BMI Iran Oil and Gas Report Q4 2010.pdf

Q4 2010 www.businessmonitor.com oil independent estimates, such as Transparency International's CPI, remain the best indicator. Infrastructure Iran has a well developed transport system that is reliable, cheap and extensive. There are 8,367km of railway, most of which is single-tracked, and 179,388km of roads, of which 67% are paved. There are 331 airports in the country, although the majority 61% have unpaved runways. Although road surfaces are generally excellent and petrol is extremely cheap thanks to subsidies, travelling by road can also be extremely dangerous. To all appearances there are no road rules and the country has one of the highest rates of road accidents in the world. In addition, the authorities sometimes mount informal roadblocks in cities and highways, which can be problematic for foreign travellers it is advisable to carry ID at all times in case of such an incident. With a number of bus companies offering competitive services, transport by bus is cheap, although it can be quite slow and unsafe, mainly because of poor driving by other road users. The train network is extensive covering most of Irans major cities and offers efficient services that are safer and more comfortable than bus travel. Air travel is generally less reliable and frequent than any other form of transport and comes with an added risk, as most of the aircraft flown on domestic routes in Iran are ageing. Recently, Mahan Air had its UK Iran Oil forecasts BMI Iran Oil forecasts BMI Iran Oil na = not available/applicable. Source: Historical data: BP Statistical Review of World Energy June 2010; forecasts: BMI Iran Oil na = not applicable. Source: Historical data: BP Statistical Review of World Energy June 2010; forecasts: BMI Key Risks To BMIs Forecast Scenario Iran is clearly very sensitive to oil price fluctuations. It also faces risks through delays in developing new oil and gas resources. Should the OPEC basket price fall back to an average US$50/bbl to 2014, oil and gas export revenues at the end of the period would amount to an estimated US$47.67bn. A flat US$100/bbl oil price should, however, provide revenues of US$95.34bn, if Iran delivers the forecast capacity expansion. Long-Term Oil And Gas Outlook Details of BMIs 10-year forecasts can be found in the appendix to this report. Between 2010 and 2019, we are forecasting an increase in Iranian oil production of 11.0%, with crude volumes rising towards 4.65mn b/d by the end of the 10-year forecast period, although there will have been an OPEC-induced dip in 2009/10. Oil consumption between 2010 and 2019 is set to increase by 27.3%, with growth slowing to an assumed 2.0% per annum towards the end of the period and the country using 2.24mn b/d by 2019. Gas production is expected to climb to 250bcm by the end of the period. With 2010-2019 demand growth of 42.3%, this provides export potential rising to 58bcm by 2019. Iran Oil the completion of a second gas pipeline from Turkmenistan; and expansion work on three gas processing facilities at Fajr-e Jam, Parsian and Ilam. Iran's gas transport and distribution system is currently insufficient for meeting the country's needs, meaning investing in gas infrastructure development is a high priority. The spending plans were announced by the managing director of NIGC, Javad Oji, at a press conference on March 13 and were reported by Iran's official Shana News Agency. Iran has signed a deal to construct a 660km gas pipeline through Turkey to Europe, according to a report on the oil ministry's Shana news website. If confirmed, the deal would allow Iran to export additional volumes of gas to Turkey and could potentially allow the country to begin gas exports to Europe. According to the Shana report, which cited Javad Oji, a contract to build the pipeline was signed on July 22. Under the EUR1bn (US$1.29bn) deal a 660km gas pipeline with a capacity of 18-22bcm will be built linking Iran to the EU via Turkey. Oji claimed that the pipeline would be completed within three years and that it would allow Iran to market its gas in Europe by paying transit fees to Turkey. Iran's Mehr News agency said that Iran would be responsible for 23% of the project, with the remaining 77% handled by the Turkish side. Iranian Gas Trunkline (IGAT) Iran is in the process of developing a major domestic pipeline network known collectively as the Iran Gas Trunkline (IGAT). According to NIOC subsidiary Pars Oil And Gas Company (POGC) the network will be fed with gas from the South Pars project and will comprise nine separate pipelines. The pipelines are designed to provide gas to the countrys gas-poor northern regions, possibly allowing it to reduce gas imports from Azerbaijan. While the early phases of the network are already onstream, IGAT 7 is not expected onstream until 2011, with IGAT 8 due in 2012. According to the EIA, IGAT 9 will be the first time Iran has offered a pipeline project on a build-own-operate basis. Iran Oil and, in our view, a weakening of the currency seems inevitable. This will address some of the imbalances in the Iranian economy, but for the consumer it will probably spell higher inflation, as the cost of those imported goods that cannot be substituted for domestically produced alternatives will rise sharply. Subsidy Cutbacks To Slow Government Spending Growth In terms of government spending, the subsidy reduction programme will allow Tehran to rein in its expenditure, which is positive for its fiscal position but means that the contribution of government spending to real GDP growth will remain fairly modest over the coming years. We see real growth in this component dropping from 5% in 2010/11 to just 2% in 2011/12, the first full year of the subsidy reduction scheme. This translates into a contribution to real GDP growth of just 0.5 percentage points (pp) this year, falling to 0.2pp next year. Furthermore, the pulling back of government expenditure growth will also have an impact on the state's contribution to investment spending. Meanwhile, private-sector investment spending will continue to be weighed down by weaknesses in the banking sector, which will restrict the availability of credit. We have been talking for some time about the proliferation of non-performing loans (NPLs) in the Iranian banking sector, the effect of which will constrain banks' ability to extend new credit to domestic businesses in the short to medium term. Sanctions Target Investment Spending The new UN sanctions on Iran and, more importantly, the additional sanctions agreed by the US in early July and expected from the EU by the end of the summer, will also have some impact on investment spending in Iran. The impact on foreign direct investment (FDI) should not be overstated in previous years, FDI has accounted for less than 2% of all investment spending in Iran; and, therefore, even the complete disappearance of FDI would not, in itself, unduly damage the economy. However, the new sanctions are intended to do more than just discourage foreign businesses from making direct investment in Iran. They also aim to damage the business interests of Iranian banks and businesses connected with the Revolutionary Guards, the government and the nuclear programme, thereby constraining Iran's own investment capacity as well as restricting its access to technology necessary for the expansion and improvement of the oil and gas sector. This means that Iranian businesses will find it harder to trade abroad, and that banks will have more trouble accessing foreign financing. Even Dubai, which has maintained strong trade links with Iran despite mounting pressure from the US, appears to be pulling back from its financial links with Tehran in response to the latest round of sanctions. Iran Oil in other words, outstripping growth in exports. As a result, we expect net exports to cut 0.3pp from the headline real GDP growth figure in 2010/11, and a further 0.4pp in the following year. Risks To Outlook As ever, an improvement in Iran's foreign political relations, due to an agreement on its nuclear programme, would be highly positive for the domestic economy as it would open the way for greater foreign investment as well as bringing the likelihood of development aid to compensate Iran for relinquishing its pursuit of nuclear power. However, Iran is currently moving further away from this option, as evidenced by the range of new sanctions enacted against the Islamic Republic since our last quarterly report. Iran Oil Sources: 2 CBI/BMI; 3 World Bank/BMI calculation/BMI; 4 Statistical Centre of Iran. Iran Oil *Financial year ending September 31 2009. Source: 2009 company data Table: Key Downstream Operators Iran Energy Sector Company Refining capacity (000b/d) Market share (%) Retail outlets Market share (%) NIORDC 1,451 100 1,100 100 Source: BMI Iran Oil ! Company-specific capacity data, output targets and capital expenditures, using national, regional and multinational company sources; Iran Oil ! Government projections for oil, gas and electricity demand; ! Third-party agency projections for regional demand, such as the IEA, EIA and OPEC; ! Extrapolation of capacity expansion forecasts, based on company- or state-specific investment levels. Cross checks Whenever possible, we compare government and/or third party agency projections with the declared spending and capacity expansion plans of the companies operating in each individual country. Where there are discrepancies, we use company-specific data as physical spending patterns to ultimately determine capacity and supply capability. Similarly, we compare capacity expansion plans and demand projections to check the energy balance of each country. Where the data suggest imports or exports, we check that necessary capacity exists or that the required investment in infrastructure is taking place. Oil And Gas Ratings Methodology BMIs approach to our Oil Downstream Oil Risks To Realisation Returns Evaluates both Industry-specific dangers and those emanating from the states political/economic profile that call into question the likelihood of expected returns being realised over the assessed time period. Iran Oil low penetration scores highly. Growth outlook Oil demand growth, 2009-2014 Proxy for BMIs market assumptions, with strong growth accorded higher scores. Gas demand growth, 2009-2014 As above. Refining capacity growth, 2009-2014 As above. Import dependence Refining capacity vs oil demand, %, 2009-2014 Denote reliance on imported oil products and natural gas. Greater self-sufficiency is accorded higher scores. Gas demand vs gas supply, %, 2009- 2014 As above. Country structure State ownership of assets, % Used to denote opportunity for foreign NOCs/IOCs/independents. Low state ownership scores higher. Number of non-state companies Indicator used to denote market competitiveness. Presence (and large number) of non-state companies scores higher. Population, mn Data from BMIs Country Risk team. Indicators used as proxies for overall market size and potential. Nominal GDP, US$bn As above. GDP per capita, US$ As above. Risks to realisation of returns Industry risks Regulation Subjective evaluation of government policy towards sector against BMI-defined criteria. Bureaucratic/intrusive states are marked down. Privatisation trend Subjective evaluation of government industry orientation. Protectionist states are marked down. Country risk Short-term policy continuity risk CRR. Evaluates the risk of sharp change in broad direction of government policy. Short-term economic external risk CRR. Evaluates vulnerability to external economic shock, the typical trigger of recession in emerging markets. Short-term economic growth risk CRR. Evaluates current growth trajectory and states position in economic cycle. Rule of law CRR. Evaluates the governments ability to enforce its will within the state. Iran Oil & Gas Report Q4 2010 © Business Monitor International Ltd Page 114 Table: BMIs Downstream Oil And Gas Business Environment Ratings Methodology Indicator Rationale Legal framework CRR, to denote risk of additional illegal costs/possibility of opacity in tendering/business operations affecting companies ability to compete. Physical infrastructure CRR. Evaluates constraints imposed by power, transport and communications infrastructure. Source: BMI Sources Sources include those international bodies mentioned above, such as OPEC, the IEA, and the EIA, as well as local energy ministries, official company information, and international and national news agencies.