by the Iranian people.

Hugo Chavez got lucky with his opposition's failed lockout, for surviving it allowed him to purge all who stood in his way inside PDVSA. Mahmoud Ahmadinejad tried to do the same with cabinet appointments, but that's not the sort of purge he can pull off till emergency circumstances of the sort that confronted the Chavez government arise.

Update

Yoshie Furuhashi, "Privatization Iranian Style," Critical Montages, 14 October 2007.