As goes Iran’s election, so goes its oil sector

The republic's presidential contenders would have widely varying impacts on the national petroleum industry.

Iran's incumbent presidential candidate Hassan Rouhani, right, and his vice president Eshagh Jahangiri. The country's election on May 19 has major implications for the future of its oil industry. Abedin Taherkenareh / EPAShow less

Not only western elections feature populists with reckless economic plans. Where the former Iranian president Mahmoud Ahmadinejad promised to “put the oil money on the tablecloth”, challengers in the current election pose a danger to the country’s vital oil industry.

In (often unreliable) polls, the incumbent Hassan Rouhani has a strong lead over his two closest challengers, the hardline cleric Ebrahim Raisi and the conservative mayor of Tehran, Mohammed Bagher Ghalibaf. If he were not to win outright, there would be a run-off a week later.

Mr Ahmadinejad’s tenure was disastrous for the Iranian petroleum industry. He took office promising to clear out the “petroleum mafia” but raised oil ministry employment from 100,000 to 250,000, fired experienced managers and installed cronies. Billions of dollars of oil revenue went missing in corruption scandals and insider privatisations. Long negotiations with international oil companies led only to dozens of preliminary agreements.

Field development contracts went instead to political favourites, particularly the Revolutionary Guard’s arm Khatam Al Anbiya, which struggled to complete them because of mismanagement, lack of finance and unavailability of key equipment as sanctions tightened.

Mr Rouhani’s government has worked diligently to clean up the mess, end sanctions and restore Iran’s oil exports. So far, as with the wider economy, this has been a job of recovery rather than progress and the common complaint against him is that Iranians have so far received little benefit from the nuclear deal.

His administration has stated that the oil and gas sector alone requires US$200 billion of investment over the next four years. That is equivalent to Iran’s entire oil export earnings over the same period, at current prices. Any president will face the same compulsion – large-scale foreign investment is the only way to sustain oil production and keep boosting gas.

Oil production recovered quickly last year to almost pre-sanctions levels but in recent months has been flat or even slipped. Gas output has surged since 2015 as long-delayed phases of the world’s largest field, South Pars, have come into service. For the first time, Iran has enough to meet its domestic needs, supply a plethora of petrochemical projects half-built in the Ahmadinejad years, reinject into its ageing oilfields and launch new exports to countries such as Iraq, Pakistan and Oman.

But this favourable situation will not last long: domestic demand keeps rising while, in the absence of firm deals with foreign investors, oil and gas will experience little medium-term growth. International oil companies have been holding off on firm commitments and the elections, and then Donald Trump’s required sanctions waivers next month, are reasons for further delay.

Mr Ghalibaf has made impossible promises on economic growth and job creation. Nevertheless, he would probably be a pragmatic, technocratic type of manager. Mr Raisi, with limited relevant experience, has pledged unaffordable increases in cash handouts to lower-income Iranians. He may opt to hew more closely to the supreme leader Ali Khamenei’s line of a closed “resistance” economy, which cannot possibly generate the required investment and expertise the energy sector needs. Both would hand more petroleum projects to the Revolutionary Guards to shore up their base.

A win for either conservative candidate would probably lead to Iran losing international sympathy, and lead to a less open foreign policy, more in hock to Russia and China. That in turn would alienate international oil companies and raise the odds of a breakdown of the nuclear deal and the return of strict sanctions.

Mr Rouhani has instead promised to get all remaining sanctions lifted, an unlikely goal. Should he win, his second term needs real results – new projects, firm contracts with leading international investors and increasing oil and gas output. Oil money has first to be earned before any of it can appear on ordinary Iranians’ tablecloths.

Robin Mills is the chief executive of Qamar Energy and the author of The Myth of the Oil Crisis

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