December 27, 2021 [Shana-ir] – The head of corporate planning of National Iranian Oil Refining and Distribution Company (NIORDC), Ali Reza Arman-Moqaddam says Iran will have to opt for petro-refineries in order to develop its refining industry.
Although a 300,000-b/d petro-refining facility with crude oil feedstock would require $10 billion in investment, incentives are expected to draw in both local and foreign investors.
Arman-Moqaddam told “Iran Petroleum” that petro-refineries would aim to diversify petrochemical feedstock and generate more revenue from Iran’s oil resources, not to mention profits from the conversion of crude oil and gas condensate to valuable products.
Here is the full text of the interview Arman-Moqaddam gave to “Iran Petroleum”:
What are the development scenarios of Iran’s refining industry, considering the energy intensity in the country, as well as plans to enhance crude oil refining capacity?
In the development of the refining industry, several issues are considered as key requirements, such as prioritization based on available resources, balancing export and domestic production programs to prevent the sales of raw materials and promote production of higher value products and sustainable supply of fuel needed by the country. In addition, how to implement consumption management programs is also of particular importance. In the case of gasoline, the current balance of production and consumption is positive, but if consumption keeps growing, in the near future, this balance will become negative and in other words, we will become gasoline importer. According to the documents and regulations of the High Energy Council, the consumption of energy carriers in the country should be managed in accordance with the requirements of efficient use. To that effect, the transport sector’s energy supply document up to horizon 2041 has been drawn up so as to take into consideration the fundamentals of energy efficiency and upgrading energy output, and hybrid fuel and electricity would constitute a 6% share of the transport mix by then. The gasoline consumption is expected to reach 94 ml/d by that time. Constructing petro-refineries is expected to meet such objective.
For instance, should we fail to find a reasonable solution to contain the gasoline consumption now, the gasoline consumption would reach 160-170 ml/d by 2041, in which case petro-refinery construction would make no sense and all refineries in Iran would have to run at full capacity for supplying gasoline and no feedstock would remain for petrochemical plants. Therefore, now, based on the assumption that energy efficiency policies would be implemented in coming years, construction of petro-refineries in Iran is economically viable. If we fail to exercise efficient energy use, development of the refining industry would be exclusively based on fuel supply. In the near future, petro-refineries would be no longer economically viable in terms of energy supply priority.
Now that all eyes are fixed upon renewable energies, while the future of investment in fossil energies is faced with buts and ifs, is it economically viable to invest in petro-refineries?
The extensive petroleum products and petrochemical markets, the facility of exporting such products compared to crude oil and its immunity to sanctions are among the advantages of development of the refining and petro-refining capacity in the country and leaving behind selling raw materials. Building petro-refineries is not merely an economically viable project with job creation advantages; rather, it is a strategic solution for blunting the impact of sanctions. Many nations have already planned to increase the share of renewables in the energy mix and therefore fossil resources are directed to development of petrochemical products with a burgeoning market. Under these conditions, competitive markets will take shape and the cost price of products will be the key decision-making element in the competitive market. Integrating refineries and petrochemical plants would enable us to reduce expenses. Therefore, petro-refineries would diversify products of higher value-added, reduce the cost price of products, boost output and profitability and reduce energy consumption. That is why they are considered a suitable strategy for economic development. Despite the economic viability of petrochemical megaprojects, the main challenge for implementing these projects would be financial restrictions, as is the case with any other megaproject.
How are we going to build a petro-refinery under the present circumstances?
Establishing a petro-refinery as a megaproject, worth billions of dollars, would require a large number of fundamentals. One of these requirements is protective law to facilitate the process of implementation of the project. In this regard, the Law on Protecting Crude Oil and Gas Condensate Downstream Industry with Public Investment, adopted in 2019 by the Iranian parliament, and the amendment to this law along with its executive bylaws provide good support to such projects. Using the incentive of feedstock supply would guarantee reimbursement of facilities throughout construction, which is unique. As far as the process of using the facilities of this law is concerned, I have to recall its history.
In 2019, Iran’s Petroleum Ministry called for the establishment of refinery. A total of 74 companies bade for this project, 42 of which uploaded their documents on the NIORDC website. Following the implementation of formal, technical and financial assessments, finally 19 projects including 8 new refineries and 11 qualitative upgrade projects in current refineries were approved. Another key requirement for implementing this project under the present circumstances is precise and expert planning for financing through diverse resources including equity provision, absorbing resources from the capital market as well as banking facilities. Of course, we recommend that those applying for these projects set up syndicates and unions under the present circumstances to integrate their capital for projects of higher priority.
Are any refineries expected to be repurposed to petro-refineries?
Some of existing refineries, after undergoing quality upgrading, would be able to supply products which could serve as feedstock for petrochemical plants. However, as the main processes are fuel-based, they would be still known as refinery. Regarding new projects, although the initial permit has been given to most of them under the title of refinery, the main projects are in the process of changing their license to petro-refinery owing to the feedstock supply incentive enshrined in the law. It seems that of 8 new projects, 6 would be looking for license for petro-refinery.
How much is needed for building a petro-refinery?
To build a 300,000-b/d petro-refinery with a 35% conversion ratio of petrochemical products, $10-11 billion investment would be needed. Such figure is big enough when compared to normal projects under way in the country. But attracting such investment would be possible during a four-year period. That is why we have recommended that applicants integrate their investment with a view to providing more suitable conditions for implementing a full project. Meantime, changing the processing paradigm by reducing the ratio would reduce investment needs.
How much do we need for building the eight refineries whose licenses have been granted?
In case applicants look for building refineries based on the initial licenses, totally $40 billion would be needed, inclusive of financing expenses. If we assume that some of these projects would shift to petro-refineries, more than $60 billion in investment would be needed.
Is this industry attractive enough to draw in foreign investors?
Given the fact that the economic incentive of feedstock supply, which guarantees investment return, has been implemented as a supporting solution for reimbursement of investments, sufficient attraction has been created for both local and foreign investors from an economic standpoint. However, in addition to economic attraction, absorbing foreign investment would largely depend on Iran’s external political and economic relations with the financial and commercial bodies of other nations. In terms of investment viability in the petro-refining sector, we have to take into account its processing pattern, too. For instance, one of the major crude oil fractions is naphtha which is widely used at refineries for producing gasoline. That is while at petro-refining plants, the bulk of naphtha is used for producing aromatic petrochemicals and olefin. In light of the significant price difference between gasoline and petrochemicals, creating significant profitability, the burgeoning petrochemical market, particularly in regional and global markets, would create the necessary incentive for investment under normal international circumstances.
Are you currently focused on building petro-refineries?
As undeniable fact, development of the refining industry in Iran is inevitable. This industry is required to be developed by prioritizing the qualitative upgrade of current refineries. As part of the Ministry of Petroleum’s strategy to increase the refining capacity, construction of petro-refineries is on the agenda. Therefore, the focus of NIORDC, as the administrator of development in the refining industry, lies on preparing the ground for implementing projects to upgrade quality of the current refineries and enhance the refining capacity through developing petro-refineries with sufficient financing in the mid-term and long-term. Meantime, development planning in this industry mainly relies on financial and management capabilities of the private sector.
Where does Iran’s refining industry stand currently?
Currently, 10 refineries are operating in Iran with a total crude oil and gas condensate refining capacity of 2.2 mb/d. In case there is no abnormal consumption of fuel in the country, the refining industry could ensure the country’s fuel need supply and even facilitate petroleum product exports. Iran’s ten refineries are producing 105 ml/d of gasoline and 110 ml/d of gasoil. In addition to that, over the past two years, due to restrictions caused by the coronavirus and long lockdowns, gasoline consumption rate had declined to some extent. But as soon as the vaccination campaign accelerated, gasoline production in Iran has been increasing. Under such circumstances, the key point is the risk of growing consumption in various sectors for various reasons including inefficient use of energy commodities due to low-cost fuels and non-application of effective mechanisms in management, in which case, the production-consumption balance would face a challenge.
How many refining projects are currently under operation?
We’re currently witnessing new projects in all refineries across the country. In the Persian Gulf Star refinery, operational debottlenecking for enhancing capacity is in its final stages, while in the nine other refineries, mainly quality upgrade projects are under way in different phases. For instance, at the Abadan refinery, capacity development and stabilization project is under way in addition to the renovation of older sections and upgrading the quality of products. It has been financed by China. At Shiraz, Isfahan and Tehran refineries, there are also quality upgrade projects under way at various stages. In other refineries, there are also projects under way aimed at upgrading the quality of heavy products.
How are they financed?
The projects under way in current refineries are divided into two categories in terms of necessary investment. The first category consists of projects pertaining to optimization and quality upgrade of light and middle distillate products, which are financed by domestic resources of refineries, as well as financing instruments based on the capital market. Examples are gasoline manufacturing or gasoil hydrotreating projects. The second category includes refinery projects pertaining to the quality upgrade of heavy products, which would require much higher investment due to the technologies needed in them and the necessity of using a large number of processing units and sophisticated equipment.
Regarding these projects, a combination of the financial resources portfolio, including the investor’s income, domestic banking facilities, capital market capacity and financing, is used. Of course, financing is faced with challenges now. As for new refining and petro-refining projects, the necessary investment depends on the capacity and the process of the project. For instance, the capital needed for a crude oil petro-refinery of 300,000 b/d is about $12 billion. For these projects, due to the high volume of investment needed for them, a portfolio similar to what was described is used for financing.
Have you held any negotiations for attracting foreign investment?
Before this new phase of sanctions became operational, in 2015 and 2016, financing of most quality projects at current refineries had become nearly finalized. For instance, we had reached good agreements with Japan for financing and technology at two refineries and we had made good progress in technical and contractual issues, but after the US unilaterally pulled out of the JCPOA (the 2015 Iran nuclear deal with six world powers), our talks came to a halt and we lost the chance of development. We had also struck preliminary agreements with South Korea, which were halted, too. Even for financing new projects at Jask and Siraf, Japanese and Korean consortiums were expected to provide necessary finance. At that time, we needed about $15 billion in investment for quality upgrade projects at five operating refineries. Implementation of those projects could practically boost the quality of all products in the country, while helping convert fuel oil to high-value products such as gasoline and gasoil. But that did not happen due to the US pullout of the JCPOA.
Have you halted development projects?
No, we haven’t. We have redesigned the refinery development projects by making some modifications in the processing patterns with the help of local contractors. Currently, some of them are close to operation. For instance, after we failed to go ahead with the Japanese the project envisaged at the Bandar Abbas oil refinery, we considered a new method for development. We reached agreement with the Research Institute of Petroleum Industry (RIPI) for technical savvy provision. The design phase has made very good progress. After this phase, we will go into the investment phase. Based on a new project for the Bandar Abbas oil refinery, we would need $1.3-1.5 billion in investment. If we wanted to go ahead with the Japanese, we would have needed $4 billion in investment.
How many refineries are expected to be built under new development projects?
A relatively high number of licenses have been issued for building refineries, 11 of which are being pursued more seriously. It is noteworthy that for the purpose of making investment attractive for the construction of refineries and petro-refineries, the Iranian parliament adopted a law on feedstock supply. Of the said 11 projects, 8 have been defined within the framework of this law. These projects include five running on crude oil with a total capacity of 1.22 mb/d are under way in southern coasts. Moreover, three refining projects with condensate feedstock are under construction in the Siraf area with a total capacity of 240,000 b/d.
Is it clear which of them would become integrated refinery and petrochemical plant?
The initial license for most of these projects, except for two, pertains to refining. But recently, most of these projects are expected to become petro-refinery in a bid to benefit from the incentive provided for in the parliamentary law and financing advantages.
Once these projects have been implemented, how much would be Iran’s refining capacity?
Currently, Iran’s crude oil and gas condensate refineries treat about 2.2 mb/d. Regarding enhanced capacity through new projects it is clear that due to the high volume of investment, implementing all these projects simultaneously would not be possible. However, with the assumption of setting a timeframe for the implementation of these projects and the startup of a total of 11 refining projects, Iran’s refining capacity would have increased by more than 1.7 mb/d, but as I mentioned before, it is not possible under the present circumstances. However, if the projects are prioritized and with the assumption of creation of suitable conditions in the international and economic sectors, increasing the refining capacity by about 750,000 b/d would be possible.
Where does the refining renovation stand now?
All sectors of the petroleum industry need improvement and reconstruction on a regular basis. That is done in refineries, like similar industries, through technical inspection monitoring and decrepit parts are handled through overhauls and some installations are practically renovated. It is noteworthy that in the economic feasibility phase, the useful life of a refinery is considered between 25 and 30 years, but the real life of refineries in Iran and other nations is much higher due to overhauls and implementation of numerous improvement and reconstruction projects. For example, the Abadan oil refinery was initially built more than a century ago. The useful life of the Tehran refinery is more than 50 years and that of Isfahan refinery is more than 40 years. Regarding the Abadan refinery, we have defined a development project, which is currently under way by the Chinese. Coincidentally, this is one of the projects that had been planned when the JCPOA was effective. The first phase of this project would come online during the first half of next calendar year.
How much was the average gasoline production and consumption recently? To what extent did covid-19 affect Iran’s gasoline consumption?
Iran’s gasoline production recently averaged 95 ml/d and its consumption reached 85 ml/d on average. Regarding the impact of the coronavirus outbreak on the gasoline consumption, it was affected by covid-imposed lockdowns last calendar year, which reduced it to 75 ml/d, down from 90 ml/d year-on-year. For the current calendar year, if we divide it into pre-vaccination and post-vaccination periods, we can clearly see the impact of eased restrictions on the gasoline consumption. Vaccination accelerated in September. Before that, the gasoline consumption had averaged 83 ml/d. In September, it was up 7% to 89 ml/d.
How can we control the growing trend of gasoline consumption now so that we would not have to import in coming years?
An important issue in the energy sector is sustainable fuel supply all over the country. This issue is being pursued through developing refineries. However, in my view, the more important part would be to implement consumption management plans. In case the objectives of efficient energy use, reduced energy intensity do not materialize, in the near future, we would experience the negative production-consumption balance even if the refining capacity is developed constantly. Planning and implementing consumption management plans would entirely depend on coordination between all legislative and executive organs and collective cooperation. That is only in such case that development of petro-refineries would make sense and instead of fuel production, part of products may be directed to valuable petrochemicals.
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