RESTRICTED '0 Repor! !J4. SA=2 3 a r-- -1 This report is for official use only by the Bank Group and specificaly authorized organizat.ons or perss. It n-uay not 'be published, quuoed or c-iuic Wthout Bank Group authorization. Ine Bank Group does not accept rcsponsibilhity for the accuracy or oJmpleteness of the report. INTUETNlA IONAL BANK FOR u < u'J.I. u ANND k VJ,LUVL zN INTERNATIONAL DEVELOPMElNT ASSOCIATiON CURRENT ECONOMIC POSITION AND PROSPECTS OF TrD A 1MT (in seven volumes) VOLUME II 'T'LT -t]- t"-~ rT) T rN =r T I rT C. & c- r- m '. THEI I AZ, XTE .I\. LL L VI SrC;0.,)Z.' I May 18. 1971 South Aksia Depatrneiit 0! I DwD ttfflV. IT QZ~" - 'bt ff 1! Ju LI u 'AV,y L. U . 1.J -4) 1 . J ! . i rIThTTrc i?;ttAV oo ............................* ................ 2 _ World Energy Demand ........ 26 U±4.. JuyjJ±y~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~% - ULII -J L JA iO Government Take Per Ton of Oil ........... 31 II. ASPFCTS OF DOMESTIC ENFERGY DEMAND ............... 32 InIi,rodUuuuu.i. . .... A. Past Trends in Energy Demand .. ............. 32 Domestic Consumption of Oil .*..... . ...... . 34 Refining for Internal Requirement ....... . 36 Distribution and Pricing of Oil Products 39 Domestic Consumption of Gas ..* ......... 43 Gas as a Substitute for Oil ............. 46 B. Future Energy Demand . . ..................... 46 II:r. NATIONAL IRANIAN OIL COMPANY .. .................. 49 Historical Background and Present Structure .... 49 Production and Disposal . .................. 50 Refineries .. ........................ ....... 50 Current Projects ...... ....................... 51 NIOC's Subsidiaries ...... ....................... 54 NIOC Revenue Payments and Dividends ........... 54 Page No. IV. GOVERNMENT REVENUES AND SALE OF OIL IN GNP AND FOREIGN EXCHANGE EARNINGS ................... 0 ... 56 Introdut,tion ... . .56 Royalty and Income Tax Payments . ............ 56 Natural Gas Exports ........... .............. . 57 Iz direct Taxes . ... .......... 57 P yment.s by NIOC . . . 57 Total Government Revenue . ...... 57 Contribution of Oil Sector to GNP . .60........... 60 Foreign Exchange Earnings ...................... . 60 APPENDICES I. THE FEBRUARY 15, 1971 AGREEMENT ...... ......... 1 - 3 II. CAkLGULATION OF' REVENUE FROM REFINERY OPERATIONS .... 1 2 TTT, THF TRANTN CrAq TRIINT.TNEP (TGAT) 0...... .... = 1-10 TIV TWF T.T RYAj fnTT. AOIPPTYFNT 1 - 2 This report, which was prepared by Frank Stubenitsky, is; part of the findings of the Economic Mission which visited Iran in October/November, 1970. LIST OF TABLES AND MAPS Table ro . Page No. 1. Net Crude Oil Production .. 2 2. World Oil Producing Countries & World Oil Production: 1959-70 .... .............................. 3 3. Estimated Oil Reserves: Bv Field on 1/1/69 4........ h 4. Export of Crude Oil ............................... 6 5. Consnortiim ridi nil F-nort qnd Througrhput, to.Abadan Refinery: 1960-7u ...................... 7 6. Destination of Crlde Oil E m orts by the Consortium 1964-69 ............................. 8 7 nq+.inq+r,n nr Oil Prn-iiit. FmwI-c 1w fhA Consortium 1964-69 ............................. 13 8Q. Additional Foreign vcchange P.cit frm h Consortium and other Foreign Oil Companies ................................... 15 9. O011l E.=orts cand P.evenues ............................................ 19 10. Oil Revenue Projections .......................... 20 ±J . ruosUL,U L.LIttd ALUL U)Y 1LIkUti 1C.Y IL4L+ .. . .q 12. Inter-Area Oil Movements - 1969 .30 13. Domestic Energy Demand: 1960-69. 33 14. Income Elasticity of Demand for Energy 1960-69 35 15. Domestic Conswrption of Oil Products ..............37 16. Refining of Crude Oil: 1964-69 ..... .............. 38 17. Changes in the Output of Transportation System Compared with Real Consumption of Oil Products 1960-69 .................................... 40 18. Average Rate of Transportation of Crude Oil and Oil Products, by Mode of Transport: 1960-69 ...... 4i1 19. Breakdown of Main Petroleum Product Prices: 1970 42 20. Produiction and Consumption of Gas ....... .......... 45 21. Projected Internal Energy Demand: 1972-82 h........ 47 22. NIOC Investment Program - Revised Fourth Five-Yeair Plan .......... .................................. 52 23. Direct Investment by the Consortium, Other Foreign Oil Companies and NIOC .......... ....................... . 53 24. Government Income From Oil Sector: 1965-69 ......... 55 25. Taxes and Dividends Paid by NIOC to the Government 1965-69 ................................ .0................. 58 26. Government Revenue and Income from the Oil Sector ... 59 27. Contribution of Oil Sector to GDP and GNP ....... 61 28. Contribution of Oil Sector to Foreign Exchange Ear Earnings .... ... 62 Map 1: The Agreement Area Map 2: Off-Shore Concessions of NIOC's Joint Venture Agreements SUMMARY i. Iran continues to rely heavily on the oil sector. In 1969/70 the GNP contribution of oil amounted to 13.9 percent, and oil revenues represented some 54 percent of total Government revenues, a share that has remained at roughly the same level during the past five-year period. The foreign exchange contribution of the oil sector also reached an extremely high level; in 1969/70 some 82 percent of foreign exchange receipts from exports of goods came from oil, and for the year 1970/71 the share is expected to increase to 82.5 percent. ii. Three types of operators are active in the Iranian oil sector;: (1) th,e Consortium, a group of European and U.S. oil comDanies that took over the exploration and exploitation from the nationalized Anglo-Iranian Oil ComE nnnv (2) the National Trania n-Oil Gompan;v responsible for over1l exploitation of oil resources in Iran, and also for domestic distribution and sale of oil (rtoducts, (3 the fonreiogn oil comnanies, opTating since 1957 in joint venture with NIOC. iii. The Consortium is the most important operator in Iran; its share is 0 ovec,r °,O Ypercent of 04 &' Troucio In --porti of4- -c --4- oil. -It a:Lso--' operates the Abadan refinery both for export and internal consumption OJ oil products. Reven.ues from Consortium operations represent some 96 percent of total income from the oil sector accruing to the Government. iv. NIOC is mostly operating in the domestic market, and is responlsible for supplying internl deman-L u d for petroleuLm productis. To thiLs end, it operates several refineries, a pipeline network, and road transportation and retail out- lets. NI'CU is also engageu in exploration and exploitation, both on it.3 own account, and in conjunction with foreign partners. Several of' NIOC's joint ventures are in full operation now, producing about 10 percent of Iran's overall output; the majority however, are still in the exploration stage. v. Two wholly-owned subsidiaries of NIOC are responsible for petro- leum related fields, the National Iranian Gas Company for the distribution and sRle of gas, and the National Petrochemical Company; the activities of the latter company are fully discussed in a report by the Industrial Mission which visited Iran in early 1971. The NIGC will ultimately assume respon- sibility for the Iranian Gas Trunkline (IGAT); its activities at present are limited. vi. Short- and long-term prospects for continued growth in the oil sector in Iran are quite good. Exports are expected to grow by 10 to 12 percerLt annually, and per ton revenue around 4 percent. This would result in 14 to 16 percent yearly increases in overall revenues to the Government, which is roughly the same growth rate achieved during the past decade. The year ]-971/72 however, shows a'sizeable discontinuity in the series due to agreements ccncluded in November 1970 and February 1971. Government revenue from the external oil sector will increase by almost 60 percent over the level obtained in 1970/71. - ii - vii. The five year agreement that was signed in Tehran.on February 15, 1971, by six Persian Gulf oil producing countries and representatives of international oil companies embodies several new concepts. One of the most important features is the increase of posted prices, around 2.5 per- cent annually, that is deemed to compensate these countries for sinliar price increases of their main import items. It marks the first instance where producers of commodities are attempting to maintain parity in the prices of their export products vis-a-vis imports. Iil-ROD'UJC1'ION Foreign and Domestic Operators 1. The Iranian petroleum industry consists of a foreign operated, and export oriented, sector, and a domestic sector where the National Iranian Oil Company (NIOC) has full responsibility. In the foreign enclave sector two types of operators can be found: (i) a group of European and U.S. oil companies, successors since 1954 to the Anglo-Iranian Oil Company, and commonly referred to as the Consortium, and (ii) other foreign oil companies, operating in joint venture with NIOC since the late fifties and middle sixties. Domestic distribution and sale of petroleuim products is the prerogative of NIOC; the company is also engaged in exploration, exploitation and refining on its o*w accomnt, and has recently exported modest quantities of oil in the context of barter trade agreements. 2. Whenever the pivotal role of oil in the Irani,an economy is discussed, it is with respect to the foreign operated, though Iranian owned, enclave sector. Growing at close to 14 Dercent during the Dast decade. and at over 16 percent from 1964 to 1970, the GNP component of this enclave oil sector is the third largest comnonRnt of the eountrv's gross natiOnnl nrodnct- Not. only did this oil sector represent almost 14 percent of GNP at market prices in 1Q(Q/70, it. also prn o ner riphri - qm hI -,r d nri w±ithrt. Tmrlh affor-t. on the prmt-. of Iran, over 71 percent of exchange earnings from export of goods and services; if' ser"vic are excluded the percen+tage share 4U o 1 .rn.+ A9 4 1 040 /7r Tn addition, oil income constituted around 55 percent of overall Governrrient revenue. Production and Reserves 3. The growth rate of oil production in Iran has been quite high, reach- ing almost 14 percent for the years l979-l969; over the pas flvte years (1X64.- 70), the increase has been 14.3 percent (see Table 1). At the same time, wor.lu oil. production increased by aruwiu 8 percent, and oil exports Dy some 11 percent annually over both the decade and the five year period 1959-69 and 1964--70 1/ (see Table 2). In 1967 Iran became the fourth largest oil producer, behind the U.S., the USSR and Venezuela 2/, and it is now the world's .Leading exporter. 4. The only figure now available to the mission on oil reserves is that of the 1970 International Petroleum Encyclopedia. Many of the individual oil fields that are listed are quite old, one dating from the year of the first oil strike in Iran, back in 1908 (see Table 3). According to this tabulation, which excludes some of the more recent oil finds, Iran's reserves 1/ Latest available data from B.P. Statistical Review of the World Oil Industry, 1970, indicate that 1970 world oil production increased by 9.6 percent over the level of 1969. Iran's output grew by 13.5 percent to 190.7 million tons. 2/ In ].967 Iran passed both Kuwait and Saudi Arabia; if Neutral Zone produc- tion is included, then Iran's production exceeded that of Kuwait in 1967 and of: Saudi Arabia in 1969. Table 1 NET CRUI)E OIL PDDUTCTION ("Million Metric Tons) G-RO)WTH -jA, E:S 1964 1965 1966. 1 967 1968 1969 1970,1/ 1l9I 70 1970 (EstimaLte) % Iranian Oil Opera- (IrCc) 83.0 90.4 100.9 123.3 135.6 155.0 172.0 13.9 11. 0 ting CompaLnieas …-…=… Iran - ParL American (IPAC) 0.2 2.3 3.2 5.0 .1 5.2 4. 5- - 13.5 Oil Company Lavan Oil Company (LAP5O) - - - - 0.7 6.0 7.0 - 16$.7 Irano-Italian Oil-- (SIRip) 1.3 1.2 1.2 1.0 0.9 1.3 1.6 3.5 23.1 Company Iranian Marine o(IirNIo) - - - - - 0.8 4. 4 International Oil Qo. National I'raniLan Oil (NIOC) .0.4 0.4 0.4 0.4 0.5 0.5 0.5 3.8 . 0 Company Production of other o:il companies 1.9 3.9 4.8 6.4 7.2 13.8 18.C) - 30.4 TOTAL (may not add due to 84.8 94.3 105. 7 1:29.8 1h2.B 168.7 l90.0 114.3 12.6 rounding) IOOC'sI % share in total 97.9 95.5 95.5 95 .0 95.0 91.9 90.5 production 17Produc:tion estimates for all companies, except IOOC, were given bDy NIOC. The figure for IQ0C output was derived from two estimates, one by IO0C of some 1.68.b. million Mtons, and the other by NIOC of 175.7 rmil:Lion Mtolas. The 172 million Mton figure is the Mission' s estimate. All orig:inal estimates were suppliedl in barrels/year, and were converte4 jnto metric tons at the rate of 7.,303 barrels = 1 Mton. Source: National 'Eranian Oil Company Table 2 WORLD OIL P.HODUCING COUNTRIES & WODLD OIL PIiRODJC0IC)'1 :1 959-70 Wl2illion Tonrs) 3/ 3/ 1959 H2t0 196'1 1962 1963 1964 1965 1966 19t67 1968 1969 1 970 % Share 1959-1965r 1964-1969 - in 1 969 USA- 350 350 357 364 375 379 388 412 438 4553 458 534 21 .3 2.8 4.0 JSSR 130 148 166 1i86 206 224 243 265 228 309 328 353 15.3 9.8 8.0 Venezuela 144 1 49 152 168 170 177 182 177 186 190 189 193 8.8 2.8 1.5 Iran 46 '53 59 66 73 85 951 105 129 142 168 190 7.8 13.8 14.5 Libya - - 1 9 22 41 59 72 84 126 150 159 7.0 - 29.5 Saudi Arabia&2/ 54 62 69 76 81 86 101 119 129 141 149 176 6.9 10.5 11.5 Kuwait.;-' 70 82 83 92 97 107 109' 114 115 122 130 138 6.0 6.5 4.0 World 1,012 1,091 1,1 62 1,262 1,353 1,461 1,564 1,660 1,822 11,991 2,145 2,334 100.0 '7.8 8.0 (1 ,976X2,l35) 1TExcludi.g production of natural gas liquids for 1 9cO-797T-9; the 1 970 statistic includes natural gas liquLids and Canadian synthetic oil. 2/ Excluding production in Nieutral Zone. , .rIe percentage arnuaL growth rates have not been calculated to include '1970, because if some major diLffereinces in the two information sources. Source: BP Statistical Rev-Lew of t'he World Oil Industry, 1969 for 196)-1 969 data. For 19O tne estimates are derived from Petroleum Press Service, January 1971; th.e totas between brazkets for 1968 and 1969 are also from this source. - l; - T' rrI AM r;.TE OIL r%rTwE'nTvrT,S BY't rr TE cQ my 1/1/6 fl~i±PI~i~iJU±ij flIIz flIVr'O 1D.L£ 14 UI'i- 1 _/f U71 (million tons) Year o l!,.e of4 T, SI ,4 e 1m at--' nye Field DiseveyEIJ Wells 1-e serves Production Production Ma8J2 I-e - Suleiman 1908 24 115.3 1.1 1414.9 Gach Saran 1928 214 891.6 27.1 201.2 Hsft, Kel 1928 10 45.2 3.4 269.9 Agha Jari 1938 ll1 799.2 30.6 502.3 Ahwaz 1958 214 763.8 9.1 58.0 Darius 1961 10 119.0 9.8 17.9 Bibi Hakimeh 1962 15 5814.7 114.9 31.7 Karanj 1963 lx 1614.1 )j. 1 15.3 Faris 19614 3 le10.9 1,0 2.1 Marun 196h 20 795.2 16.6 26.7 Noroz (I'ersian Gulf) 1967 -- 111.0 Rostam (Persian Gulf) 1967 -- 136.o _asan 1967 -- 20- 175 5,072.7 117.8 1,276.1 Source: International Petroleum Encyclopedia, 1970, p.244. -5 - are estimated at more than 5 billion tons at the end of 1968. Production in that vear was 142 million tons; the reserve:output ratio therefore amounted to more than 35 years production at the 1968 level, and to over 30 anid 26 vears at the outout reached in 1969 and 1970 respectively 1/. iY^ort nnd T'helr DestnMaton r,-mr1n r1 nl-rn"+.- lhfTinyaf,T h v n1mncq±. 17 nprnant. nnniinllv 1 during theyears 1964-70, reaching 183.7 million tons in 1970 (see Table 4), and m.king Tra the world's leading r. por%, 9/ Tn adintion, GonQorti rn crude oil throughput in the Abadan refinery, also exported, amounted to over J - L4 -L.i JdSJ 4LJ.J . U~JI iO Jt~. +4,,-A --,f5 O1*OU C---+LAO O.O'A by 14.8 percent in the 1964-1970 period; shipments from the joint venture concession, UIichory 1ecentlVy ca..eULV -into E,oc-tio grew atew ; he rates.. 6. The overall destination of Iran's exports is not known, but data from the Consortium indicate that Western Er ope and Japan - wile switching first and second position - have remainedtlie most inportant customers. Together they account for almost 3/4 of iras crude oil export from the Consoi-uluTi Agreement Area, which in turn represented some 90 percent of total Iranian exports i:n 1969. Other Asia, and South Africa and East Africa account for the 25 percent (Table 5). Developments in energy demand of these areas will have a crucial bearing on Iran's future export potential; some factors affect- ing these developments are (i) growth in GNP, (ii) associated growth in. over- all energy demand, (iii) prices and availa-bility of other energy sources, (iv) discovery and exploitation of oil fields. Paragraphs 40-42 will cover these matters in greater detail. 7. Petroleum products are now of minor significance in the overall export picture, amounting to 14.4 million tons in 1969 (see Table 6), and an estimated 16.3 million tons in 1970 3/. Crude throughput of the Abadan 1/ For comparison, Venezuela's proven reserves at the end of 1969 amounted to over 2 billion tons; in terms of life at 1969 production this cane to 11.3 years (Volume III - Current Economic Report, No.CA-5a). 2/ Exports of crude oil, in million tons: (Estimate) Growth Rate 1967 .1968 1969 1970 17I W967-70 Venezuela 160.1 T6F.8 I75. 6 T7i-6 I7b-4 0 Irl Iran (including Abadan 122.3 133.8 158.7 183.7 20O 3 11h9't throughput) 3/ Crude throughput on account of the Consortium totalled 16.3 million tons in 19Q69 and 17.0 mnillinn tnns in 1970. PoReinpn oss n,rnmnir.i- +to :r.uighltr ].0 percent. Table 4 EXPORT OF' CRU]DE OIL (M:Ll-lic,n- ton-s) Growth Rates c64 1965 19_66 ig967 1968 19 1970 L 1970 94Estinate) % Iranian Oil. 0peratiag Companies (IoOC) 7E.1 E 25 122,1 ulT.kLR 16a 7 ;LLL ]L!L of whicht crude export 69.7 80.5 101.3 .10.9 127.9 146.7 . l4.5 la.5 i throughput Abadan rerinery 15.1 15.0 15.0 15.0 16.2 16.3 17.0 2.1 4.3 National Iranian OiL Ccompany 1/ (NIOC) - - - 0.3 1.6 2.5 - 56.3 Export from Consortiu, Agreement Arela 78.1 84.7 95.5 116.3 1.27.4 145.8 166.2 13.4 1.4.0 0*. Iran Pan Anerican Oil Company (IPPAC) 2.4 3.1 4.9 5.2 5.1 4.5 - -11.8 Lavan Oil C ompany (LuPCO) - - - 0.3 5.9 7.0 - 18.6 Irano-Italian Oii Company (s;EREP) 1.3 1.2 1.2 1.1 0.9 1.3 1.6 3.5 23.1 IraniaLn Marine Inte:rnational Oil Company(IMINICO) - - - - 0.6 4.4 - Expcirt from other producingy areas 1.3 3.6 4.3 6.0 6.4 12.9 17.5 - .3.6 TOTAL 750.4 88.3 99.8 122.3 1.33.8 158.7 183.7 15.0 1.5.8 IDOCI iI share in total crud oil -expIrts 98.4 915,9 95.7 95.1 95.0 90.9 89.1- 1/ Exports by NIOC in the context of barter trade agreements. Sourcel: National Iranian Ol LCompany -7- Table 5 CONSORTIUM CRUDE OIL ExPORT AND Tirl UGHRUT TO ABADAN RF2'INERY: 1960 - 1270 (million tons) Crude Oil Exrorta of Delivery lignt crude heavy crude Totai to Abadan 2/ Crude off-take 2J 196) 31.3 2.hs 33.7 15.) I A.R8 1961 31.6 10.2 41.8 12.7 54.h 1962 33.5 12.B 46.3 15.0 61.3 1963 37.5 15.7 53.2 15.3 68.4 1964 41.0 22.1 63.1 15.1 78.1 1965 42.9 26.8 .69.7 15.0 84.7 1966 4&.0 36.5 80.5 15.0 95g5c , .z , f-f I ~ 1.- n ,,, ~. 1 I' -s*..e- lYuf 7u.0 4 44 9 1.01.3 .1v.0 v1. L¢68 660 110.9b 16=2 127.1, 1969 70.7 57.1 127.9 16.3 lhh.2 1970 n.a. n.a. 146.7 17.0 163.7 Aznual Average Growth Rate& 1960-70 15.8% 1.2% 12.8% V 1960 is the first year of heavy crude export. if Excluding daLiveries to Abadan refinery on account of NIOC. ]/ Excluding daliveries of crude to NIOC for export undar barter trada agreeeants. DESTINATION OF CRUDEB ()IL EORTS BY THE CONSORTIUM: 1964 - 1969 T 1n m.llion tons and percentage points) 1i°64 1565 196 1967 1 968 1969 Volume Percent Vollume Percent Volume Percent Volume Percent Volume Percent Volume Percent Westeyi Marope 26.9 42.7 35.0 50,2 3h.0 42.2 1,.5 l1.o 33.i 30.1 32.2 25.2 Japan 12.4 19.6 15.L 22.1 25.0 31.1 37.9 37.4 46.7 42.1 59.9 46.9 Sub-total 39.3 62.3 50.4 72.3 59,.0 73.3 79.4 78.4 8&. h 72.5 92.2 72.1 Asia, excluding 11.0 17.4 6.4 9.2 7.5 9.3 9.3 9.2 15.7 14.2 17.1 13.4 Japan Afri.ca 5.0 7.9 6.C) 8.6S 5.5 6.8 6.7 6.6 8.8 7 .9 1 3.9 10.9 North America 5.9 9.3 6.1 8. 7 6.0 7.5 3.6 3.6 4.2 3.13 3.8 3.0 Sout,h America 0.3 0.5 0.3 0.lh 0.5 0.6 0.5 0.5 - - - - Australasia 1.6 2.6 1. 3 1.8 2.0 2.5 1,7 1.7 1.8 1.6 0.8 0.6 l'otaL 63.1 100.0 69.7 1OO.0 80.5 100.0 101.3 100.0 1110.39 100.0 127.9 1C00.0 Total I :ran Crude Oil E4orts 6.4 73.3 B4.8 107.3 117.6 142.4 Consortium Exports 58.0% ' 95.0 S 9h4.9% 94.4%, 94.3% 89.8% As Percentage of Total Source: Iranian Oil Operating Companies; totals may not add due to rounding. refinery is at present a little over L0 percentVu of 'o'-l er-ude 0-ta 10 years ago this share amounted to 31 percent. The reduced importance of oil product exports is due partly to the increased deliv-eries to NIOC, but also to the construction of refineries near the consu4'tion centers. Only the Coasortium, operating one of the world's largest refineries in ADadan, exports petroleun products; most of these are destined for Japan, Asia and Africa (East and South), together accounting for oome 78 percent in 1969. About 25 percent of the Abadan refinery's output is delivered to NIOC to meet domestic requirements. Export of Natural and Associated Gas 8. Until recently most of the gas produced in association with petroleum was flared off; only very small quantities were used in the produc- tion fields or at the refinery. From now on this resource will be more intensively utilized as a result of several large projects: (i) the Iranian Gas Trunkline (IGAT) for gas exports to the USSR, and for increased domestic consumnption, and (ii) a number of petrochemical ventures, using gas as the major input (Kharg, Abadan and Shiraz projects 1/). The IGAT will eventually carrv around 10 billion m3 of gas to Russia, equivalent to export earnirgs of $67 million by 1975/76; in addition, some 6 biLLion m3 will be available for internal consimntion. The various petrochemical projects, producing for the domestic market and for export,,will contribute an estimated $55 million to emxort rpicents by 1971h/75 2/. 9. A mnajor natural g2S f4ifeld w2Sn not long ago, disrnovrrci near Masha. in the northeast; although no exports are currently contemplated, it is planned to connect the fieldeto iMaqhad to supply plrt of the city's energy needs. In the future, natural and associated gas supplies wilL play _n4 iwr+or-f anA- role L a1 meeting4 4 a A dwnao+ x en OrQy rba rm-entrnan+ - 4- Ta.. tp,.4 S 0.11 SW1 Id . J..C=l .4.41 *IJ.ĘV U..1 VSi 'A'.JSIt'..V;IJ U.A 1tJ. 54 4.W L..QA.4 i.1k WI&L1U J .44 .1.4 0.11. A. 11.. subject will be further discussed in paragraphs 57-61. 1/ The Shahpur petrochemical plant uses natural gas with a high sulphur content from wells specifically developed for that purpose. The Abadan p:Lant receives refinery gas from the nearby Abadan refinery. The Kharg Clhemical Company receives its gas from the nearby petroleum extraction op erations. 2/ Estimated by the economic mission. - 10 - CHAPTER I ML ExtL_4--alH Oil S ecio nistor' ual BDuij-ruw-- 10. In the foreign operated, though iranian ownea, oli enclave sector a distinction can be made between (i) the Consortium, and (ii) other foreign oil companies, wihich are operating under joint venture agreements with the National Irauiian Oil Company (NIOC). Consortium operations historically date back to 1908, when the first well was struckc near Majid-i-Suleimnx; this field, inte alia, is still being tapped today, with about 24 wells and estimated reservea of over 115 million tons. Up to 1951 the Anglo-Iranian Oil Company, operating on a 259,000 km2 concession in southwestern Iran, accounted for practically all production 1/. The original concessions granted around 1908 were revised in the early thirties, and a new agree- ment concluded in 1933. Following unsuccessful negotiations between the Government and the Anglo-Iranian Oil Company on revisions in the 1933 agreement, the oiL industry was nationalized in 1951. In that same year the National Iran:ian Oil Company was established by the Government; NIOC was given the exclusive rights of exploration and exploitation of Iran's petroleum aLnd gas reserves. The Anglo-Iranian ceased all operations in 1951, and oil production fell to very low levels in the follow.ing years. A. The Consortium 11. On October 29, 1954 an agreement was concluded between the Iranian Governmnnt and n groun of ei rht international oil conmanins. known as the Consortium. A 40 percent interest in the Consortium is held by British Petroleu-ml , the successor to the Aaglo-Iranian Oil Co.mpnny; other participnt are: Royal Dutch Shell (14 percent), Mobil, Standard Oil of New Jersey, Gulf, Texco=n ar.d' FSt-fmnn. A r Oi I r%-r (In al l fErn-a, each T,- t+h 7 perent,+ C'mp-a n li Francaise cles Petroles (6 percent), and a group of six U.S. companies with +.Ah -cirnmininn T rran+.+. 9/ TTnAav +-ha ov-aaman+. R P wJ'a rr nnaQ+.,nA for the loss of property and concession rights; Government payments totalled I t r..i-.4.I'I$A n- f uhih the las+ 4-i.-ttall 4 te&ll due ln 196.J UL1±6 oil companies also made compensatioln payments to B.P. 3/. 1/ Originally the Anglo-Persian Oil Company, the name was changed after the second Wlorld war. 2/ Tne six so-ca.ued '"Iricon Group of Companies;; joined the Consortium as of April 29, 1955. They consist of: American Independent Oil, Atlantic Richfield, Continental Oil, Getty Oil, Signal and Standard Oil of Ohio. 3/, The coxpensation by oil companies was paid as a $0.10 per barrel levy on all oil exports; these payments will terminate in 1971. - ii - 12. The 1954 Agreement is for a period of 25 years, with provisions for three five-year extensions at the option of the Consortium. The init,ial concession covered the original Anglo-Iranian Oil Company's area, some 259,00 km2 adjoining the Persian Gulf (see-Map 1). The Consortium would pay an income tax of 50 percent on its net profits calcu-Lated on the basis of posted prices for crude oil exports; special provisions apply to the refinirig operations, where profits are calculated by using a so-called "uplift" formula 1/. The original agreement also provided for the pay- ment - in cash or kind - of a royalty as part of the 50 percent income t;ax payment. The division of net profits between company and country gave rise to the n.xen 50:'O agreements. 13. Two suDplemental agreements became effective on January 1, 19614 and JuLy 15, 1967 respectively. The most important of these modifications is known a.s theh "epensing of royalties": the 12.5 percent royaltv was thereafter treated as a cost in the profit calculation, rather than be part of the 50 percent incomp tn. pavment.. This modification changed the basic profit-sharing arrangement to 56.25:43.75 in favor of the Government. It was fu-ther a>^eed that exploration and drilling exprdit& t -res wulld be capitalized, and charged to costs in the same way as additions to fixed assets, rathe55cr t15hass beilng treated as n' ratinf cos .t: this provision was made retroactive to 1963. 14. Another aspect of the 1964 Supplemental Agreement was the volume and gra-LdVdIty UscoJunts off posted priLces; t Lese discouts were introduced reflect lower realized prices, without changing the posted prices themselves (which incidentally have rermained -virtualy the sa,me slnce 1960 2/) . Thus effectively the basis for calculating Government revenues was lowered; sub- sequently however, it has been decided tihat tihese discounts would be graduLally reduced and completely phased out by 1975 in accordance with a formula worked out between the major oil companies and the Organization of Petroleum Exporting Countries (OPEC). In yet another supplementary agree- ment the Consortium agreed to relinquish about one-fourth of i.ts concessionary area - three parcels totalling 64,903 km2 _ to NIOC. 1/ Undler the "uplift" formula a value-added for the refinery operation is calculated on the basis of posted prices for the crude oil intake, and for the refined products output. The value-added so derived is added to the posted price to arrive at "value of refined product" for prof'it calculations. For details see Appendix II. 2/ But posted prices had been'reduced significantly before that; the pcsted price of Persian Gulf Oil in June 1957 was $2.04 per barrel ($14.90 per ton). This was reduced to $1.86 per barrel in February 1959, and again in August to $1.79 per barrel. The total price reduction thus amounted to $0.25 per barrel ($1.83 per ton) or to 12.25 percent on the $2.o04 per barrel posted price. However, June 1957 prices were considerably inflated due to the Suez canal closing, and the oil crisis in Europe that followed. S~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~A "I t tI A z Y.dr~ -/ ,--^ L~~~~~~~~~ t- E;' N S.o) 1.544sN'fg I uras+zs 1; ri; >; % ° hr ,/ LEGENO < ^ | - - ~ ~ ~~~~~~~~- -f - 12 - 15. Sinlce 1965 the Government has placed increasing emphiasis on obtaining a high growth of oil revenues through expansion of production and exports<. In this it has been very successful, and Iran has now become t:he largest; oil producer in the Middle East, as well as ov6rtaking Venezuela as thle world's leading exporter. The Consortium has installed additional crude oil production and export faciliti.es, the latter including loading facilit-ies at Kharg Island that can accomrmodate even the largest tankers. Present production capacity is close to 215 million ton per year, with additional expansion to 250 million tons now under implementation 1/. Production and Exports 16. Tables 1 and 4 show the importance of the Consortium in production and ex.port of oil from Iran. Although its share has gone down as a result of new production from NIOC's joint-venture agreements, it was still at arcund 90 nprcent of tot;al production and export in 1970. Duriiig the period 196h-70 export of crude oil has been growing by almost 1'7 percent annually; ConsorEiuLm Pxnorts; inciiidinsy deliveriesn to NTOG. have i nrtrlasc3 almost 15 percent per year. The' destination of Consortiwn crude exports has changed. unritej' rir.m.aLi c.1l.y Lwi t ivnrnp and .T5nin swmitrchingr nositti.ons ef fivrst- nrid second most iqDortant clients. Table 6 shows that Iran's dependence on these Lwo Ji. mnvPt-i-oir as has rema:nea'r avrt-ua rlyr 1e s v-n ln accnrrnoi>r . ing for over 72 percent of Consortiulm exports 2/. It is interesting to note tha - t.-e ,rolun n o slipi.rlts to WnsterrI Euro ha st i at anri - million tons over the past l'ive years, at a time when Europe's tctal. oil conlurptlonand:trpots .ror.the M-Wd-le F,ast increasedl by over 1'f per-cerl c0'1JJI13U1~JC1 ptLon an :,L4p.L r U-s fror.1.I J UJJ( Vi.l(~(( L i~ 11 uJ .41 (.. L 1C~C LJJ. U V U.L FC;L, .L(J ( - L It an;nually. Shipments to North Almerica have declined both in relative ancd absolu,.e ter-risv, adLIU exports to outhA Ull UIave ceasedU altogetie. There is a real possibility that these latter exports will be resumed, howevelr, as a resu . lt uf rtrrIationaXfl bidig fUI' U s UpplL.y ColnraclLtu in Brazil, Argentina and UruguLay 3,/. 17. In addition to exploration and production of crude oil the Consortium also operates the Abadan refinery -with a thiroughiput of over 20 millicn tons in the yea;rs 1968 and 1969. About 25 percent of the production is destinied for tthe domestic market, which is also served by DIIO(C's ref.in- eries in Tehruan and Kermanshaih; the other foreign oil companies do not ha-ve refining, operations in iran. Although tthe capacity of the Abadan refinery has been increased over the past five years, much of this was used for Iran s dornesti..c requirements. Petroleum product exports amounted to 15.5 rydllion tons in 1969 withl- the preliminary 1970 figqure at 16.3 million -torns. Table 7 shows -the destiination of these exports. C insorttium crude oil is shipped througth. thfie Kharg Island terminal, where 1OOC recently constructed some J. nu.l].:ion. barrel oil tanics (holdcuifrg an equivalent of 136,900 to1ns); oil products are ex:ported from Bandsar Mashiar, -the fornmer crude oil term-rinal. ]/ Product.ion figures for Marrh show .-n annunl level on' 211 millicnl tons. 2/ No such data is available for the other foreign oil corrpanies. 3/ Kuwait now exports oil to these countries; it is interesting to not,e tlhat Venezuela is not a supolier i-n tlis area. Table 7 DESTINAI'ION OF OIL PRODUICT EXPOrS BY THE CONSCORT'IIM 964 - 1969 7Th percentage points of totalaT 1964t 196' 1966 1967 1968 1969 Western Europe 5.5 8. 6 11.9 8.9 7.8 8.4 Japan 9.3 17.1 14.7 13.9 12.3 15.9 Sub-total: 1473 7 26.6- .2.. 20. 1 24.3 Asia, exclucling Japan. 45.I 40.0, 28.5 40.6 38.2 38.3 Africa 25.() 23.13 33.9 27.7 26.5 24.3 North America - - 0.9 - 1.0 0.9 South America - - - - 2.5 0.9 Australasia 4.6 5.'7 h.6 3.0 2.9 4.7 Other Regions 10.2 4.8 5.5 5.9 8.8 6.6 J( 100.0 : 100.0 o. 100. 0 100. 0 100.0 Oil Producst ExportsI 13,876 1L4,029 Iii,123 14,428 L4,835 15,5.46 thiousiand 14tons = 1/ Data for 1064 - 19°9 from the Animal Report :1969; converted from long tons to Mtons at ILton = 1.01606 Mton. For 196,4 and 1965 the data. provided by NIOC :, m3 were converted into Mtons at 1 ton = 0.868 m3. Source: Iranian Oil Operating Compani.es - 14 - Additional Foreign Exchange -eceipts and Advance Pa-y-ments: i8. The Consortium aiso seiis foreign excnange to tne Central Bank for local cuirrency expenditures; these amounts vary considerably from one year to the next (see Table 8). In the past few years the Consortium has also agreed to make slhort-term advance payments against future revenue; in fiscal year 1969/70 these advances amounted to 482.6 million which were repaid in 1970/71. A similar arrangement has been made for 1970/71, in- volving a total of $100 million. The amount will have to be repaid in 1971/72; but the Consortium will retain an equivalent amount for an equiva- lent period during 1971/72, so as to cancel out the interest foregone. This is a new feature of these advance payment arrangements; future agree- ments are e:xpected to be of a similar nature. B. Joint Venture Oil Agreements 1/ 19. Tlhe Petroleum Act of July 1957 enabled NIOC to enter into partner- ship ..ith forei-gn oil ccmpanies to explore and exploit petroleum districts outside of the Consorltium Agreement Area. To this end NIOC divided the territory of Iran (including the Persian Gulf continental shelf, but excluding the Consortium Agreement Area) into 27 petroleum districts, each comprising about 80.000 souare kilometers. Shortlv afterwards certain districts were opened for bids, and two were accepted, subsequently leading to the creation of STRTP (TcDrrete Tnnra-talienne dHs Petroles) - nd TPA(. (Irani Pan American Oil Company). The SIIUP agreement dates from August 195'1 and is a joint venture between NIOC-and t.he Italia +ns+.a c ournrl empanyr TNT The seconr venture, where NIOC also participated with a 50 percent share, was concluded in 1958. --rt! the Pan fA-merican Oil 0 .o.m-- 2/. Both cm'paies state actual production in 1962. Additional petroleum districts were opened for bidding _in 1963, a.inDc.ber 16NICconiclued iesprt areet _11 J7.), d.LkA .Lli 1:U t,1LU~ .L'7'.J14 II. ±UU UU .UJ-U . ±±-VV OMPJd.LU. CLr,1UUIi; L AD1U VW-L Vi successful bidders for off-shore concessions in the Persian Gulf; a further agreem,entL wiLth a Germilan gr-oup- wa-s signed Lin Ma-y _95 / (see ,p 2)"I Z 9 eL foreign companies paid Iran $190 million as an oil-bonus, and undertook to gi-ve Iran an additional $51 mRilliCon in "'lon1g.terma1 bonus paymtents -wlthin five years, or, depending on the particular agreement, whenever oil in comnercial quantities would be discovered. i/ Information on tne joint venture agreements is not plentiful; for this section the following sources were used: Oil and Petroleum Yearboolc 1968; international Petroleum Encyclopedia, 1970; Iran Oil Journal, various issues, DIF Consultation Reports, and information collected by the missicn in Iran. 2/ Pan American Oil Company made a bonus payment of $25 million to the Iran Government. 3/ Names of new companies formed in joint venture with NIOC, the foreign partners, and the size of each concession in square km are: Dashteshan Offshore DOPCO Shell 6,036 Iranian Offshore IROPCO Getty 2,250 Lavan LAPCO Atlantic Group 8.000 Farsi FPC French Group 4,759 Iranian Marine IMINICO AGIP, Phillpins. 7.960 International Marine India Persian Gulf PEGUPCO German Groun 5; 1 50 Table 8 AUJITIONALL FOREION EUIRAIGE R3EFPTs FTEM THiE CCt1S)Il M AND OTHER FOREIGN MI. COP4NIES iMillionm $) 1296/4 L9645 a 65/6 19&D/7 c?67/ 6 2970. 1970/1 Pturchase oa Fori3gn Exchange From: Consortium 8o.5 77.3 75.6 8:1.4 82.5 82.5 89.8 134.0 Other Oil Compamies 2.3 1L1.6 17.8 26.3 23.3 22.2 414.64. Spedal Receipts/fPayments V -7.0 191.4 34.0 5.8 - TOTAL 75.8 2,50.3 127.4 116.5 105.8 105.0 131.4 1i/ Including compensation payments to B.P. (successor tc the Anglo Ir'hian Oil CoTpany) armounting to $57 millic'n for the years 1563/4, 1964/5 and 1965/6. Source: Bank Harkazi, Iran and IP5. IRAQ A I RAN OFF-SHORE CONCESSIONS ../ ..... .T r,: Ninr(h 'r I(TIr,IT \/,N ITI ID: A,IrDIE,E:2AAFKN1-Q J : 8' / \\\ '1 1 Nki 1 k_ J JXJ 11 ~~~~~~~~~~~~N I V ILI1 N I UIMLI8LL V ILI N IJ (FROM NIOC 19658 ANNUAL REPORT) KUWAIT I PAC \ * - . \iI \ \ j B%sieh! ------ l1hree nile limit t *. IPAC \ Agreement bouindary N\leutral LI.I>/ '\ z IROPCO Irarian Offshore Company Getty Zone E~: // LAPCO Lovan Petrcleum Compony Atlanitic Group Zone ) FPC Forsi Petroleum Company French GrouJp -./ 4 \$ j IMINOCO Irarion Marine International Oil Company AGII, Phillips, India , F. PC. I E ill P FEGUPCO Persian Gulf Petroleum Company Gerrnan Group t ¢ | IMINOCO El Ii IPAC Iran Pan American Oil Company Pan American Oil * .~~~~~~r SSSO5SA~~~iND AL !j AULDi AtASIA nNL.. - 20. The financial and other provisions in these Joint venture agree- ments are all of a similar nature. The concessions are for a'25-year period (with 3 possible 5-year renewals), and the agreements provide for payment of an oil bonus, minimum exploration and drilling activities, and relinquish- ment of non-explored areas. Each party of the joint venture is entitled to 50 percent of oil production, with the option to buy any part of its partners' unwanted share V/. The foreign partner pays an income tax of 50 percent (since November l, 1970 this has become 55 percent) on their net profits; theoretically the Iranian Government receives 75 percent of the net profits of these joint ventures, which are therefore known as 75:S2'; percent arrange- ments. In practice the profit share is lower, because NIOC has agreed to meet part of the exploration and production cost. In the Sl1-IP and IPAC agreements the NIOC pays 50 percent of exploration expenditures once oil in commercial quantities has been discovered, an(d after that 50 percent of all capital and operating expenses connected with production and further exploration of the oil fieLdq. Tn the later agreements ep1loration and production costs are treated as capital outlays, which will be amortized once comrnrninl productiocmn hbgins; the same procedure applies to the oil bonus paynents that were made at the concluding of the agreements. A final, rncd most important provision, pertains to the valuation of oil for punroses of net profit calculations; all crude exports are valued at posted prices, but reasonable +reat+wrent on A;4scouts wu-ld be --+A r b-y i The-I4rar Government. 21. A departure from these 75:25 percent arrangements is the contractI signed in December- 1966 betwuen NIOC and the French state owned oil companr ERAP (Enitreprise de Recherche et des Activities Petrolieres), covering one off-shore and three on-shore areas. ERAP acts as a contractor for NIOC, and bears the whole exploration risk, estimated at between $30-$h0 million for the first few years. If oil is found in commercial quantities the exploration expenditures will be treated as an interest free loan to NIOC, and amortized over a period of 15 years at $0.73 per ton. Subsequent development of oil discoveries will be financed through loans by ERAP, repayable over five years and at interest rates of 2.5 percent in excess of the official French discount rate. These loans to NIOC are repayable in either cash or Icind. 22. In return for bearing the exploration risk, ERAP received the right to purchase, at favorable terms 2/, a proportion of actual oil produc- tion for a period of twenty-five years. ERAP's entitlement, which varies with the location of oil wells _/, only applies after (i) sufficient discoveries have been made to amortize the exploration expenditures, and 1/ Apparently the foreign partners have bought much of NIOC's share in production because NIOC lacks the tanker capacity to export independently. Another possibility is that NIOC has in this fashion paid its share in the exploraticn cost of some of these partnerships. 2/ Cost (including amortization), plus 2 percent, plus 5O percent of the di.iference betwoen the cost an(d realized market price. .3/ 22.4`; percent of a]l oil after amortization of the exploration expendi- tures, if tho Jield is 00 Ia or more from the coaBt, and 17.5 percent if the fiieLd is 1]00 kin or less from the coast. - 17 - (i.) one half of subsequently discovered oil is set aside as a "national reserve" 1/. Another feature of the agreemenit is that ERAP may dispose of NlIOC's share of crude production, tor which NIOC will receive the actual market price less $0.22 per ton as commission to ERAP. 23. In early 1969, NIOG entered into a new service-type contract -with AREPI, a group of European companies 2/. Under this contract, AREPI will advance fLunds for the exploration program, and in case of an oil strice, be reimbursed by the right to buy 30 to )5 percent of oil production. ActuaLly however, AREPI will only be allowed to purchase 15 to 22.5 percent of the oil, because 50 percent of discovered oil will be set asicle as a "national reserve" for Iran. AREPI must spend at least $28 million on exDloration over the next ten years. Another Drovision calls for a ohaseci surrender of the concession 3/. Arounld the same time an agreement was sinned l.rith C.ont.irnentnl nil Fclmnrnnnv_ -ith term.q similar t t.he ARPT contract except that an oil bonus of $10 million is part of the deal. Conoco will er.plore on t+he Gonnrti ,m relinquished area nort h of Bandar Abbas; within the first five years it will spend $8 million on explora- tion, and then turn back 50 percenti on concession. Conoco will be allowed to buy 45 percent of production (after 50 percent has been reserved for To~~~,,-,-rea h s A0 5 5 r+ too'ns4- ab ^o e I I' _; -I 1; 4onAA t. on s[ -I 4l 4- s r; share will be only 35 percent. Production and Exports 24. Production by NIOC's foreign partnerships has been slow in develop- ing, with the i970 ouutput estimated at 17.5 mii]ion tons, some 9.2 perce nt of the total. production of 190 million tons (see Table l). Companies now in production- are SITIP, IPAC, LAPCO and =RnqOCO. It will take a few years before the new service contracts will begi.n to produce oil in signifi- cant quantities. The ILPCO venture, concluded in December i26iq, began 1/ This concept was initroduced either to guard against over-exploration of oil wells, or alternatively to provide NIOC with oil reserves that they can use at their oim discretion. The "national reserve" can bc api0ortioned either by separate field or by reserving a share of crude oil w1ithin each reservoir. 2/ AP,EPI members are: IRAP (France) 32 percent; EMI (Italy) 28 percent; Hispanoil (Spain) 20 percent; Petrofina (Belgium) 15 percent' CMV (Austria) 5 percent. This combine will explore for oil on a 26,553 kmI block of on - and off-shore territory in the Persian Gulf. 3/ Other conditions are: (i) price of crude purchased by AREPI is cal- culated. on the basis of unit cost production, plus 2 percent, plus taxes and royalty, (ii) if there is a discovery, NIOC will repay AREPI for exploration cost over a 15 year period at the rate of $0.73 per ton produced, (iii) development costs borne by AREPI as loan to NIOC wiLth repayment in 5 equal annual installments, (iv) ii AREPI sells NIOC's share o1 oil out.put the nrice will be based on realized prices, less $0 .023/ton for quantities under 2.3 milliorn tons and less $0.096/toi. on bigger qunntj ties. - 18 - comr.ercial production lk n 1lat-ae 196I a.',nd at LITTV rO -I., at 4h I,i - .e, production caine on stream late in 1969. All other joint ventures concluded at the end of 1 _-6 I and ear 19A65 lave no4t yet s+tack oil in cvmercial quantities. 25. Exports fromn joint ventures are almost equivalent to production (see TabLes 1 and T). i-re foreign compianies Ia-ve di'sposed of JN.I('s share, partly because NIOC lacks the marketing outlets abroad, partly because of limited tanker capacity, and also because NIuC had agreed to bear part of exploration costs, payable in kind. The price that NIOC receives fo:r crucie sold by its partners is based on realized prices less a marketing discount (ARIEPI and ERAP'), or on so called half-way prices, defined as ithe average of posted price and tax paid cost, which consists of production cost plus income taxes (SIRIP and IPAC). Revenue ay2aments, and Other Foreign Exchange Receipts 26. Income tax pay,ments by the joint ventures to the governments have increased from $2.0 nillionin 1965/66 to $36.3 million in 1967/68 and subsequently decreased to $30.1 million in 1969/70; the estimated revenues for 1970/71 are substantially higher, some $42 million. At the same time, production and exports have increased fairly rapidly, in fact, more than doubling over the past three years. The main reason for the lagging revenue receipts is a disagreement between IPAC and NIOC pertaining to the pricing of exports 1/; other factors are (i) early revenue payments were higher than actually required. and (ii) the refund on exploration expenditures was raised from $0.73 to $1.10 per ton. LAPCO's revenue payments to Iran are lower because ex-nendituires on exploration and exoloitation are now being capitalized. All in all, revenue per ton of exported crude oil from foreign ventures have averaged about $M427 per ton over -the period 19066/67-1970/71 as compared to some $6.37 per ton for the Consortium (Table 9). 27. Assuming that the present disagreement on contract interpretation can be resolved, govemment reven.ues could increase to $60 million by 1971/721 up from an estimated $i42 million for the 1lst fiscal year. The figure for 1971/72 could become very mruch higher once it has benn drecd dtA .t *,-4mpact the February 15, 1971 agreement on posted prices will have on the joint ventulr+e contracts. Thesn m-tter areo nrcu ',d+r discuso Yor the somewhat lon0ger run,forecasts become tenuous indeed, since so much depends on new oil discoveries, and on the speed of exploitation. For this reason the oil revenue projection,presented in Table 10, uses annual gr-owth rates app'led to both Consorti-wum and other cU Upnies' estimlated revenue figures for 1971/72, rather than attempt individual forecasts. 1/ The issue apparently is over the magnitude of discounts allowed off the posted prices of crude exports. At the time the agreemet was signed the Iranian Government had guaranteed to a "reasonable treat- mellt"' on disounlts, TabILe 9 OIL EPXPORTS AND lREValUES_ 1963/64 15 64h/65 1965/616 1966/67 1967/68 1968/69 l969/To 1970/71 (Estimate) Exoorts I/ (OiLlion ton) 69.8 79.4 88.3 9?.8 122.3 133.8 158. 9 183.7 of which: crlde 54.5 64.4 73.3 84.8 107.3 117.6 142.6 166.7 products 15.3 15.1 15.0 15.0 15.0 16.2 16.:3 L7.0 Revenues (InilLion $) 388.0 466.5 514.1 608.1 751.6 853.5 964.6 1,64.0 of lv+ich: Cionsortilum 388.0 466.5 512.1 591.5 715.3 817.3 915.' 1,092.0 H NIrOC 2/ - - - - 5.2 19.0 30.0 Other Comnpanies - - 2.0 16.6 36.3 31.0 30.1 42.0 A%nM,revenue ($ per ton) 5.56 5.88 5.8 2 6.09 6.15 6.38 6.07 6.34 of which: Consortium 2/ 5.67 5.97 6.o5 6.19 6.15 6.33 6.35 6.67 Other Compa'ies 3/ - - 0-56 3.86 6.05 4.84 2.33 2.40 1/ Refer only to calendar year: revenue figures are by Iran:Lan caLendar year. 2/ Trese revenues are derived from NIOC's barter trade crude exports from the ConsortiuLm Agreement area; as such they are included in the average! revenue figures for the Consortium. 3/ Other olil companies did export 1.2 arid 1.3 million tons respectively irn 1963 and 1964. - 20 - Table 10 ()TT , 1T U17T'' ID 1-Tr l'TTV O lTzl / (In mil-Lion doljars) Totad Consortitim Other GoiiLuiies 1 969/70 Actuial 965 935 30 1970/71 Fi.nn Estimate 1,164 1,122 4, 1971/72 Estimate 1 820_/ 1 ,76c2/ 60 Annual Rate of Growth Assumptions: 1972/73-1975/76 1"I 1 4.5 5/ 1 6, 1 8; 1972/73 2,038 2,084 2,111 2,1 I.;3 1973/74 2,283 2,386 2,449 2,53!- 1974/75 *2,557 2,732 2,841 2,990 1975/76 2,864 3,128 3,29', 3)529 For Period 1976/77-1980/81 a 12 nprcent Annual Growth }tate 1980/81 q,l)o7 51 -3 5 jf7 6,219 1/ Revenues from Consortium and other foreign oil companies: using a 12 percent, growth rate for export volume, and the assumption of a 16 percent revenue increase, average per ton revenue for both Consortium and other companies would increase from $6.02 to $10.08. 4/ 2/ Excluded from this figure are the NIOC barter trade oil sales to Rumania ancl Yugoslavia, because of s-trong suspicion that these amounts - some $40 million in 1970/71 - have been double counted under Consortium exports. 3/ Official I:ranian Government figure. 4/ Export volume would develop as follows, using 12 percent annual growth rate: 1970/71 186 million tons ) 1971/72 208 million tons ) 1972/73 233 million tons ) derived by adding 1 percent to the 1970 1973/74 261 million tons ) calender year exports of 183.7 million torts 1974/75 292 million tons ) 19'7576 327 million tons ) 28. In addition to income tax payments on crude exports the Governmrent receives foreign exchange from (i) oil bonus paymen-ts, and (ii) sale of exchange for local expenditures. Tables 8 and 9 show the past record on both oil revenues and other foreign exchange receipts. C. Recent Developments on Government Oil Revenues 29. PavmlerLts by the Consortium, consisting of royalty and income tax, constitute the major component of Iran's oil revenues. These payments are calculated on the posted price, which is an agreed price used exclusively for revenue calculations 1/. Since 1954 the basic agreement on revenue nalCnilntlon has remained virtually unchanged, namely a 12.5 percent royalty on the posted price, and a 50 percent income tax on profit, also calculated on the bai 9 f t.he posted. rather than realize pries- The only important modification of the agreement was the "expensing, of royalties", which became effecti- te in 196I and resulted in additional revrenues to the Gornment-. (3ee paragraph 13). 30. In mid-1970 however, the Libyan Government negotiated with the foreign oil compar es JeaILt in there n ar men t V. ltl i n: ( h i ghe posted prices ancd (ii) a higher tax rate. And since that time the whole £~iUJJUO[±j U~~VVt~1 J~ ~~J~Lex Ii '-) 'L.± U W1 C111LZ.L L~ ill U,)IfV CL/ , dAIU Wit=~ relationshJip betwvieen oil. p+ort-ing count rie -organized4 lnT)T- `PIl 2/- -n the., international oi:L companies has been in considerable flux. For Iran these developments resulted n an agreement of Nove-mber 14, 1970 -wth the Consor- tium, which raised posted prices on heavy crude oil and boosted the inccme tax rate froml 70 percent to 55 percent. On average these changes amounted to 7.5 arnd 1].0 percent increases in per ton revenue for light and heavy crude respectively. Coupled with an estimated i2 percent growth in export volume, the Consortium revenues would therefore increase by over 20 percent in 1971/72; the November agreement, although immediately effective, would have had only a very small impact on Iranian fiscal year 1970/71 revenues. 31. In other OPEC countries the income tax rate has, in the meantime, also been raised to 55 percent. Before the smoke of last year's sometimes fiery negotiations had been cleared up, however, the Libyan and Algerian Government again added fuel to the debate by demanding further increases 1/ At one time the posted prices were reasonably close to actual price,; when oil prices fell in the middle fifties the posted prices were a:Lso lowered. The oil exporting countries, however, effectively blocked further erosion of their tax base, although actual prices have cont-inued tc fall. In late 1970 e.g. posted prices for Iranian light crude were $13.07/ton, as compared to quotations of $10.22 to $10.52 per ton. 2/ "Organization of Petroleum Exporting Countries", formed in 1960. O]?EC members are Algeria, Libya, Indonesia, Venezuela. Iran, Saudi Arabia, Kuwait, Iraq, Abu Dhabi and Qatar. These countries accounted for over )l5 percent of world production. and rouLhlv 83 percent of world exnorts in 1969. - 22 - in both posted pri.ces and income tax rates. Other OPEC members joined Algeria and Libya, but negotiations with oil companies proceeded on a regional, rather than a global basis. Thus, the six Persian CGuli OPEC members - Abu. Dhabi, Iran, Iraq, Kuwait, Qatar and Saudi Arabia - under chairmanship of Iran, specified certain revenue proposals to fit their common suppliers' situation. Algeria, Iraq 1/, Libya and Saudi Arabia, all Mediterranean oil exporters, are concluding a separate agreement with the international oil companies. And earlier, Venezuela unilaterally took some legislative steps - in late 1970 - to raise oil revenues from its exports destined mainly to the U.S. and Canada. 32. The agreement concluded on February 15, 1971 between the six Persian Gulf Droducing states and some twenty-three international oil companies wi:Ll signficantly raise oil revenues to the Governments (Appendix I gives the details of the agreement). Estimates from oil company circles place the increase in 1971 at $1.2 billion, rising to an exttra $3 billion in ,tevt-efies by 197?. whefi the present agreement lapses. Over the five- year period the increase in revenues to the six nations would amount to over $10 hilI-inn. The settlement, stabhilizes the income tax rate at 5 percent, and raises the posted prices imnediately by $0.35 per barrel (equiivalent to $266 per ton), andi by a further $0o005 per harrel for each degree below 400API[. One effect of this provision is to lower the spread between posted prices of lig.h+ cri-e (APIT of arond 35) mri heaaJr c.ude oil (with API of around 30). In addition, the OPEC discounts and gravity a-ll wances, sched-:LLd to teinat b-y -1 7 If been el nated per February 15, 1971. Tlhe settlement also provides for (i) an inflation ad- juswmer-t of 2.3 percent postd prices, ad (il) an increase of 0.05 per ba:rrel. The first such irncrease will take place on June 1, 1971; equal iUncreas(e..e:s Wiaa vjeuuRm t'llU(;±LVo UJali n 1, IfrLL L>() UU JL17(). I[LU ULUI feature of the agreement is that future reductions in transportation costs, e.g. resulting from the opening of the Suez Canal, would be taken into account to beneiit oil exporting countries . Thus, the agreement, although formally effective over a 5-year period, may in fact be changeci earlier. 33. For Iran, the lFebruary 13, 1971 agreement raised the posted price of light and heavy crude from $13.07 and $12.56 respectively to $15.85 and $15.52 per ton; by 1975 these prices, on which the royalty and income tax payments are based, will ba $19.01 and $18.64 per ton for light and heavy crudes respectively 2/. Thus, posted prices which did not increase at all in the yeai's 1960-69 3/ will show an average annual growth rate of 1/ Iraq and, Saudi Arabia are both Persian Gulf and Mediterranean oil exporters, because pipelines connect the oil fields in these countries with Lebanon. 2/ The usual way of quoting prices by oil companies is per barrel. By 1975 the posted prices would be $2.603 for light and $2.553 for heavy crude. 3/ In fact, posted prices have effectively been raised throughout the years 196hI-69, because of the gradual elimination of allowances - deuc-tdedt from the nominally constant nposted prices - that were accordedc to the petroleum companies in 1964. - 23 - 7,1 percent for l.ight, and 8.3 percent for heavy crude for the period January 1, 1971 - December 31, 1975, when the agreement expires V/. The agreement itself provides for increases in posted prices of around 3.6 percent annually after the first major price hike effective February 15, 1971. Tablell presents in systematic fashion the increases in posted prices and government revenue resulting from the various oil agree- ments. The increases in prices posted for heavy and light crude, effective February 15, 197:L, raise per ton revenues to the Government by 29.3 and 27.5 percent respectively. The lower part of Table 11 shows that revenue increa,3es f'or the five-year agreement period amount to 9.lh and 9.1 per- cent annually for heavy and light crude oil exports. The average yearly increase, excluding the major adjustment of February 15,1971, will be close to 4 percent. This contrasts sharply with the last ten years, when nominal posted prices did not change at all, and effectively declined 'because of the inztroduction of' volume and gravity discounts in 1966. Coupled with anticinated increases in export volume ranginsg between 10 - 12 percent in the years 1972/73 - 1L975/76, Iran's revenues from the extelrnal oil sector can be expected to grow by between 1L and 16 percent on average during the years 1L972/73 - 1.975/76. 34. The revised estimate of Iran's revenues from oil for 1970/71 is put. at. 1'~l1A)il mi'iliojnn- thel+.i figm-re fonr thep curre"ntfisa yeapr Tri Ill amount to over $1.8 billion. Using the official estimated growth rate of Il..5 percent, oi' revenues wou ld 1 ncre t o 0 br 1 n4 '' 1070/73 and reach some $3.1 billion by 1975/76. Projecting further to 1980/81, 4-- e p4.. prcent aLnu.l grVoiih. ralue wIuld. reSU1 1- 4-4n U 41 revenues oJ well over $6.1 bi:llion. Alternative revenue growth assumptions are presented in Table 10. A' pessumistic vie-w of the t-uure would have reveniues grow by only 12 percent per year, to $2,864 million by 1975/76. An optimisti.b, 'but by rno means unrealistic, perspective is the io percent annual growth rate; revenues from oil would then reach over $3.5 billion by 1975/76. A more prudent growth rate of 12 percent per annum has been assumed after 1975/16; under these assumptions oil revenues could by 1980/81 range from $5.0 bbillion (12 percent assumption) and $5.5 bilLion (lL.5 percent as- sumption) to $6.2 billion (18 percent assumption). D. Prcspect;s for Iran Short Run Developments 35. The short tern prospects for oil exports and revenues appear quite iavorable to Iran. For the year 1970, production is expected to have reached some 191 million tons, an increase of 12.5 percent over 1969 levels; exports will increase by 1)4 percent reflecting the growth of domestic oil consumption at aroLund 11 percent. For 1971 and 1972, it has been assumed that Consortium production would continue to expand at around 12 percent annually, which is 1L Prices posted for light and heavy crude oil amounted to $1.79 per barrel ($T13.07 per ton) and $1.72 per barrel ($12.56 per ton) resDec-- tively on January 1, 1971. They will increase to $2.60 per barrel (*19.01 per tori) and $2.55 per barrel ($l8.6L Der ton) resnective1v by Jnrruary 1, 1975, and those prices will,be valid iuntil December 31, 1975. - 24 - Table ii POSTED Pm CE_ PjiD wvrJiiTRVV'Y-u"ES (US dollar per ton) Light Crude Heavy_Crlde - ° APIT -D-3A° O - Posted Percont Revcnue Percent Posted Percent kievenu Percent Year Price Increase Increase Price Increase In.rease 1970 13.07 ( ) 6.53 ( - ) 11.90 ( - ) 5.95 ( ) ( Ja. 1 ) 1970 13.07 ( - ) 7.02 (7.5) 12.56 (5.6) 6.79 (1,14.1) (Nov.14) 1971 13.07 ( - ) 7.12 (1.4) 12.56 ( ) 6.87 (1.2) (Jn - 1 '.57' 15.85 (21.3) 9.08 (27.5) 15.52 (23.6) 8.88 (29.3) (Feb.15) 1971 16.61 (14.8) 9.54 (5.1) 16.27 (44.6) 9. N (5.2) (June 1) 1973 17.39 (4.7) 10.02 (5.0) 17.05 (4.8) 9.81 (5.0) (Jan.1) 1974 18.19 (4.6) 10.49 (4.7) 17.83 (4.6) 10.29 (1.9) (Jan.,l i n~~ r' 1 A.a. 1L .e\ II.^ /I-.-\ In.0 /-I. fl- r \ an ., I ..a 7197 17.01 k4.2J II *UV (4.971 1U.4 kL4. 2 10.78( I4.B) (Jan.l) Annual Percentage Increases in Posted Prico and Revenus Poated Prico Revanun P otd Prc Ranut 1970 (Jan.1) - 1975 (Dec.31) 6.4 9.1 7.8 10.3 (6 yearv)' 1971 (Jan.I) - 1975 (Dec.31) 7.8 9.1 8.3 9.4 (5 years) 1971 (Feb.15) - 1975 (Dec. 31) 3.6 3.8 3.7 3.9 (5 Year) 1972 (Jan.1) - 1975 (Dec. 31) 3.4 3.6 3.4 3.7 (N yaar8O in linc with the industry's own estimates. Actual output could increase by as nruch as 15) percent, as the Consortium is mcaking heavy inves tLents in (i) loadinig terminals and storage facilities at Kharg Island and (ii) oiDieinLes and comTressor stations fIrm oil fields to terminals. Acco,d- ing to the International Petroleum YEncyclopedia these current investments wiili bring ca.epacity to over 200 million tons 1/. Productionr by othej- foreign oil compa9nies is also exnected to increase rapidly, although thi3 :is more a flunction of new oil finds by existing concessionaires. It has been assumed that these companies' production and export will continue to g,row at; slightly higher rates than the Consortium. All in all, total net production wad export of crude oil in 1971 and 1972 may develop as follo-s: 1970 1971 1972 (In million tons) Net Crude Production 190.7 213 239 Ex-norts, including oil products 183.7 204 229 The annual rates of increase are 12.0 and 1l.5 percent for production and exports respectively 2/. LQng Run Outlook 36. Ionger term prospects for Iraniaxn oil exoorts and revenues are, of course, more difficult to estimate with reasonable accuracy. Factors such as: (i.) world demand for ener, (ii) netroleum's share of energy demand, which is determined in -art by the price structure of competing energy source, (iii) oil p)roduction and (iv) oil exports from other countries are difficult to Ouantify or isolate. However, Iran may loolk forward to continued buoranc/ in its external oil sector. with exnort volume vrnr!ng by qrourcA 12 percent per annum until 1975/76. For the years 1972/73-1975/76 the per ton revenites urill every year jncre;ine byh rohl-v 4i perceTt. as a result rf the Fiebruary 15, 1971 agreement. Government revenues can therefore be I/ Tn 1970 nrnditiorn by the rConqort.iim rechpd 172 millioHn t.on.; at the assumed 12 percent armual growth rate the 200 million tons capacity will be renched by e rly 1972. jrt in+fact a 211 millin ton capcit ha been achieved alreac' Jn March 1971, when net oroduction mnounted to ove l. 4lion barrel's pe a-. LJV 4 14 . ±l.L4 J .IJJ J, -4 -I~ .tC 2/ Over the past five years (1965-70) production and exPorts have increased a+ nnual rate of 15.0 ar.d 15 L-0 respnctlvely. V-n A 4n th se growth rates into the future would yield the following (in million ;ons): 1970 1971 1972 lket crud3e ProductAon 190.7 219 25l prodcrts, 3nclud-7n1 ol p lO(IU Ct13 1H3.7 210 2hl - 26 - expected to grow by arouLnd 16 percen L per ycar; the offici;al Iran:iall Iii re of 1l .5 percent anm:ua]. increase in reeuW a;p.ii tC~ be veryr .e:sr 8\l Beyond 19'75/76 piojections becomlle muchi more difficult to mijke, bul. a .Low export -xlir :i ex,cted ^rsI"l be-'9rel '3Il.,ecn -; y aome of the .facts and analyses on which these projects are based follow,l bolow,i. Wiorld aier{ Demand 37. First to be considered is world demand for energy and de-velopment aniong variouis enery sources that are projected for the 1970us !1/. V)I; 1d energy demand( is expected to grow from 14,965 million tonis of oil equivalerit in 1970 to 7,935 million tons of oii equivalen-t by 1;j0, an annua-L grrowth rate of 5 .L percent 2/. The main sources of world energy demand in 197( were: oil (52.7 percent); coal (21.7 percent); natulra-L gas (18.2 percenrt); hy r'rn (6.7 percent) and, nuclear (0.8 percent) 3/. In t,he projection for the next decacie, some significant shifts may occur in the relative ,-osition of these en.ri_y sources. The following tabulation taken from the Inter- national Petroleuli Thhcyclooedia shows these possible changes. Share of Energy Sources in Energy Demand of lJarket Econories - Percentage Share (1TIternational Petroleum -1,'cyclopedi a) 1968 1970 1975 198U Oil 51.0 52.7 56.5 58.0 Coal. 23.7 21.7 16.9 14. 11 Natural Gas 17 . P 18.2 18.1 17.9 -brdro 7.1 6.7 6.0 5.2 !;UC1e6;.Lr 0.4 0.8 2.6 2.5 Total in million tons of oil eouivalent 3,316.0 3,665.0 4,645.0 5,9145.0 'I'he table shcws demand for oil at a substantially higher growth rate than overall enerpy demand; its relative position w.ill 'icrease by 5.7 percentage ooints. Nuclear energy will grow in relative terms by 3.7 nereent; all other 1/ The Tntet.iational- Petroleum rncvelonedia. 1970 Overview of the Seventies. pp.4-27. I have not been successful in locating other up-to-date energy st1-ies.- The data from the IPE rmst thhere-fore he taken as illiitrative, rather than authoritative. 2/ The pro,jection for r renery demand is broken domm by nr onntAnents; Centrally Planned Economies are expected to-have a 4.9 percent growth in enerr' demandl, versus -.( prcent for- +th rest of the worrqald 3/ F'or Centrally P anied Economies, the reliance on coal is very much larger than for all ot,her coWntries: T'orld shares of-. ener-r sources, Central,y Planned Economies are: oil 15.6 percent; coal 30.6 percent; natura3.1 Il ~ i ga C0.4 11 a: , IQ yUI4) I 4 '-,' e L, CadU. nuclear 0.5) p.rcent . - 27 - energy sources will diminish in importance, with coal showing the _reatest declinie. A study preDaredi by the IBRD Econonics Department 1/ shows that 'between 1955-1968 energy demand by Market E-conomies increased by 1i.4 percent ;ninminl1vy wonrld demand grew by J 9 nerrent nper year 2/. For the next decade an annual increase of around 5.5 percent is anticipated, calculated by using n averae elasticity of rdmand for ene-rgv (0 55), nn arojected gron-A-A- rate of industrial production, some 6.5 percent. The future relative position of inndvi r-duanl energy sources is anticipated as foll1ows: I-.er. Sou, es4 in I;,arke Enomi,n es ' 4.11± 'JU LA i.,V4 LJL .L A 0.1 -fl ¶~ - J..VA''L I ..f Percentage Share -iri4% I K -107C - ' A le^ n 1.6117v1R -,,-. -~ -, I ri._ ietro'letLm 39e3,- 467-4 5?4@85 Coal 39.2 28.4 19.2 15.2 t B q n o o rsr ~~~~1-) . I n, . o 1Natural Gas 1u.5 21.5 20.4 17 .U 'Hydro & Nuclear 2.6 2.8 5.6 7 .8 Total in million tons of oil equivalent 2,0S1.O 3,304.0 i4,4O0.cu 6,30u.0 A comparison with the IPE data (para. 37) shows that for the future some differences exist, which are only to be expected when a long term projec- tion is attempted. More puzzling are the widely tiivergent figures Ifor the pastt, which apparently can be attributed only to the use of different basic data. In any case, when there is no consensus on the past, full agreement on future trends is highly unlikely; the projections are therefore! only used as indicators. One such indication is that demand for petroleum will continue to grow faster than overall energy demand. :39. Over the past decade world oil consumption has grown by 8 percent Cannually, and by 8.4 percent during 1969-1970. Oil consumption by- Nlarket Elconomies is projected by the IPE to grow by almost 6 percent alnually, f'rom 1,936 million tons in 1970 2 to 3,h50 million tons by 1980. World clemand is expected to increase at a higher rate, some 6.3 percent, from ;,268 to 4,158 million tons i/ The IBRD Economics Department foresees a ;growth rate of 7.5 percent per annum for 1968-1980 for mrarket econodmies, and 7-.7 percent for the world. Both projections take into consideration the slower rate of substitution of oil as an emergy source. 3! Draft yellow Cover, March 1, 1971 by Mr. A. C. fluang. 2/ Individual energy growth rates for the neriod 1955-1908: Japan ilQ 9 :percent; Western Europe 3.7 percent. US and Canada 3.9 percent; all other -market economiPes 6=3 percent. Ibid.; pagce 16= ' 3/ The figure given by EP for 1970 is 1,942 million tons; world dermand is put at 2j28H million tons. h ,/ Ibid. - 28 - 40. Overall growth rates are usef.ul as general indications, but it is necessary to analyze the components of world oil demand in order to ass3ess Iran's futura position as exporter. The destination of Iranian crude oil exports was presented in Table 7; it shows that in 1969 some 72 percent of exports were destiaed for Western Europe and Japan, where consumption over the past decade has grown most rapidly, by 12.5 percent and 22.0 percent respectively; the increases for 1964-69 were 10.3 and 17.3 percent respecl- ively. The projection of the International Oil Encyclopedia for the next decade f'oresees rates of growth in oil demand in Western Europe and Japan of 7.2 percent and 11.1 percent 1/; IBRD forecasts are 7.5 and 10.2 percent respectively for 1968 to 1980. Other Asia and Africa now take some 24 per- cent of Iran's crude exports; and these markets will, according to the IPE, also be growing at rates which are substantially above the world demand for oil, 8.9 and 8.2 percent per annum respectively, mostly because their per capita energy consumption at present is so low. Thus, the analysis of projected consumDt,ion patterns for Iran's maior export markets indicates that potential demand i'or Iran's oil may be expected to grow by about 10 percent over the next dec:ade 2/. 1/ OIL C011SUi4PTITON Past.- Projcction bv TPE9 Annual Pate Anrnal Rate of g.rowthl of g, rowth 1969 O!O-),, 1970 1975 1 V 7_-'i(, lUstern 2urcpe T 10.3 21 IOK i 7.2 Ja, .-n 162 17 3 cW' C 5 11.1 ,frica 39 7.3 4 66 97 Other Asia/Racific 7R In. , 122 179 26) 1 8. World 2,08' 8 2,268 3,lOh 14 ,158 6.3 c.. le: BP S+--Q,c-VLCa1 1 -i.w or . thc J. O T,ndust,y: ]969. '/ Thls alnximat.e ,grW4-1h rate i-s base on thJ?oet;4ice . in 1/Li (l.A-C) U.LL LiL~~V I J4 I)W 'A UtS .) VLSI A-L '/...-. JJAAL US, A . 4/ L demand for oil in the four major Tranian exnort mirkets, arnd the share Of J'tULese marksets in 19'699 cr-uade exp,orts. UrCUft,,J Jaa,,s ~Mfl ex;votolilli;SI-i are as fullows: Percuu Gi1 UIVJU II Percent Shar-e 1970-80 7T97-i?o9) Western Europe 25.2 7.2 (10-3) 0tuer As ia i-34 8.9 Africa 10.0 8.2 ( 7.3) - 29 - O.`l -;olnlv Comneti tion 1/ )| 1 .Trji-i of cniir,m-;c i not, the only 9uo1_o-i0r of oi I to those four majior alrea ,. Table 12 gives a breakdown of suppliers to jestern Europe, .Jran, o they Ar:ir, nrild Africa. At. nreson,f the irnAor comn'TnnrT nreas for Mif.1ddle JT.,SFL 0:;1 are: (i.) North Africa, US3,`, and '.lest Africa for destern IEuroo)C, andrd (;i)' Soultheast Asia fOJ jaloan. Tn Southeast Asia and Af-rico. the co:mretition to Mi-ddle Eastern oil also comes from wi.t.,hin these area2:, soclnmret-in{ y HVt H rl"-e niotr .+, - T.r nnrl r)+7hJr 1oJrn+ ' .r.icn (A w-i.ll., of course,contintue to flow to listernz iEnrope, and to -the U.S.; so wi.ll ,iest A i ca'- I ni, 41 - ,, 1 4< Pn F l nv-ie+; - ) ,-. i-m a4-F + - ni-I r -a 4 q-a .T *m ...t i-m, aCa ii a,- + mair r'rm s w ~~~~~~~~~Ji.flh)*288JC'VV t ¼ii .J_ALV k|./t,Uv.I l .J~. LUJI U AL¼ 9 }. i.It. L* ALIiSDi *iti2AL..f' V JlZis t J from the Indonesian continental shelf and the China Sea, where explorati.on is cnntinuing,4- -at ,-,4,-4SI - ,- pa-. -)las'-, oil ,ro,lu*tioru mc ,1 alao comze-a for 'iiU 3 L. i U Ci .3 ' V' J . J 1±i.C Ui A i.n0~ W 1'L J JJA t/ I .:LcL 'A ' S.lIJS V. J a shartre of the Japan market, but most, of this oil will- probably flow to ('anai.L}ar,miii dJ'L. U .*. marUkets whic are as cit aras The North U~a area :i.s expected to produce close to 50 mil.l.on tons of oil within a few years; LIU t':OULJIIiULSG LUL iJimit mU1I) W (.)ULJ 1.0 cIIIUWLJI 6) ili.JJ_LJ.UIL LiiJ1I0 LJ,) Jn' OcIaIL O thlat the Trans-Al.aska p)ipeline constract:on will commence in 1971 2/. The .UiLkneiU .n1 I TI]J)(elago, ail(aluy -ro.LU(LaCu ;.omnu L,a mif.1.ion t,OlSj i1 979 oxnected to increase its outnut to around 100 million tons by 1973/74. 42. It is entirely possible, therefore, that Iran's share in these four .an . r. -n.le,4 ar.a ch1-.g e-ve -rn -tAto +l-,a,, +nefw, -i A4 a vr.a,a,- into,-4 acoO ,3u` then new outlets nmay develop, such as Latin America. On the whole however, the impact of the new nroducing areas mentioned above on total avanilbnl.e oil suc)nlies should no-t be ovea-rated. In the last ten years, Lota-L o-il rProdUCtion has been growing almost every year by Iran's total oil. aroduction for that year, and still there is a sellers' market in oil 3/. Pa.-her than-i fear an oil glut develon-Juig as the result of new discoveries and off-take from Alaslca, Indonesia and the lIorth Sea continental shelf, it :i.s more likely that these suoplies will be absolutely necessalry to keep up with grow4n.g world demand for oil. 1/ The working paper of the IBID Economics Department contain an analysis oi overall supply potential: Chapter IV, pp. 23-36. 2/ The Jlaska pipeline would carry 2- million tons by ]975 and 220 million tons by 19PO, bitL the line ;.s noti ]. year beh-Jind schedulle. 3/ From the B.P. Petroleum Yearbook, 1969 (In m-illion tons) 126 161 1962 62G3 )t6I 1965 1966 1267 l_98 1262 Inereaso in world o:il production over p:.ev:ious years 78 7 99 91 108 10)4 132 126 169 15 :ran's total oi.l r) r1odulct orr O 3 59 66 73 f r ? 95 15 0 12"9 1)42 168 - 30 - Table 12 INTER-AREA OIL MOVEMENTS - 1969 (Million tons) From: To: Western Europe Japan Southeast Asia Africa Caribbean 32.0 2.2 -.5 Middle East 289.0 152.8 33.3 18.8 North Africa 194.5 0.8 - 0.5 West Africa 24.o - - - TJSSR/Eastern Europp 4 .' 0.5 - 1.0 Southeast Asia 0.5 16.0 583.5 172.3 33.3 23.0 Other Sources 3.5 .5 8.31/ 5.5V Total 58.o172.8 41.eo 28.5- L cI. .U . _ ... . _ _ 1/ Southeast Asia received 8.0 million tons from other Eastern Hemisphere countries. .2/ Africa received 5.0 million tons from Western Europe. Source: UP Statistical Rteview of the World Oil Industry, 1969. - 31 - 'overInie lt T'ake Per Ton ' O.i:l n (v-r the nnrO. 10 yenars -thp incre.ase in Tranns oil revenue has come nc lmrost exclusively ifrom growth in volume; t.he onl.y instance when pe-r ion -evenuc inc'reased1 ~wns in IO)14) with Hipe introduction of' "expensi ncrg ol' royaltyr npaymnents. Thus, for Consortium exports the lverenere per t-on revenue t.o t1f (;o reo rin-nt a {' cr-,il, and - ,rloi , v exprt .s ncre 3se h\r 10.~30) inR l9ALL/ ,i- as a resullt ot' e:pensin: t;o $5.97 per ton, and subsequen-t- I - -o an aq-, e ,nrua 1at.e 1.° -anl; t. ;., e tonm in 10 -) /7' (see- lTa!le 9). As a result of recent a-reements the avera-e revenue a, CiL 1(Y I~ I _ tC o ! -r. - -A )C) I, ,, ,'o C< 'tc-iLL IVUI1 1 . _, .L L. .1<- rJ] Lw LL 1) J C !.()2 i)J ; l ton, I L tHU -,DC per IV) aIJf I Ir Junle L, 1-971; thi;s ivera ;e assiimes a; r.?tlio of )0O:60 in heavy and light cs a; dexport. L;. p. e . iJ ices Lr. pa t.ed prices r "'1,- 1' -2 , 1.971 will increase the. averagee per ton revenue from Consortium expor-ts I.)y i.rou)l h pe,-c^ent arinua:3cLy (se e Li-ai.LL/ .h. uovei-nmenui revenues from i -.. 'O s joint, vcnture agjreermneL- 1s 1hiJVL heen s3lo1! in coming, biut, once initi;l e.lorat:ion expendit4ures lhave been amort:izedn, the net profits, and thlus income tax payments shouid grow ap,.recd..Ihly. Althougrh per ton revenue ot' the partnership exports will )robably never become quite as high as r onsort.ium paymenrts, they shouid increase substantially over thle very low figurcs of 1°;°/70 and 1970/71, 3somre T$2.33 end jt? .7 respectively (see Table 9). )j5. .lrom t-he foretluin%l analysis on both e:port quantity and p-r ton Governmen;- revenue it may be conc.ludd that the g,rowt,h in revenues f'rom :Irini-an oil. exports in the next 5 ,years could be between 1)4 and 16 percent per annum. Th:i-s projected increase can be separated into (i) a g,ro4tlh of' 1O-1.2 percent i.n export volulme, and (ii) an increase iin per ton revenue of around 14 percent ]/. Developments af ter lL975'V/7b are quite uncertain, but J7or lack of better daita simrilar growth rates have bcen ass .unmad. These projecti.ons would then result -in fairly massive inflows of Lore- .n exchange. Based on a preliminary figure oL oil revenues for 197'0/71 oL' $1,65 million and( oi' $1820 millionl for 1971/72, oil revenues would increase as followvis (in miLllion dollars): Annuail lb evenue Increase: 11 po:rcent Th percent 18 percent b)y 1')7157'W ) 3,0714 3,295 3,529 h9y i 9;3o)/(l 6.9 l w9I fl073 I/ TIle incrrteaso i.n Conr:sorti.uin revenue is )1 percenTt per year: depending on t,lie d]eC"e'1opMherLtr; of illTOC nar[-;nernhi_ns the overnlL revenupe minrren,se is estimiateed aIl t.he same percentage rate. Actual revenue :increasen nUI:j be (iir 1 due t.o ledc ti.ons, in transport.t:i on east., whlich aco:rd- in, I,o the *recent 5-year a,reementl ;ould bene.I'it the prioduicer countlrie-s. CIAPTER II 111sp ect sof4 Domcs-tic Eer-I Dsnd-.-1 Introducti on 46. Tran is currently engaged in a major study of its future energy demandLs, whtLich is carr.Led out by a tlea from Staniord Research Institute (SRI). It is on the basis of these studies that the Government will decide Oi-i a n-ub'Der of questions, such as (i) to what extent will gas be used as a substitute for fuel oil demand, (ii) when and where to construct addi- tional pipelines, and (iii) when and where to build new refineries; it may be expected that the whole price structure of the energr market will also come under review, so that the Government may be able -to encourage a desired substitution between various energy sources available to Iran. 47. F`irm conclusions regarding future energy policy will therefore have to awaeit the final SRI report, which should be ready in the very near future. Hovever, some facts and figures are already available that indi- cate an emergJing energy shortage in the Northern part of the country, a conclusion slhared by SRI and NIOC. Northern Iran, including the Tehran region, has only one limited energy source, hydroelectricity, and a potential for natural gas near Mashad. But most of its energy require- ments are brought in from the South, either by pipe, rail or truck. To alleviate the shortage-t yo sets of projects have been proposed: (a) a new product pipeline from Tehran to Tabriz; electrification of pumping stations on the Ahwaz--Tehran crude and products linejwhich w5ll marginally increase throughput capacity; and additional pumping stations on the Tehran-Mashad line, and (b a new products line Ahwaz-Tehran, plus additional pumping stations on the Abadan-Ahwaz products line. The first set of projects were qppraised by the TBRD in March 1971; total cost is estimated at t63 rillion, of which $43 rmillion is foreign exchange. The second group of projects would be ready for annraisal by the fall of 1971. These proJects would, accordling to SRI, meet the energy requirements of the next 4 or 5 years. l,R Thre loqng+-tefrrn problem, l er c^fX ctsfyring Tran1s rapidlv growing demand for energy still remains to be solved. Regarding the long- term. projectio-Ons 0Jo' dema-nd, .nrl avir -la 1ble ene-"rgJr sour-r.c-s a mna,r rli qa-ro- ment exists between NIOC and SRI about the role of natural gas. NIOC cons-iders theC 6gas-.u-ply contrac -rlth the- TTSR, iv-lirjn- 1r0 billiony -m3/yer, t441 I.JL tkV;± 3 UuIV; - .3 V; Liii Vi ~~~~~~~~~~~~~~V; V 114 VIA VSAV; V LiLAL, 411 V L4~~~~~~~~~~~ V 16-L'--iL--i4--..t-.J....t'w-.J-h-- J as completely- fixed; only the remaining throughput capacity would thus be ava 4lable fo. doms cos v,r,ption, some A bllion m3. - SO Iome o-fU th'-e so- 3 to meet the long range energy supply problem will be discussed in paragraphs 629-65. /P Past Trends inl riergy Demand 49. Total internal energy demand has gro-Jm rapidly over the past decade; for the years 1L960-69 demand grew by 8.6 percent annually, and for the period 1964-69 the :increase is 10.7 percent per year (see Table 13). Table 13 D)mFEsTnc ENERGY DEMAND: 1960-1969 (Trillion BrTU i/J) 19-269 GGrowth Rates per Year 1960 1961 1962 15963 1964 196 7 1L967 1968 1961 1 Share . Petrolelxn 13,2 145 154h 161 185 202 228 261 295 329 74.0 10.6 12.2 Natural. Gas 2/ 59 37 39 42 42 WI 51 51 55 61 13.7 5.2 7.4 Hydroel.ectS-ic 1 3 4 6 7 10 14 23 e5. 1 38.5 Charcoal and Wood 23 23 23 20 20 19 19 18 17 1.7 3.8 -3.0 -2.7 AniTal Matt,er 1:2 11 I1 10 10 9 9 8 8 7 1,7 -5.0 -5.2 Coal 6 6 6 5 6 j 7 7 7 7 7 1.6 1.5 )1.9 TiOTAL ?11 221 234 242 266 286 320 356 395 4.3 100(.0 8.6 10..7 Ann-ual Gro-wth RIate -- 4.7 5.9 3,4 9.9 7.57 119 11 3 11.0 12.2 1/ -BT: = Bzitish Thermal TJiit. Average conversion. rates are: 1 billion BTJ = 24M ton oil (equivalent to 172 barrels); 1 billion BT1U7 = 27,(000 m3 natural gaF; 1 billion BT'U = 203 .,CO0 KWH. Source of conversion data: International retr o1e Ui hcyc`oped4a- 1970. -', /-7atural gas consunmation includes use in the field, as well as use for refi-ner, fuel an.d for pumping stations. Source: S.RI. Report on Short Term 'Growbth of Ener_g Demand in Iran, August 1970, p. 23. G(ross d(Omest;:LC proCdllct :;.]CreasCd by 10.-9 p(_erccn L ar)d :0. ).P )rcent)t respec- tively, ant for non-o.l GBP the rates wtvere 8..9 and 9.7 porccrnt J.!. Ihe income elasiticity of' demand for crieigy, cal(alat-e( on non-oil GpfP, there- fore increased Frorm 0.y .7 L or the years 960-.69 to 0.U7 I.or the per-iod 196)4-69. On a year-by-year basis, however, the elasticities fluctU1ate rather -uiicdfLy, reachi.ng a low of 0.57 in 196,3, and a high of 1.6 irL 1966 2/ (see T-able 1l4). Yor tVe last few years, 1967-69, th-e iigure is arounnd 1.0; the Sm;;anford Research Institute study works with an income elasticit1y of deiisand for energy of 1.2, based on energy dcemand increases of 9 percent and 10.Ij per(cent re.pec:tively. Unfortiunately, past dcata are no great h-oelp in deciding whether this figure is on the high sidce or not. 50. Table 13 also shows the sources of energy supply, with the per- cerntage shares Jor :individlual products in 1969. Petrolewi products supply almost 3/4 oI total domestic energy requirements, natural gas almost I4 percent, 3'3/ so that the oil and gas sector together provide over 87 percent u.. iu'uu dome,stic ener gTy. Next conies hyctro-electric power, ;ust over 5 percent of total demandl; this source of energy lhas been groWing at almost hO percent ever the past five vears, thus reflectine the lheavy investments in this sector, especially on dams. Coa:l consuLmiption has been increasing quite slowlyv. and represents oIlv 1.6 percent of enerev suo)lv: charcoal. wfood and animal matter have decreased in absolute terms and together accounrt for onlyv nrc. nrefrnt of total siorce.s of e rnnrc'-v Fmnlvt Dorn.'i e (Coism1rrint,ini of Oil 51. ThbT ? onnl T-radnian Mil Gonmnprnr i z -in hargp of' oil ma ikePtincg ndnr distribution in Iran. To this end the company operates (i) refineries, (ii) pipelirer,~ (iii) trucking fleet, (:iwr oil -i A n+ ar.d (v) r+etail out- lets; the company also sells aviation fuel. A wholly-owned subsidiary of NIOC,1 t-e NoCn' Iranian fGas k1OI;P1Y (NGC isrsosil Uo pouto and distribution of natural gas andt liquid gas products. The NIGC will 'so operate the- Irai-an G:.as Tr-li1ne;_ --,-1 Iprie fr om thl-s4 trunlne -.ill dL) .p'S- a UM L I'S L i 4 ui \J IS .1 £UJiS jU JLI I UXlUlt_ L l UIi.L~ UIUrL W'S LV±.JL connect to various cities such as Shiraz, Isfahan, Ghom, Tehran and Ohazvin. 1/ GDP series: Non-oil GDP, plus the GDP contribution of the oil sector (in billions of rials): 60/61 61/62 62/63 63/64 64/65 65/66 66/67 67/68 68/69 69/70 Non-oil GDP 256 266 283 300 346 377 405 477 498 550 Oil Sector GDP 30 33 38 40 46 52 60 71 82 95 GDP at Current Prices 286 300 321L 341 393 429 465 548 580 645 2/ OECD energy studies show an income elasticity of demand for energy in West- ern Europe of 0.8 over the recent past. For a developing country, how- ever, starting, from a low base of enerev consumption, the income elasti- city mAy well be around 1.0. 3/ This figure includes use of gas in the oil fields and refineries; see paras. 57-61. Table1 INCOIMEl _LA5TiC;TT OF D 'f" a 'Fo Non- il DP, at Trwo Y~ear Movin D'emand for EnerKr Fact,or Cost Percentage Increase of Income El=asticitv' of Averae:e of Income Yea- in trillion BTU Current Prices Eergy Demand CDp De]nand for Energy Elasictr of Billion Rial-s Demand 1960 210. 6 255.7 -- 1961 221.2 266.3 5.C3 4.15 1.212 1,056 1962 23:3.6 282.9 5.61 6.23 0.900 0,73Ll 1963 24L].7 300.2 3.L7 6.11 0.568 o.61 5 l96 266. 2 346.3 10.1.4 15.35 0.661 0 .735 1°6, 286.1 377.0 7.L48 8.86 C.8l44 1.226 1966 320.3 Lo5.0 11.95 7.43 1.605 1,.336 1967 355'.9 L47.3 11.11 10.44 1.064 1.023 1968 39o5.2 197.6 1l.C)L 11.24 0.982 1.067 1S69 443. Sd 5aL9.9 12.1o0 lQ.51 1.151 S>ourcWe: 'i.R.I. S-tudy, and I.B.R.D. cLata, on \',DP. - 36 - 52. Dormest;ic consunption of oil products _/ has increased by 12.5 per- cent during the past five years; for the future a slightly lower rate of increase is anticipated 2/, in part because of the availability of' natural gas from the Iranian Gas Trunkline which will be used to substitute f'or fuel oil requirements. Growth rates of individual products over the period L964-69 were as followqs: fuel oil (13.5 percent); gas oil (14.5 percent); kerosene (10.1 percent); and gasoline (7.6 percent). Sales of other oil products including LPG, were growing at about 17.5 percent anmually over the five-year period (see Table 15 ). During the years 1964-69 nona-oil GDP at current pr-ices increased by 9.7 percent annually over the five-year period; consunption oi' oil products grew by 12.5 percent per year over that period; the income elasticity of demand for all oil products was therefore 1.29, quite a bit higlher than the overall elasticity of 0.87 that was calculated in paragraph 49. Refining t for ]:nternal Requirement 23. Refining of' crude oil in Iran currently takes place in Abadan, Tehran, and Kerma.nshah refineries 3/ (see Table16)e The Abadan refinery operates both for the Consortlum (Throughput 16.3 million tons in 1969) and for NIOC. with a 1969 throughput of 4.1 million tons. The Tehran refinery processed some 3.8 million tons in 1969, and Kermanshah 512 thousand tons. During the past six years (1964-69) total crude oil refined for Iran's domes'tic market increased from 3.J, million tons to almost 8.5 million tons. an annual growth rate of over 19 percent. 4/ The capacity of the Tehran refinery -is ThImt Jh 3 t ri iIi on tons. and the Kermanshah rf'Linerv is nresently being expanded to 777 thousand tons. A refiner- with the capacity of about 2.1 million t.OISn per year is now u nder cntr .ict±ion innS.hiraz. with com- pletion date set f'or September 1972. An additional refinery is planned in Tabriz, but finalization of these plans is pending the SRI report- - Iran's future domestic requirements for petroleum products. 1/ Excluding sales of bunker (ships) and jet fuels. r/ SnI St-udy: R4eq-uireu expansion of riiajor petrolew.i facilities in Iran to meet short-term gro-wth in demand; August, 1970. The growth rates for inteInal demnand are 10.7 percent for 1960-69, and 10.2g percent pro- jected for 1969-82. The SRI long-range projection foresees a definite change in that relationship as natural gas will become a substitute for oil, especially for industrial users and electricity generation.. The use of gas for household consumption will probably remain fairly limited in the near future. 3/ The Kerrnanshah refinery is supplied from the Naft-e-Shah oilf'ield, where a topping plant omperates r in con cM on winth the refinery- hi Refining for the domestic market increased by 19.1 percent and con- sumption by 12.5 percent during 1964-69. The dif'ference represents sales of bunker (ships) and Jet (airplane) fTels. Table 1 5 DOMESTIC CONSUT1IION OF' OIL PRODUC`'S/ ( Thou.sancd MtonsT Growth 'iate s 1964 1965, 1966 1967' L968 19?69 196a6 169 /O Fuel uil l,247 1,417 1,638 1,852 2,133 2,332 13.5 9.3 Gas Oil 1,117 1,319 1,557 1, 808 2,042 2,196 1405 7.5 Kerosene 1,188 2,216 1,266 1,456 1L,647 1,933 10.1. 17.3 Gasoline 612 591 662 706 780 883 7.6 1]3.2 Other Products./ 310 409 506. 611 551 689 17. 5 25.0 Total 3onsu=rption-/ 4474 4h,952 5',629 6,473 7,153 8,033 12.5 1L2.3 7 Th-edata. werIe originalLy gi:ven in barrels and -were converted at a rate of 7.6 barrels = 1 Mton for fuel oil, gas oil, kerosene and gasoline; other products conversion rate is around 7.0 barrels = 1 XLton. 2/ Includes; liquid gas sold by the National Iranian GaLs Co. 2/ Excludes sales of bInker fuiels. Source: National Iranian Oil Company (i) 1965' - 1969 data given in Mtons - Bank Markazi Report 1970 (ii) 196:3 - :964 data given in barrels - Bank Markazi Report 19659 T'able 15 REFINING OF CRUDE OIL: 1964-1969 (thousand tons Growth Rate 1964 1965 1966 1967 1968 196,9 1 : Crude Oi1 De'livered to: Abadan FLefiniery 18,587 18,791 19,]L54 19,1322 20,585 20,474 2,0 ; of which: for IOO 15,052 15,019 15,013 15,,050 16,238 16,331 1,6% for NIOC 3,535 3,772 4,:L41 4,772 4,347 Lh,L43 3.3% Tehran Refinery - - - - 2,811 3,808 Keriianshiah ard Naft-e-Shah - - 480 1i82 505 512 Refineries Sub- total: crude oil refined for domestic market: 3,535 3,772 4,621 5,25L 7,663 8,L463 19 1% Total crude refined in Iran:18,587 18,791 19,634 20,30o 23,902 24,794 6.0, Source: National Iranian Oil Company - 39 - T; stt-bu ion &nd Pr icng of Oil IPnroduc 5~~iLS . stribuLtion of petr-l w, products absorbs considerabl resour-e * £LL~ Ut .LUUU~L'J1 . ~J UI_ UJ-LU Lul JJ tL L'- U D, v ~ L C) L C A. in Iran, because the major conswuing areas are far removed from crude oil production areas on -the Persianl Gulf . Trar,sportation of oil aLd oil pro- ducts now account for about 30 percent of all internal traffic ton/km. All modes oI' transport; rail, road, and river tankers and pipelines, are used. Pipelines, however, have become the predominant mode of transport, accoun-t- ing for over 73 percent of total ton/km traffic in oil products during 1969 (see Table 117). Pipeline transportation makes good economic sense where long distances and large volumes are involved; in Iran, wnere tne average length of haul is approximately 1,000 km, the advantage of pipelines over other transportation modes is illustrated in Table 18 1/. In 1969, the rate per ton/km for railways and road transport (by contract) were 4.5 and 6.5 times more expensive than the rate for pipelines. Major pipelines are product and crude lines from Abadan to Ahwaz, and hence to Tehran, from Tehran to Mashad, and from Ahwaz to Shiraz; the netwzork is some 8,980 km long. 55. Petroleum products are priced unifonl-Ly throughout Iran, except for fuel oil, which is about 38 percent cheapcr in the main producing area, the prov:ince of Khuzestan (see Table 19). All petroleum products are taxed., with motor gasoline bearing the heaviest surtax. Total indirect taxes -- surtax, charity and municipality tax -- amount to some 64 percent of retail sales price of gasoline, around 30 percent for kerosene and gas oil, and a varying percentage on fuel oil, depending on the region (see Table i9). It would seem that the price structure of at least petrolelum products does nolt properly reflect the economic cost for the vari-ous regions of Iran, some of which are highly inaccessible, or far removed from the producing and refini ng areas. In view of the pro'jected energv shortage in the North. a restructuring of retail prices -- not orLLy of petroleum products, but al 1 Pnmrpv .nrc. - - mi prht;, wp.l ht _n onJrfil1 tcnol in mst.i ntn t.hat. .qhrt.- age. 1/ The reference to the "average 1,000 km haul" is from the IBRD Transport Sector Survey. The SRI report gives the length of the pipeline network by individual pipeline; none of these is longer than 1,000 km. It is only -hen oil products are pumped from Abadan to Mashad. that the total haul exceeds 1,000 km (1,701 km). - LAo - Table 17 CHANGES IN THE OUTPU[T OF TRANSPORTATION SYSTII CONPARED -wTH iREAL CONUIM'1TI0N OF 1OIL PJD1)CTSL/ 196(-1969 Output of transportation - Real Consumption rmiI11i n tt-!n kilometer of oil products Year Pipeline! Other Total 1000 cubic _Transt^"+3/ ritpt+ me+ter 1960 1532 1559 3091 385'7 1961 ~ ~ ~ LL.L ±18A4 161 31 0U6 , -LI , - .L7U) .LcU 1 i LOU 1763~ ~ ~~~~~~~- --7 123 45 464UU 1904 ~~~~2-24 4 5 -51 553 9un i965 28149 2037 4886 5877 i966 337A 2163 5537 6655 1967 4296 2025 6321 7650 1968 5286 2074 7359 8569 1.969 5835 2236 8071 9591 &/ Actual consuTnl)tion of oil products without taking into account consumption of oil industry, liquid gas and purchase of fuel for ships (bunker fuel) 2/ From 1966 onwards includes output of Kermanshah pipeline 3/ For the years 1962 - 1966 a breakdown of "other transport," is available- 1962 1963 1964 1965 1966 Road tankers 568 567 633 770 9143 Rail 662 641 1,171 1,238 1,180 Sea and River 33 22 23 29 L0 Tankers 1.263 1230 Ls27 2,037 2-1F3 Source: NIOC Management Statistics, 1969; page 37 4hi- Table 18 AVERAGE RATE OF TRANSPORTATION OF CRUDE OIL AND OIL P.DUCTS, By MW OF TPiLPORiT: iL960-1969 (p4 *,-I jJeI o dLI I 1 41OIW Year Pipeline Railway on contract by NIOC IRate 1960 0.37 1.20 1.83 2.51 0.96 1961 0o36 1,20 1.78 2.40 0.89 1962 O,4O 1.20 1.67 1.79 0.78 1963 0.39 1.21 1.64 1.71 074 1964 0,35 1.08 1.61 1.68 0.72 1965 0.38 1.o6 1.60 1.69 0.75 1966 0.38 1.08 1.51 1.71 0.73 1967 O.34 1.12 1.47 1.71 0.65 1968 0.27 1.14 154 1063 0,58 1969 0.25 1.12 1.61 1.75 0.58 Source: NIOC Management Statistics, page 49. Table 19 BREAKDKOAN OF MAIN PETI?OLEE PRODUCT PRICES: 1970 (riaiS per liter) Taxes Le-vied on Petroleum Products Retail Sales NIOC Sales P:rice Tax & Chatv 'X,rnicipa1ity __Price (Inc .Dealers' Io) Total Surta Tax T ax 1Motor Gasoline 6.C0 2.15 3.85 3,.15 0.20 0.50 Kerosine 2.5c0 1.70 0.80 0.75 -- 0.05 Gas Oil 2.4CI 1.65 0.75 0.70 -- 0.05 Fuel. Oil. in: Khuzestan 0.750 0.5982 0.1518 0.125' -- 0.0268 Keinanshah 1.2CO 0.5'982 0.6018 0.575 -- 0.0268 Tehran 1.200 0.8661 0.3339 C).307'1 -- 0,0268 Other P:Laces 1.200 1.1:339 0o0661 C).0393 -- 0.0268 Source: National Iranian Oil Company - 43 - 56. A comparison shows that in Iran petroleum product prices are in alimost a:'l cases substantially lower than in otner countries 'L/. ThE following tabulation gives data per July 31, 1970 for several of the major countries: Motor Gasoline Kerosene (Regular) Bunker & Fuel Oil (In US $ per G esti-mL-rated by SRI rto gro-w by 1 .L4 percent arnually for the period 1969-1982; at this rate total internal energy demand would double by 1976 from W43 trililon BTU in 196O to around 910 trillion BTU, and almost double again by 1982 to some 1,800 trillion BTU (see Table 21). At the same time, G0'P is projected to grow by 8.5 percent per annLm, indicating an income elasticity of demand for energy of 1.22. Over the past ten years, Iran's energy demand, as measured in IBTU equivalent, has been growing at 8.6 percent per arnum, and at 10.7 percent for the years 1964-69. 1/ I am thirnking here of ef'fects on nollution. and more generallv the ecology. ./ A limiting factor in expanding product exports from Abadan has been the need to supply Iran's domestic requirements. Even though most consumiing areas prefer to have their own refineries, there wiould be no problem to dispose of another 4 million tons of oil products, now supplied to the domestic market. Tabloe 21 PROJECTED INTTEFNAL KITEGY D341AN: L972-1982 (Triillion KTU) Pe:rcenage Share Growth Rates,_Anmnual 19R69 1972 1975 197'17 7L982 _9__ 1982 196Ri2 :.17772 Petroleum 329 430 569 697 1,j135 740o 63.0 1C).0 10.2 NaLtural Gas 061 77 138 218 561 13.7 3101 18.7 21.0 Sub-total 389 507 707 914 1,696 87.7 94.1 12.t0 13.2 Charcoal amd ;.,ood 17 15 14L 14 12 3.8 0.7 -2.0 -2.5 Ar.dmal Matter 7 6 5 45 4 1.7 0.2O K3.4 -4.7 H:rdro-*electric 23 35 80 77 75 5.1 4.2 9.7 -0.5 Coal 7 7 11 1: 16 1.6 0.Q 6.4 0.4 Total 443 569 817 1,025 1,802 lo0.0 o00,C) 11.4 1L.9 Totals ma;y not add due to roindIMg. Gro,Ah Rate bV Period, ToteLL Er er_)erneand 1969 - 72 8.8 196,9 - 75 10-7 L972 - 7' 12.8 1969 - 77 l L1 l972 - 77 12c5 1975 - 77 12 7.0 1969 - 82 11 .4 L972 - 82 12.3 1975 - 82 : 12,0 1977-82 :-1.51 . resort on short-tennr growth of energy drnanti in Irani, August 19'Q. oo.23. - 4L - 63 Amonng -thle sources of energ supply, petroleuirm anrd natur-l g2s are expected to increase their combined relative share from over 74 per- c enr t i-n 1 Q '1 / -to over 0) perIr -i n ]98. C h-a-n Il iw.oor1 onrl ni in-0 matter will all show^: absolute decreases, with hydroelectric 2/ and coal r1nor'l i ni n y) in wr' a 4 !- . 4-- ..n .. I,-4 .I . n, A r A1 cn e.rn + -r. es 'JL ' .~ , S L v 411,V), tI 0_1 Jll,:.) 0 W UG UZ . L,JV U O LI .LLA'_i CiCLO - l *61 O WILj . _l V- will be due to coking requirements of the steel mill in Esfahan. The most U IJtLi t 4'4v 4i t1h Iu-4jJl j -tUeZLI, -- 1 4et2 is the projec- ted 4- - 'L of natural gas, particularly aft;er 1972; some of the major benei'its from this' "UeYrelurilernt .wou'ld bUe: (i) to use a resource, now mostly flared, which has a low or zero op)ortunity cost; (i:i) to save a resource, petroleum, which can be exported, and has a oositive opportunity cost; (iii) to use a fuel that is convenient, easy to handle and to cnrtrol - and that renqires no consumer storage facilities; and. (iv) to use a fuel that, is clean, and will help alleviate air pollution. il 64. Out of SRITs long-term energy demand study grew the realization of imminent short-term supply shortages in the northern areas of Iran. Suclh shortages were also predicted by NIOC. To meet -these projected energy requirements, the SRI has strongly recomrnended, and NIOC has endorsed these proposals, to construct a new pipeline f'or oil products from Tehran -to Tabriz, and to increase the capacity on a number of existing pipelines from the south to Tehrari, arid from Tehran -to 14ashad. The approximate cost of these projectls is around $63 million, wii-th a $L3 rillion foreign exchange content. A second related batch of projects, involving a crude oil pipe- line from Ahwaz in the south to Tehran, and further electrif'ication of existing pipelines to increase throughput capacity, would be ready for Bank appraisal in the fall of 1971. The estimated cost wouLLd be $100 million, of which $70 million foreign exchange. 65. The recornuiendations of SRI are now being discussed with NIOC and the Government. Wahen the projec-tions have been finalized, the Government would bDe ab:Le to draw up an investment program for the energy sector. 1/ For 1969 primary energy consumption for the US, Western Europe, and Japan -was iiet by the follo-wing sources of energy (in percentage share): U.S.A. Western Europe Japan Petroleum 44.5 58.7 67.4 Natural las 324.) Q.o 1.3 Solid Fuels 21.8 32.8 23.0 Watpr Power 1.3 3.2 8=3 Nuclear 0.1 0.3 0.1 Total~ 100.1 100.1 100.1 2/ llyclroelectric power supply will peak in 1974; no reasons given f'or this developmen-t. But presumably by that year all ava-ilable hydro-capacity will have been utilized, and dams under construction would only be single-purpose dams, namely for irrigation. - 429 - CHAPTEI I'Il National iranian Oil Company Historical Background and Present Structure 66. Following the April 1951 nationalization of the oil indulstry in Iran, NIOC was foiTaed by the Governient in order to continue the oil operations in Iran. On October 29, 195)4 an agreement was signed between the Government and a group oF oil companies (eight, later increased to seventeen), usually ref'erred to as the Consortium. While the Consortium was given the right of exploitation and the use of the fixed assets in the Agreement Area, NIOC retained the owniership of these assets, taking, however, responsibility for non-basic services in -that area. The company is also in charg:e of oil marketing and distribution in Iran; in a sense, therefore, NIOC is the successor to the Anglo-Iranian Oil Company, which operated in Iran from 1908 unti1 the nationalization in 1951. 67. The authorized capital of NIOC is Ills. 10 billion in 10,000 shares which are 50 percent paid up; all shares are non-transferable and are held by the Tranian novernment. NTOC has formed two affiliates to ideal with relatecd business activities, namely the National Petrochemical Company (NPG fIrmnrr in rQ54). and the. Nationa] Trani2n Gas Colfls nv (NIY,r formed in 1966), both wholly-owned by NIOC. Furthermore, the company operates a pipe-rollin I I fig m inAlwaz refineries at Tehran and Kerranshah, -and a topping plant in Naft-i-Shah. Operations of' NIOC range the whole gamut of the oil industr - 'rom ex,lorati-on a-nd _exp`1oit+ation,I to+ r nn nrd distribution in Iran, and have lately also included exports. 68. EXtensive exploration and drilling were carried out in many parl;s of' LIran .u hL bI- e Agreement Area ole A - - ± 1 -eA'as been -scovore in Azarbaidjan province, and the company is operating and developing the Naft- i -Sah oilfield. In additlon, gas has been di scovereed in the Serajeh area (about 200 km south of Tehran), the Tanj-e-Bijar gas field southwest of' Kermianshah '2/, and at Sarakhs sore Ou Km i7rom Mashad; the reserves in the latter field are of great magnitude, but will at present only be developed to supply- the city of Mashad 3/. 1/ Following an agreement with Iran in December 1966, the Consortium has relinquished about one quarter of its concessionary area - three parcels total-Ling 64,929 square kilometers - and these are now being explored by NIOC in partnership with the Continental Oil Company. H/ Gas deposits are estimated at 85 billion m' (3 trillion cubic feet at 1 CFz'0.02832m3) - NIOC, 1968 Annual ReEart, page 5. 3/ Prelimin-lry tests show the Khan-e-Giran reservoir at Sarakhs contains some 1L() billion m (18 trillion CF) op.cit. page 5. 69. With a view to fully exploiting the oil resources of' the petroleun districts of the-country, arnd thc continental, sheli' - which lies outs ldo the Agreement Area - N']OC has entered into jo.int ventures wit;h overseas companies. 'Sincre l9'7 agreements have been concluded with about 8 foreign partners, of which S'IlP,IPAC, 1APCO andc IM411iIGO are currenttly in p)roduc - tion. Paragraphs 19-23 contain detailed int'oiination regd.rding these ;jorit venture agre'emrlents. Production azd Disposal '70. Table 1 shows that actual prodiiction by NIOC, is ninute, some 500,00( torns in 1)7(0, as comparud to Iran's total pro(duiction of 190 million torns. NIOC howe-ver, also has a claim to oil produced under the joint venture agreements wi]th f'oreign oil companri-1es, which produced an estimated lb maillion tons in 1970.. The oil produced by NTOC itsell' from the Naft-e-Shah oil- fields is processed in the topping plant located near the fields, and thence byv tha iefinnery at Kermans,-hah: NTOC's share oi' oil nroduced bv the partner- ship agreements is mostly disposed of by the foreign partners. To satisi'y Iran's dnmomet.i c oi req;uiremelnts T N(V has ac la1nim to Cnnsortium-produced oil; these deliveries accounted for almost 8.6 million tons in 1969. Part of the oil comes inr the form of' products fron the Abadan refinery, and the rest as crude feedstock for the Tebrani refinery and lubrication plant. The 1'-4 Agreement guarantee ITran f'irs- c all on Ab--an o-tp an-r shorage of oil, or oil procducts is therefore a result of shortcomings in the distri- UU.LuIL'iJ b, II IU U1 C dvdl J dU i JLty. 71. in a supplemental agreement of Decemer 1966, the Corlsortium agreed to make availabl( to NIOC sorne 20 million tons of oil during the years 1960-72 tO itelp meet N]:OCIs sales commitments to Eastern European countries. These commitments are part of Iran's barter-trade agreeaents with Rumania and Yfugoslavia 1/. In t,he luture IUOC expects to export more oil, probably from i-ts joint, vent-ure Production, to ref'inleries in India anid South Africa, in which it has an equit,y participation. Refineries 72. Refining capacity in Iran has increased quite rapidly in the past few years (Table16 ). The Abadan refinery, operated by the Consortium, and still the largest in the world, supplies part of Iran's internal product requirements. Tlhe iTehran refine-ry, recently expanded, and the Kermanslnhah refin1?ry meet roulrhi.y hall' of domestic petroleuim product consumption. One additional rei'inery is unrder construction near Shiraz, and one is planned near Tabriz, in the northwestern part of the country. A lubrication oil plant is also umder construction near the existing refinery in Tehran. _/ The Following amounts were exported by NIOC from the Agreement Area: 1968 0.332 million tonis 1Y69 1.550 million torns 1970 2.1,61 million tons - 51 - Current Projects 73. NI-OC is currently engaged in a number of projects: (i) in tlhe oil sectUor, (LI/ L[i u I the natural 4dt UUJ, \ - 4I L1 1- bi sector, and (iv) in overscas joint ventures. The fourth Five Year Plan allocations for oil, gas, cUlell1iCal arid petrochemicaJ. irI-vesI(LaLts were originally budgeted. at iHls. 51,582 bil:Lion, with another Rl.s. 2.5 billion for direct investments abroad (see Table 22). Revised allocations for oil, gas and petrochemicals are now put at over Rls. 80 billion, and th:Ls may be on the low side cdue to cost un(deret-nmat;es oG vari.ous oil pipeline projects now under consideration. The petrochemical projects will be di.scussed in a report of the Industrial Missiorl that visited iran in early 1971. The natural gas project - the Iranian Gas Truinkline, or TGAT - is discussed in Appendix III to this report. This secti.on will theretore limit itself to the oil sector investments, both domestic and overseas. 7l4. Very recently the Tehran refinery operations were- completely "de-bugged", and capacity increased to 4.3 million tons; throughput in 1969 amounted to 3.8 million tons. Currently undlerwray is the renova- ti.on and expansion of the Kermiarshah refinerv, from around o.r. imi.li.on tons to 0.78 million tons; the current cost estimate of this eypansion is Rls.1,25 billionor $16 million, of which about $1.1 million is foreign exchange 1/. The start-up is planned .or April 1571. Yet anothler refinery is now under construLction near Shiraz, witlh a 2.)4 mil]ion ton throughput capacity: start-uip is scheduled lor Sep,tember 1972. The final cos-t estil- mates are fRls. 4.25 billion, equivalent to $56 million, of wl-ich around $40 million is foreign exchange. Finallv, an oil lubri.cation lanI. is being constructed a-t the site of -the Tehran refinery. The investment is estimnted at Pls ? hi bilion. or .$314 million; .nri th the nlant comi-nr on streaum in November 1972. Another series oi projects is related to thle nprnor,ectdi rperTr hor+age in the northrern rtbionn (seeo pfr.-ur'r- 625nh). 7L NITOG is also) rnacdrrPr3 in nve(rses vnture,n -notablyarfr er in India (Madras) which became operative in July 1969, and *the constrnction, s1;il1 o n-ging rof a i;n million ref'inery in SoUt:h .frica. The lMtdras refiner.y is a joint venture of the Government of India, NIOC and Amoco Tndiai;-i -i4- 1.Hl process 9 2. million ons, fr nil r-,-r,'i tb- D oi] fielcd. NIOC has concluded a 20-year supply contract withi the Indian Goverunment; no detIalls on. prices are avaitl.abl e. Oi]. is ex-por 4Ctked 4 . to A r from a. joint-ag.,reement concession, apparently by the foreign partner. The South i;:Ur,a n reieywl lopoesahout 2.r J lli t -ls c- - n-l-l-- ,J WLU bt L _L.I.'t retZJ. .LJit3.~y W LJ_L ItLOUI 1JJ.Uk SJ~~cULU U C ILLLLJ)JLA)lI W tUJU Cd41iU_1tI.iL~ it wats expected to go on stream by the end of 1970. The capital outflows coninect;ed. W,th. Uthe (Lirect, investmlteLnt.; of NLUL -arU Ic) d i LC 23; 1// ci'cs t u.i 'uie capacity increase seems- cuite hign, around .j;57ton as ompared to $23/ton for the new refinery in Shiraz, arind an investment pe:r ton1 of' ;$140.00 f'or the Tehran reflnery. The Tehran invesi-inerlt F.ig,ure is, i,nter al-a, calculated on refin(ery and ancillary facilities, plus a neow pipel.ire i rom the AlWwaz liel d; throughpuit cap)acity then achieved WaILs I .8 million tons. Table 22 NIOC INVESTi4ENr PROGRAM - REVISED FOURTHI FIVE-YEAR PLAN (billion Rials) Oi:L Gas Petrochemicals Total 15968/69 (actual) 187 14,132 5,951 20,270 15969/70 (actual) 1,080 11,424 4,874 17,378 1970/71 (buidget) 4,571 6,733 3,239 14,543 1971/72 (estimate) 9,937 6,871 1,368 18,176 1972/73 (estimate) 5,459 4,218 387 10,064 Tot..l Rvi sed 4th Plan Allocation 21,234 43,378 15,819 80,431 Original 4th Plan Allocation 4.,670 21,630 25,282 1/ 51,582 1/ Allocation to cheaical and petrochemical industries. Page 129 of the lith Plzn Docunient. Source: Armex to Report "Current Economic Postion and Prospects of Iran" of Febrruary 17, 1971, titled: ':nvestment Program and Projects". Table 23 D)IREC'T IT NESN.D$T BY 'FE CONSORTIUM, OTERBR F'REIGN OIL COPANIES Ai:D NIOC (in million dollar) CL5>67!L 1965 196516 166/7 1]967/8 1968-/ Co]osortium 6 -1 53 El 16 20 Othner Foreign Oil Comxanies _2L -1I 13 20 Sub-total O 189 L2 107 34 hO NIC Direct Investments Abroad - -1 -2 Net Direct Investrents _n the Ixternal Cl Sebctor 6 189 L2 107 33 38 Soarce: _Bsrik '.arkazi, Iran and I.IF. th-ie amounts are Jai rly modcst, $p1 ancd $2 nLlILiri fior 1966/69 ani( 1969/7U respectiveJ y. The, Jour thi Pla) allocation for theso investments amounted to lhs. 2.5 billion, equivalen-t to i;$33 million. 6tudies are currently underi.ay involving cooperation and poss ibly partic:i.pation by NI()C in expa.ision/Icnontrut-ct,ion of refineries in ?lugoslavia and Spain. NIOC's Subsidiaries 76. The wholly-ov.1ned subsidiaries of NIOC are operating in the gas and petrochemricals sector, the National Irarian Gas CoCmipany and the National Petroc:heiriical Company respectively. These two subsidiaries do not under- take any major investment themselves: NIOC acts on their behalf, and only after project completion do the subsidiaries assume responsibility. NIGC is responsible l:or distribution and sale of gras, and gas linuids in Irin; it will also operate the IGAT system, including spurlines, once that projec-. is comnletelvr finished. NPC nroducepsimports andl distributes fertilizer procducts; a substantial part of outpult from recently completed projects J;''T he exr- Yn L. li't;i s 0o' rece?nt bJPC nrn-iect.c ro nvm-il,nhi in -a January 26, 1971 workinEg paper, and in a forthcoming report of the Irndustrial Mission to Iran. NIOC Revenue PalyrTents and Dividends 77. T'he Government receives from NIOC (i) diviclends, (ii) profit tax, (lii) indirect, ta;:es th+a+ 1TT' co11ects on sa los of petroleum prodc-ts, and (iv) the share of NIOC in miscellaneous joint venture agreements. Table 26 sho-us thL'a-tL Ior') -h l- 1 ,ye a rs I 16'A to 1969 )i tota 'I a,t oy4 N--- on, all th..se ~tiL)V~ UL. U LU.i ,i1~ .i7~) UU4L7'J aU d P-Z< 1 I 0A 1'41U' UIL Udii LIU11ZD: accounts have increased from ills. 7.3 billion to hIls. 12.2 biIlion, equiva- 1IentU tu n94)f IF mi11i on anid $16U) i1ioInI±L rIspucaJvely-. TeU OUIK 01 tleUse wiCourL,s is derived irom indirect taxes. It is also evident that NIOU's contribultion to Governmrrent irevenues is rather imodest, and has remained at around 164. percent of total oil income during the past five years. Paynents from second party agreements have increased six-fold between 1965-69. A ready comparison of Table 216 with revenue data from the Consortium, and the P:Lan Organi zatiorn is at present not possible, mostly because of diflerent re- porting periods. There are also small diffierences in Table 25and section B of Table 24. Table 2l, uuWE.M'A2iT IN= ra IROM OIL 6ER - 1 , (Million Rials) 126g '1966 it1 1968 A. From Foreign Corpanies Income tax fror. IOOC - trading companies 27,857.9 31,643.8 38,913.9 tdi,667.1 52,201.3 - operating companies 744.0 811.7 933.8 908.5 1,033.0 Stated payment, after 2% reduction for NhOC 9,706.3 10,8 u 59 ru. '0 13,2,7.3 ' 5. .9 Total Payments from, Coon3or+vwn 38,308.2 LO331A5 53125.0 60,131.5 69.9-38.0 '-.come tax from SIRPI agrez.ont 14-8.7 l ' 7 126.4 108.2 160.1 IPAC agreement (second party) - 240.9 567.6 399.6 290.6 LAPCO agreement (second party) - - 38.9 342.5 I0NIGO agreement (second party) - - - - Total Pa-mants *- Other Foreign Cponi es8 38.6 ._6. 7 8376 Bonus payments, after 2% deduction for NIOC 13,953.7 - - - 74.7 Total Payments - All Foreign CoMpanies 52,410.6 43i699.1 53,819.0 60,681.2 70,850.3 B. From National Iranian Oil ConyZ Income tax from IPAC agreement (NIOC share) 221.3 4z73.3 661.0 677.7 653.7 LA^.O agree ....entW (NbOC slhare) .. - - - 31.2 633.0 IMINICO' agreemont (NIOC ahare) - - ^ - 59. 2 Total Payments frau 2nd Party AgreementG 221.3 473.3 661.0 708.9 1,345.9 Profit Tax 289.2 317.3 856.3 1U176.9 1 076.8 D.vidend 277.2 322.9 849.3 857.1 1,000.0 Irdret:t taxes on do,mestio consuwut.opi 2 o,e91.2 7,o29.4 7,809.5 8,749.3 Total Other Paeiita 7,126.8 6,931.h 8,735.0 9,843.5 10,826.1 Total Payments rrom NIOC 7,31j8.1 7,404.7 9,396.0 10,552.4L 12,li7.0 C. Other Pay ents:: Employee's income tax 707.8 807.2 722.6 743.6 833.7 Contractor'sI income tax, *2I-.( I, 49 InP I 98 I 9-., - Total 1,062.7 1,226.7 1,120.7 1,732.7 1,787.2 Grand Totall Gavsrnr=nt Income from Oil Sector 60.821.L 52.330.5 6h.335.7 72,966.3 84,809.7 Source Nationasl Iranian Oil Company - 56 - CHAFT'ER IV Government Revenues and Sale of Oil] in GNP and Foreign l'xch:ange I_rnifl-; Itntroducti oin 78. Goverrnient revenues from the oil sector consist of' (i) royalty and income tax payments f'rom f'oreign oil companies, (ii) bonus payments connected with awards of' new concessions, (iii) natural gas exports 1/, (iv) indirect taxes on domestic consumption of' oil products, and (v) pay- ments by NIOC for corporation tax and dividends. Additional income to the Goverrnent is derived from the employee's income tax pavments; an estimate has also been made of' the income tax received from contractors emnloved Mr NTOG- All these reveunesi re pnreented3 in Tahl=e 2) f'or the years 1965-49; the amounts increase f'rom IUs. 61 billion in 1965 to Rls. 95 billion, equivalen1t to snme $N800 mil:lion and $1,120 millionn The data in TabLe24 were provided by NIOC; they are on a calendar-year basis, and the treitment of various ite.ms is different from eg the balance of payments and pub:iic finance accounts. It is diff'icult therefore, to reconcile theso dan n wa 1ith info'rmation received f.nrom oIher sor--S. Rtoy~a-ty andC In4COmeC Tax 1'ayMent~S 97 * yalt.y, or stLadiae paymLent YdL a made onlLy by tLhe UCoUI Ur- they amounit to 12.5 percent oi the posted price of crude exports. On the incomie tuax side, the prcvi±oiis for the uu C-UiQ dll oLthe foreign oil companiies are very dii'f'erent. In Appendix I a detailed calculation has been made to show the derivation of lincome f'or tax purposes" on Consortiumlll trading activities. The joint venture agreements are mostly based on '75:25 prof'it sharing basis. The profit calculation is based on posted prices, on which the Iranian Goveriment, however, has guaranteed a reasonable discount to reflect the lower realized prices 2/. On the whole, the detailed revenue payments by NIOC's foreign partners, and tihe reasons for the lagging revenues when exports are increasing rapidly are very hard to come by. Income tax and stated payments of' the Consortium have increased from RIs. 38.3 billion in 1965 to Ills. 69.9 billion in 1969; payments by other foreign companies grew from lils. 1J49 million to Ids. 838 million. Iran has on several occasions received sizeable bonus payments when newi concessions were granted; such was the case in 1964, when Rls. 14 billion was paid by foreign partners in joirnt venture agreements. More bonus payments were received in 1969 again in cormection with the award of' concessions. 1/ First natural gas exports took place in October, 1970 to the USSR through the IGAT system. R/ Realized prices before the November 1)l, 1970 Agreement were estimated at $10.bO per ton, whereas the posted prices for light and heavy crude were at tha-t time ',13.07 and $11.90 nper ton respectiveltv - 5? - Natural Gas E,xorts 80. With the partial completion of the IGAT system, gas began to flow to thre IISS? in Olctober 1970. Fxoor-T nX expec-ted to i ncrea.se to 10 billion m3 by 1975/76, but throughput in 1970/71 will only aimount to an estin-ated 300 bil-ion 3 h0 A+. the conractula o1es pric -e of -1A 660 per ,,OQOcm3 3/the export proceeds would be as follows: 1 970/71 - some $,20 ' -- 1 )7-1 /*70 A H j Ii X -- ..- - 4.1 - --l.A -4. 1-, '4.7 -41 4-. pi- mCllion, 1971 / I - CAJ UL.UIL PL3) m,LLL ULId t ,hen JWi.4-1,G .* r4 " lo;:l ../', '- year till the final 10 billion m3 is exported, at around $66 million pDr year, For grelater detail oni the IGAT syeSt., s Appendix IITo Indirect Taxes 81. The NIOC accounts show that the revenues froI indrect tLaxes increased from RI. 6.6 billion in 1965, to RIl 8.7 billion in 1969; these revenues consist mostly of motor gasoli-ne surtax. It is notr. clear what other tatxes NIOC collects; a comparison with indirect tax receipts frou petroleum and fuel, as reported by the Ordinary Budget and the Plan Organization shows these taxes growing from Rl, 4.5 billion in 1965/66 to Ri. 7t.5 mniLlion for 196b970. It has not been possible to determine the nature and source of these discrepancies. Taxation of individual oil products is presentqd in Table 19, and briefly discussed under the section dea ling with domestic energy demand. Payments by NIOC 82. NIOC's share in foreign ioint ventures has increased from RI. 221 million in 1965 to some RL, 1.35 billion by 1969; this income .is derivred from the IPAC, LAPCO and TINTNOCO ventures. As other concessions come into production, this source of income will increase proportUonately. Corporation (or nrofit) tax haqs gron from Rl 289 million to lH- 11 billion; and (ividends from Rlo 277 million to Rl. 100 in j9692-7-(Table 2L), TotaL Government Revenue 83. Table 26 summarizes the tota-l receipts by the Government from the oil eector; the figures were pr0 ' ded by 1h1 ]'lan +Jon in the Ordinary Budget. Oil revenues and indirect taxes account for a significant sh-are Ofl to" " over-nment revenuesg Xo 60 pecntoe the pI-r 1 964,/65'-1 970/71. With the very large increase of income tax payments on oil eAcpoVLs.- in I9717/ 72-, W;Js oldle wI.,.Ll Lunuo(JLvut(u.LVy Ub -La4t;As teVten LuL-WiL.t.{o Thus the t,raditional heavy dependence on the external oil sector in financing the Governiment'Uns current and capital expenditures will also increase, TTThkfghanistan exports natural gas to the USSR at $5.62/1,000m3 z/ tuvidend payments were increased to 1lU 3 biJLion, but the accounting action will be taken in 1970. Table 25 TAXES AND DIVIDIEINDS PAID BY IIIOC TO TH-lE GOVE;RNMEIJT - 1 _6 (6 ('liillion R'ials.) 1965 1 9GG6 1b 1968 1962 Indirect Taxes 6,560 6,291 7,029 j,810 8,7l)9 Inicorae Tax 2/ 506 795 1, 517 1, 886 2,L2) 3 D)ividend3 277 323 849 859 j oo TOTLI 7,3143 7,l09 9,395 10,553 12,172 1/ ';ise axd sales taxes co-"ected by IbTrC on sales of petroleum an.d fuels. Inccane t;ax paymnents include (i) lJIOC 's share in foreign joint ventures, and (iI) corporation tax on iBlOC's operations. -iivdenc. for 1969 was raisedt to 1 .3 billion riaLS, but the accoim.tin{ action vl4ll be takcen in 1 970. Soulrce: National Iranian Oil Gompany. Table 26 GOVER-.,,Ef>I,T 1`REVEN,Z;TE AND I-NCO4MIE FROY THE OIL SECTC'R ( billion RiaIUs ) 1970/7:1 196L /65 1 965/66o 1966/67 1967/68 19`8/659 1]969/70 Estirmate Oil -.evenue 1/ 36.4 39.5 47.4 54.-0 61.8 70?,1 88.2 ::l.i:;.r.^.ev ax.es on Petrole-m Prodcacts 5.7 . 6.8 7,5 8.5 Sub-total 4C) . 8 L44.O 5.3.1 6o.0 68.6 77.6 96.7 )il Bonus Receipts -- 13.9 t3o 4 _ _ _ Total Oil Revenuies 4S0 3 57.9 53.5 6o.0 68.6 77.6 96.7 TotaL Government Revenues 68. 93. 9 96.2 108.? 128.3 1h3.c 175.6 Oil .tevenues as X of TotsL JoveniTeent Revenues 59'.7 61.7 55.6 55.2 -53. 53.9 55.1 7l R Hevenue fron, Consortium and othe!r foreign oil cormpanlies. Sou.rce: Ordirary Budget and. Plen Organization. - 6o - U.AJ_r.L'UW-LoL of OUiLL SectoUr ito LrlNr al. ~ _- ~- , -- U14. ±iCL cal(culat ion of the oil sector:s contribution to CuiP and uNP is based on Bank Markazi of Iran series, adjusted by the 1 970 1IB1W tconomLic Mission (Tblle 27), It must De pointed out, however, that thle U(1 figure is a purely notional figure representing income accrued to b?oh Iranian and foreigrn factors of production engaged in the oil sector.'. Since the oil sector is basically an enclave industry it follows that the GDP figure is not very meaningful. Tlhe (INP contribution, calculated as (3lP of oil minus investment income to foreign oil companies, has grown from RK. 27.5 billion in 1959/60 to il. 95.0 billion in 1969/70, all measured in current prices. The annual growth rate of 13.2 percent conmares favorably with thiat of total GNP, some 9.6 percent. 85. The share of oil in GNP therefore actually increased during a decade of relatively fast economic gn)wth from Iluo percent in 1959/60 to 13 9 percent in 1969/70. This reflects the very fast growth of oil production and exports during those years. ror the years 1972/73 - 1975/76 the Iranian Government hlas projected oil revenues to grow by 1405 percent per annum, with 1971/72 showing an increase of almost 60 percent from the 1970/71 leveL of $1,164 million. Consequently, the oil sector?s share in GNP will continue to increase; the very vigorous and exogenous growth of the oil sector will continue to provide Iran an important stepping stone towards achieving fUrther high rates of economic growth. Foreign Lxchange Ea.rnilnE 86. The oil sector's contribution to Iranfs foreign exchange earnings is also of great significance for financing the economic development, and military ex.penditures. Smoothly and effortlessly, at least on the part of Iran, and disregarding energy and resourcefulness displayed at recent negotiations, the oil sector provided Iran with almost $1.1 billion in 1969/70; the prDliminary figure for 1970/71 is almost $1.3 billion (Table 28)o Included in. these amounts are the sale of foreign exclange by the oil companies to finance thei.r local expenditures. As a percentage of total exports of goods the foreign exchange contribution of the oil sector has been on average over 81 percent during the years 1963/64-1970/71. 1 / The metHrcEdlng lsr~ i xpynl ,irid in a Bank Markazqi pubicat-ior~--n, Nh-i-rr.tl Income of Iran: 1962-1967, page 99: "The sum of wages and salaraies, rentalsj inteests depreciation 1for -r.oable .ad J.Lovab le properties, net profits of the National Iranian Oil Company, the Trnni an, Oil -perating C i-e oa TIr according to the oil agreement and the share of the Consortium was determ-ined as vdalue added in dom,iestic oil." !!It tLIen continues in a footnote, #1 on page 100, 'Provided the Consortium's share of oil revenue (nob accrued to Irrcnian factors of production) is not taken into account, thle result will give the national value added in oil." Table 27 (,QNllZCBTCION 0T7= MTOR TO GDP & G1N Current Prisc 2(Bilions Lal i959/60 1 6!/;61 196l/62 1962/63 1963/164 '964,65 965,/66 1966/67 1967/68 1968/69 1969/7' GD? Oil 47.1 51.5 5505 64.4 70.7 72.8 82.6 96.1 112.7 131.4 150.6 Less Investment In- come due to Foreign CoX.nies 2/ 1906 21.6 22.1 26.4 30.3 26.6 30,.6 35.7 41.7 49.2 55.6 azi-i~~~~~ ~ ~ ~ ~ . _.6 2 6 2. 64256. G:P Oil 27.5 29.'9 33.4 38.0 440.4 46.2 52.0 60.4 71.0 82.2 95.0 Depreciation - 3. 3 3.5 3.7 44.0 4.3 4.6 41,4 5.14 5.6 6.0 6.1 4c +1T7p oil 24.2 26,4 29.7 34.0D 36.1 41.6 148.6 55.-0 65,4 76.2 88..6 Tpota L GDP -4/ 281 307 322 346 371 1415 460) 50-L 56D 629 700 WGp 275 302 315 336 358 141c 4l4 093 551 618 6815 Jhare of' Oil inl GI}P d 16,8 16. 8 17.2 18. 6 l9.1 17.4 2G0.0 19.2 20.1 20.9 21.5 IIP s 1 0.0C 9 9 10.6 11.3 11.3 11.3 11.4 12 .3 12.9 13.3 1,3 . 9 /L (enatral Bank Revised Series; t;is fi ge includes all io.ConMe a-crued to rarn`an, ancd foreign Factors engage` . n tne oii sec uor . 1/2T 3,,lance of PayraEnts 'Yearboo', ^3 E.stMi:.tes of d,-epreciatior for th e Tears 192`/63 to 196i/68 from centr' Banks INational Acco.nts. hs a rati3 to oil sectorts contri.ut,on t;o GDF tihrey ranged from .06 318 to 0,,04963. In absolute te2:as the de- preciiation has been groad.ng at W per annwum, Te latter was used f'or the estLnates of other years. It, sho'ia be rnoted that, all. oil assets are owned by Iran, not by foreign c.il cozn axries. II [.g-D - Carrent Economic Position and Prospects of Iran. Table 28 CONTRIBUTION OF OIL SECTOR TO FOREIGN EXCliANGL EARLNINGS (nrllilon dollars) 1963/64 1964./64 196c/66 1966/67 1967/68 1968/69 1969/70 1970/71 ( Pr elir,n'aayr) Payments of income tawx and ro;alties 388.0 466.5 5iJ4.-1 608.1 751.6 848.3 945.6 :L, L34.0 SaLe of foreign exchange 182.8 88.9 93.4 1(7.7 105.8 105.0 1-34.4 135 0 Ep?orts NIOC - - - - 5.2 19.0 30. 0 Sp c-ial Payments -7.0 191.4 34.0 8.8 - - Net Oil Receipts b63.8 746.8 641.5 724.6 857.L4 958.5 1,099.0 L,299?.0 Total export of goods 602.0 899.9 822.3 882.1 1,039.2 1,175. 4 1,3l43.7 1,57,.o Net Oil Receipits aLs a percentage of total export of goods 77.0 83.0 78.o 32.1 82.5 81.5 81.8 82.5 Source: Flank Markazi Iran and DlIF For information on individual items, see the Ba:Lance of Payments Section in the current economic report. - 63 - 87. Tn vriew of the recent revenue increases on oil eorts. as negotiated in Tehran on February 15, 1971, the foreign exchange contribution of the oil sector will become even greater. Estimates of 1971/72 rev9nue are of the order of $1,820 million; add to this some $160 million in s '-le Or foreignl exch'arnge, and Ile, oi etr cnrb4in 1s5aSt $1,980 million. Even if non-oil exports would continue to grow at the healthay ratLe of' 8 percentu annually, thi'e-ir re.L1ti-.ve JU1 port'-ance as a forecign exchange earner w-ill (liminish rapidly in the face of anticipated 14.5 perc_nit an.nuIL revenue irncreases. Xyr 197/ I when oil revenLues wouldu. amount to $3,128 million, plus around $200 million sales of foreign ex- change for rial purchases, the foreign exch--ge receipts from the oll sector would amount to over $3.3 billion, or roughly $100 for every Iranian. Non-oil exports, growing at 8 percent, would then be aiound $410 million; and 1,he oil sector' s contribution to total foreign exchange earnings of $3,7.38 mrillion would then be almost 90 percent! Appendix I The February _57 1971 Agreement 1. The agreement concluded on February 15, 1971 between six Persian Gtulf oil producing states and representatives of twenty-three internlational oil companies ended a few weeks of considerable anxdiety of Western European and Japanese consumers. These two areas are, to a large deFree, dependent on Persian. Gulf shipments of oil, and an oil embargo would have had grave economic consequences. For one of the producing countries, Iran, the impact of' breakdown in negotiations would have been equally grave, in view of the very tight foreign exchange position. 2. The main features of the new agreement for Iran are: (i) an immediate increase of Dost.ed prices by $2.76 per ton (:ii) f'urther increases of posted pr.;s n f'nr light nnd heawv crude of 3.65$cents/ton per degree API below b.00. Thus, for light crulde of 3l0 A PT, an. 99 2 nr ls 1 a,'ded for h-e- a crude the increase amounts to 40$cents per ton (iii) posted prices will be further increased by 2.5 percent and 3.65~cents/Uon on JLu 1_, ' 7/l and_ thereafter on Jniu _'. _ , 1973 until 1975 (iv) OPEC discounts and gravity allowances, originally to be phased out by 1'97, have been discontinued immeuiately .(v) the agreement, effective for a period of five years, will be effective as of February 15, 1971. ('I:i.) r( e d cLic ,n in trann'L[)l'i.OL .ost;, < .. as i l rnSul , ot' t: reo n:in, ol.' -the L z i';In'dl wi-ll o pM:le to ex Po l,in co ints, t Ap4 - ,lx, V1.e-venues fromI G'onsortUU um UxipoirI L'1s aUbe rU the li'elhrlry lS-, 1971 A rreemrcit . Not.ation: A posLed:i price B selli.ng expense = 0.005 C prodLu:tion cost ali(1 management fee = 0.1i6 1 = royalty = 0.125A X inconme txLx rate = 0.55 Ol= oi.l revenue Equation: OH-> i1 + X (A - (b + C + 10) 2. Febia -5 - May 30, 1971 June l 1L971 - December 31, ?197. Light Crude: A = 2.17 per -barrel, or $15.85 per toIl A = $2.27L per barrel or $16.61 per ton OR = 0.195?'+O.55(A-(i3+C+O.125A)) OR = O.125A+O.5(A-(B+C+O.125A)) = 0.27125+0.55 (1.76775) =0.28425+0.55 (1.85875) = $1.2h35 per barrel equivalent to =$1.30655 per barrel. eauivalent to $9.08135 Per ton $9.5)417 per ton Heavy Crude: A - $2.125 per bar'rel, or $15.52 per ton A = $2.228 per barrel , or $16.27 per ton 0 = 0.125A+0.5,,(A-(f+o.1 I25A)) OR = O.125A + o,55(A-(s+c+o.125A)) = 0.265625 + 0.55 (].7S8375)=0.950606 = 0.2785 + Qg5~ (1.8185) = $1.216231 per barrel, equivalent to = $1.2786 per barrel., equivalent to $8.8821 per ton $9.3376 3. Asouming a t10:60 mix of heavy and lIght crude exports by the Ccnsortium, the uverages revenue would be "9.- per tUon tb)-gh May , 197-an Per ton from June 1, 1971 till December 31, 197212 4. FoIr the Luture posted prices will increase as follows (per ton): Light H January 1, 1973 $17.39 17.b5 January 1, 19714 18.19 17.83 January 1, 1975 19.01 18.64 On average each 1 percent increase in posted prices will add 0..606 percent to revenue per ton. Thus, per t.on revenues will increase roughly as follows: Light Heavy Revenue per ton on June 1, 1971 $9.54 $9.34 Iricreases or January 1, 1973 0.°473 o.AL73 January 1, 1974 o.485 o.479 January 1. 1975 0.L,97 0991 Revenue per ton on January l, 1975 .!10CQQF 5 0 7R 1/ The average revenue from February 15 till May 30, 1971 would be:O.4. X $8.88321 + 0.6 X 4o. - $9.00 per ton. Thereafter, the average revenue would ount to o.4 X $9.3376 + 0.6 X 9.5417 = $9.146 per ton Annen di X T Table 1 'Tge 3 IINCIq;A,';E;S IN', P0S'llUD P,_TCES;, 1 97 O_1 975 (In do10l .ar per ton) ljight Crude lHeavy (iclde Post-led Price ' i:ncrease Posted Price , Increg., e 1 t/70 - .1nlla,r 1 1 3.('7 -- 1 9( 1 9w) - !\!OSromhor I )i 1 3.07 -1 '6 1071 "eb,a-,y,! 1 1 ',(R'7 91 1- C)-I - I 1 6 7. 61 L .70 1 6 7 I. UJIIU.dJ.y I IL'.~~~~~~~JI I~~~J4.LII 197,'3 - January I 17 *9 1t.70 17.05 14.79 i ''7b -. J.alo'xfy 1 18O.1 t F.60 17,8 )0i 4. 57 97/t - Jtllllr i lv.oi L4. 1 1 8.64 i '. Annual PercentLcae Increases7, over the Periods Light Crude Heavy Crude 1 '.)70 (January 1) - 1 975 (December 31) 6.11 percent 7.8 percernt (6 years) 1971 (Jinmiary 1) - 1975 (December 31) 7.3 percent 8.3 Percent (5 yea rs) 1 71I ('ebh:ci.rv7Y 15) - 1975 (D)ecember 31) 3.6 percernt 3.7 Percent, (5 y,ears) I1972> (.Jantja,ry 1) - 1975 (D)ecember 31) 3.It percent 3.)l Percent (Lt ve.,rs) Appendix II Calculation of RZevenue from RefLinery at Abadwn under the November 1 5, 1970 Agreement: $ Per Barrel. in i 970 Value of Refined Product 0.1674- add: Value added in ref/inery i 1.7501 less: Trading Co. fee 0.022 Office &r Selling Expenses 0.005 Prod.uetion1 Cost n~ I L Production Fee 0.022 Rnxralt.v2_/ n20i7J1 0 ?7T)I Profit fonrv +.n-v nirr-n 1 .317 Income to Governmentt: Royalty 0.2074 Income Tax 555 0.7561 Total Income: $ 0.9635T 1/ See aunexed calculation '9 / 1 5) A e +h Irz7 -Ii ef rnr.iftA an+ nmrI lj r 1-ohI n r%c+. r1 r,i rna p en ix Ix I. Calculatiorn of value of crnudeat refineZry: Gravitioe: (i) 55% of 330 API at $1.710 posted price (ii) -i c.t' f 29e0 PIT '.- a."I A rn NrQ.P. nri ce L tA fly ;j 4AA . .I . v *.1 .W- .' J F-- less: load:ing charge O.5 pQostecl price ±-it;:i: uPEC~ a±±owuxice ~z;: V.O'joi Gravity1 Adjust- ment - : u. oi. .0'.Ujoi Value of Crude, per barrel II* Calculation of value-added in refiinery- Average va:lue products per barrel $2.443 less: 2% aLlowance o.ol86 OPEC allowance OQs81 Gravity Adjust- ment 0.01852 _ l2>'*) 2. 3UU1 less vralule of c,~de 1.58R27 average cost of ^bo~~~ rls - ~n cAR o n z 4 a ^ss v . ,vBv , . = ,,~~~~~~~~~~~1, Value added in reI ining, per barrel 1/ Average adjustment for gravity at 4.10 over 270 API AZ value added is also called "up-lift" Appendix TII THl1i; 1RANIT'I ,AS TBORN-KLIN'; (Ti'AT) Hasic Dlate: (from: Iran Oil Journal, October 1970) (i) i,en7t h: Total length of pipelines is 1,868 km-, of which: (a) a,nthering, lines: 97 km of )10" and 36" (b) main lines: 620 km of ht?" pipe (inmainline section 1 and b9', km of L,.0" pipe (mainline section ?) total. 1,l1f; km (c) spur lines: some 6f '6 km of lI" - 30" pipe: to Shiraz (16"), Isfahan (16"), Kashnn (6" ), Ghorm (6 ") an d Tehran (30"). (ii.) Compressor Stations and Treatment P].ants- -1. Did Bolanc, gas treatingb plant andS compressor stations. 2. Com ressor st a-tios on the atmi- ng, trunk li.nes. ,3. Compressor stations on the mainline: (i) phase 1] includes; 4.-e st0ations l¶hiICh, hav,e been construct- (i phase , includes seven more stations. (iii.) Capacity: In phase 1 the pipeli?e capacity will be some 990 .llviSCF7< equjivalen-t to over 142 UbLlulo m /year±v. cUditional compressor stations beyyme operational, the capacity is anticipated to rise as fllowrs:-A 1970 9, 860 milllion m3/year qetui.valent. to 9,h 1,i4MISCFIJ) 'i')71 1., 783 million m3/year kequivaIen ; to l,l1' O L t 1._97 13, 922 mi.llion m-/year equival ent, to I, 3).-7 1WTSCFD 1973 li, 83h million m /year tequival,en t; to 1, 5,s2P 5jfD ) - NITOC 1969 Annual report gives total length of 1,91ll kmn, consistin,c, of I -I n1. " * -1 A l n0 k_ n 4, .Lj ri maiinlriFn-J, cA-I ,,,.. "I L opUt. I. 'Co;rpressioq in trunkline will. be 70( lbskua.re inch, equivalent to 20)..'. kg/cm,-. 3/-- -PivRir' = mmtiiion stream cubic feet per day. Conversion factors are: 1 SCFD = 365 CF/year 1 MCF = 1,000 CF 1 MCF - 28.3168 m3 11/ ~1 S(.i'D = i. 33>6 m3 The National. Iranian Gas Company (NISrC) gave the Economic Mission thle 1 0.1lU qj ui, Uda,- J3r,U-l11JUm11 .: tY 1., LAA P1U I2)t'.,C' L, et lU IVa1tent tUo over 1.6. '. bi.ll i.orl m p)er year. Domestic consumTptlon woiil (1 reach some 6 bi'llion m /year, andi the remqinder of 1.0 bi0i.i.on m3 woul.d he availl-).e For export. -o the USSR. A,/ r-rbr.rl,-I--v I I I Page 2 Domes ti c Dernad 2. Preqently domestic demand f'orr natural gas ias estim.ted,at about h13 ndlillon m'/gear, e.pected to rise to betueen 1,50 rmi'llion ITiv and 2,067 million m-i/yealr by 197, and finally reaching 6.2 billio on T13 by 1977. These figures exclndr-: the uise of gas in refineries an(J oil fields. Indug- trial users will, be sel-red on a priority basis, wTi th household connectiorni coming7 lat.er. Connections will be chirged to users; i'or indu:s l.ry thi ese charges wT^i.ll amount to the total cost, of bringing gas to the plant. Households will be charged for the connection from the main 1:1ne in the streets: these charges are estimated at around 7,000 ri.als per coraiec Liorn. 3. The prieo stnicture will be an escalat-inrr one. varving from R 1.1/rn3 to Ft 0.8/rn3; big indu.trial users will be gi.ven lower rates. The prices ioul..3 hp. cornetitive Tnth ot.hpr fuels; a qs-!;dyv hr lJTl(C shoF;; that in compariscc,w .-i-.-th fuel oil, natural gas would yieldc a 29w. cost adva.ntage, excluding anorti zation of the ne heating equip.ment. FT-or ne;:- factories the advantage of natural- gas for heating and energy over olher fuels has be1en ceri established- cQ s v k . t . .P 4 c . _.L - . I- - TTIC L) -. 4 Ms 1- e Li. F1 I ;1 te L Ufi U'st yIa t,UiUJ, .-[J L,> uu ULt I UUUU CLI the USUSL ated at 6 billion rn /year, going up to 1.0 billion m /year lithhin , years. Gas belgan to flow to thle USSR around Sep teUUnber 19v70; lt i; abi.ueulj ,that eports in 1970/71 i.will. amount to approximately hal.f of the first operative year'r. capacit-ty. Thr.e contractlI sales price amounts to $0.U.d87 per 1,000 Cr, or $6.60 pe/thlousnd m3. - Export proceeds can therefore be estimated as I 0llOIJS:-~ Export of Natural Gas Export Proceeds (in bln myear (i n n dol.lars) 197(0/71. 3.0 19, R 1971/72 6. Lt2.9 1972/73 7.5 49. C 1973/74 865 56.1 1 97' / ,/' 9- 5 62. 7 1 97YK`/76 10.0 66. 0 (;;nd thereafter) 7_7 A_fhganistELn exports of 2.6 bln,/m3, with a value of $14.6 mln, whlich is equivalent, to .|j.6L138 per 1,000 m3. This dif ference in m3X/revenue couid be accounted for the processing of Iranian gas in the treatment plnnt at Bidboland, where natural gas liquids are removed. Ex orts ot DutChil gas to Belgium are priced on average at Hfl.4.0C0/l,O()() m5, equivalent to a little over $1..00/1,000 im3. 6,' It has been assumed that the first year of operation is October 1970 - :-3es t ember ilvJ.. 'hu,, the ei-oorts for Iranian yemr l9711/72 wouid be made Up of year capacity in the 10 year of operation (6 billion 1113) pluz J- of 20 year operating capacity ( 7 bLn mi3), and so on. Append-ix r.1ll (Co,_ of the Procectl r,'!'he I.ot I *cost. of' t.he r)oC tee. ;, i :; I.linllte(3 a.. :I lmo;t. '! T7°) rmilIi I accor(? nog tzo NTCf;( a round $450 mu ii oni h,s al ready bee n sprm 1., i il nr I I rT .132 in 'I !m or 1i ' -iral.:i cI I O r .pI fVrr :i li li pri1il F' . :lhr!i rJ , 1n iI 's i!! i p I '.I fi.el Os, spur Tinen; to citie.; a1on:r t.he t ru nh li ne, 3nd ;ddi l.:ion,lc o(Th- -r,,s Cor )I !.i i.iI 3.o fc.rcr,cz the (',:i ty.r The allocabioi.n the : -'1 , or '0;,17 ,1in I ]iOro (Rials, 3709, 9 m1.1 ionI at .; = U :;L) rIl L ,r:i n teL7: ., / ollo m,,s I , '/()7 .pluIJZ 3 mi l Ion ( ac. ' uA .) 19(69/C) $1 33. 1t mi I lion ( actual) 19 ,'/72 a 73.L million (estimate) I'-' - ~ ~ $ 7. -' , ' T.'-'t or . I -ivmw/ / /73 ~.. (, 7 miLl.ion ( ens i,ia te) A bouv. ;4553 0 m:i.ll ion hans been spl,. lip to October 19ZJ7C); actua'. aiJoc.,iin up to that: date are only $h18 million, so that s.one $32 mni.] i on in ecpcn- ditures Jer'e pAr!, of" the 'Third Plan. For the fluture, the FLuo th Plan allocations add ul) to arounri $,>c82 milliorl, t-rdereas antiripated ezpienrici tunas to complete the conmp7ressor stations gatherinr,; andc -oim no-n :mlm acinouni.m to 2,0C) million. Consecquerli:ly, Fiftil P1 ane )]locaLi noaorj 'iT hV tvo IC;-cOVo the remaining amnou t, sonie $16' mill ion. Econom',.c Asioects 6. The origfinal cost estimate of ihe. lA'I' systemn vas sonle :;;LY)O mrillionq i!hich accordiing to pi)eli ne expertts is about ;O10 mill ;In or'Ihu( a generous es4>mat,e for a pipel]ne of that size. At costi of 'Jm1t0 i(J11ion the w.el1-he ad½price l ould be aroundcl $'1l.2 per 1,000 m, based or, the (if e-,qort pri ce tzo the USSR. A reasonable el-1el-hc.ad price in> aro!und 1'j;" ner l,OOCm3 8/in the U.S. the average figqure is about $6.1'J per 1., 000 Mr. 7. Present cost estimates indicate that cl1ose to $70()0 mil iorij wil) be spent on the pipelJne. Considerixm> the rper 1,000 mn' ,el1-head T)r:ice wn. would result. from a q);400 million pro,ject, the vell-head prie rCE ia no' :oell . be neg,ative. 'Ln addition, one has; to consider the fn'cL that acrual n, z-- moent by the 1USR ),`; i Wi11 be m.-Ade by tGransfer of' oods, valued, at nrori-cpott 0, .i ve prices, viz,. the steel iil]. in Ishan. ivErW ii; tlhe ultimate -ell-heod ]AlOpic would nomirl,ly be just positive, the metLhod and( rttL,ure of pra,nMelt fo'n :a deliveriesi by tlic Uo'SS may well resu-lt; in a .ieTI-hea,)d price Ch.at.L is . I.: Ii vi in real. tcnm,;. .7./1el.->*;|a.{ ls>r of arolind ;+11 .00&,/1,0200 m~. ITe zonversion ratiios used are: 000 lite) o' c.'de soil is e.- et to 0.2 0 M--'lio :Dcilo-caiories; 1,000 m- ;as is equivealent- to 9.216 'i llion oilo-c roie-; nz coerz- sion fa3tor for f.uel oil c c -1 be folrnd. so crude oil wlas uased as the clcsest, eui-.v- ent. Aoncn:dr7(i x ] L I Oa eT(Te 5 ;W) ~i(iVdI) ~ t)1 i,IIU LU/It A 1-IL, .__. JJ .1L L r . 1 IL I , _ I J 1 _LJl_ 1'-,r 6:.-tLi~biitiorj (om,ietically. 'I'hese deliverJ es - for purp-)oses of pr, er i. e va' inn .i , - caIrn be va luIed aL (i) e,)ort pr.e to U,,"i, (;i) price o Juiel oil, for i-hich gas used by in(dustry ariLi po-wer generar ion moul1eO be i,the prim-iry substituce, (iii) a, the cost of- pr o Icin,r a3],errnv-Live services of enerqy, or (3.v) at prices ind:i cateci 1; -( tJi C! ore r!i(;io. Data on the co,t o" a]Iternitivre enery& ^S' 1,> i s , _ c.' i ? ' - _, 2r7- -, __ 62 e^c' e 3 iL' - - o. 55,0 40),0 35 . 4iterest. C-are 0.966 5.201 3 5.01 4.DJu C.3- rl l.73C 12.070 10. 588 7.7C700 6 .6 o4. Tot ' to be eT' c,.96S 32.20' 217.33; 1',.008 92.c93 87.630 74.770 65.53b 47.70( 37.564 34,K 7 1,j : ot5^_ --tio,A ~~~~~~~~~~~~~~~~~~~~~~~~ E~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~2C i4'', 'A'----_____. - 9 _ & - - -. - - - - - .,-'-- _ _2. D.! . _. - - - - _ _- 7 5'9, . _ 1.,2 i3.L4 - - 2 _ . ^; c" 1 /;, . 2 6.L 43.2 -,3*- - 3 150,1 // ,2 6.2l 143.14 3U? 20 _ _ _ 3 1 5,~ J-3 1 .2 6 .. ' -r . l! 3L.2 .9.0 . - c ,_ - I .- ,-- / :_ _ '5 I, 3L!. 9. _ 1 ? 1 5.o _ _ 129.1 1?;, nr _ _ _. )4, K'.* _- K.;, 15.0 1 3.1 - 98 5S !i7 - -7 - - - C-. V .5 15.0 13.1 9* 7-74, 19'~~~ -: _ _- - 1?. 15.c 13.1 9. 7.5 L5._ 1 - - c _ _ _-_ _ _ 1 5 O 13.1 9 7 7 30.1 CI. ; c,-)Rc "R ?. 1 c vl U - - - - --- - 9 71>7 .0i_ -~~~~~~~~~~~~~~~~~~~~~~~~~~ -, -- - =- -R i - _ _ ][nterest charges of 5.5 percent mnually have teen caiculated as ar, average over 7 years, i.e. on 50 percent o' the arount borrowed, mnult:ipled by 7. .2 IThe ;5.714 r.il ion differer.ce witrh tne amount; _n ro is due to rounding. Appendj,x Ii1I I'age .' benelit pay back periods are almost -i.dentical, becaause operati.on urid maint.eriance co,ts are relatively ,ma:Jl. 10. Table 3 presents tVe beneL..t (Alternativoe II) arnd cost sIre.uns, the latter consist:ing ol (a) thc initial investment and (b) op:)erattion u-Ld maintenance. The time table of investments is sel, ouL in p-raIrapL 'S. For operatioin anti maintenanc- an aveLage t'igure ol 1177 to 237/km;,I/mile lor a line varying from 16-22" was used as a basis for derivinrg estinmated 0 & M charges for the IGAT. These 0 & N charges are assumed to go up by 10 percent every five years. The folloiting estimates were used in the calculations: 1adin Line (4g0-h2") Spur Line (It-301') 1 970/ '7 $300//veaxr :i;1 50/kin/vear 1971//75 $330/km/year $1 65/kn,/'ycar 1979/80 I370/km/year 1i3 /in/vear U.sinc these f'i nres 2 net hbenfi t qtr,rmn isr deri ved (cOl umn i_ in Table 3), which shows negative benefits for i9G66/67through 1971/72, beccoming positive thereafter, and increasing from );7.h million to. Li19! i7 millinn in IQ`o/R30 Beyond this year benefit will remain at roughly that level. The econoirac rate onl return lunder these assumpti rons woul bTe 11 A pecent; th c:rti- only marginally above the IMIRDI lending rate for indiustrial projects, some o percent (o-vr-r¶nmc+ bonds, wh"ic. are t-x ,-nd rik free, yir.ld R porce.nt .V fl -fl- V l I2'A,V kA- LW lkt. ± . Ofl - 1 4. 1'.1J~~~' ~ C~f nominally; the tax free statlus effectively increases that return to possibly !0 percent. 1-r-ng th 1eI Ifn' ia l J L: ul ast IMDBr._ -loan neg o-tations thA'e Atre.a E-epat-tmuent argued that 9 percent would not adequately reflect the actual opport,uli.ty cost of capital in Iral. 11. A sensitivity analysis of the rate of' retturn to other assU2ptiLons is giv-en in Table 4. One assumption is to price do est:ic gas sales at export prices, $6.60 rather than $12.50 per 1,000 m-; another to introdulce shadow prices for the input of gas. These shadow prices would account Joor (1) profIts foregonie from fuel oil sales, and (ii) treatment of gas before transmiLssion. The first point concerns the presumed substition by gas of fuel oil; NIOC makes a profit on these sales, and even though the price of gas would also include a profit allowance, the foregone fuel ci:l profits would have to accounted for. Gas is now treated by the Consor- tium for free, or rather, in exchange for extracted gas liquids; the pre- sumptLon is that in this arrangement implies a subsidy. The shadow price would then account for thiis subsidy element. 12. Two levels of shadow price have been assumed, $0.50 and $1.00 per 1,(000 m3. Coupled with the two sales alternatives we can derive 6 net benefit st.rAmnn The Pcono,nic rate of return calculationsF come out as follows: Apndix-[II (i) shadow price = 0 - Price Alternati-ve ] (ii) shadow price 0. 0/1 ,000rnm -- 7.0% (export price.s cnly)- (iii.) s hadow price 1 *1O/l ,OOOm3 -- 5.T7' (iv) shadow price 0 -- 11.8 ( Price Alterna tive -IT (v) sh- adCow p rice $0. = q /O.;O,/nI - I 0. B5 N16C price for domestic (vi) shadow praice = .1 .00/1 ,OOOm- - 9.8 use) L3. An alternative method of evaluating the IGA'I systemii is by using estimated transmission costs, includ:ing depreciation, per m- gas. The Bolivian pipeline ot' 20", some 510 kilometers long, is estimated to have transmission costs of $2.83/l.000m3. The main IGAT lines are 140-h2" wide, and 1,104 kmn Long; on this section alone transmission costs of between 5.0 and $7.10 per 1,00Gm3 would seem reasonable. This compares -to a sales price at Astara of 6.60/l,O(o)m3. Clearly the margin on export sales would be very sinall indeed. As indica-ted in paragraph 8, the domestic sales of gras - some 6 billion m3 eventually - would seem to be the finrancial and economic prop for this project. Revenues from these sales would be in excess of export proceeds if valued at NIGC suggested prices (Alternative II, Table 1), and the cost of transmnission per 1,000 m3 woulld obviously be muich below that of gas delivered at Astara. Con l us i ori 114. Si nce. much de;a_iled information on rPnavmen-t of lans, an d cost of transmission is eith.er not available or non-existent, it is difficult to accurately as the IGAT proiect. -/ The economnirc evaluati.on made i.n paragraphs 10 to 13 indicate however, that the main objec-tdir- nof the -ppelirne, n 1-ne_r to earn f-eriL-n -hirin for tlie financing of the steel. plant at Esfahan, is not likely to be achieved in t;he near future. Iota--l lon ~ri ,-'or rmn-i -inc-lcir 4u i+ntrest, are Ceti mated at some $835 million; export proceeds will only surpass this ,oO i19Q4/Qi. T,.us 4--h TOAP s-stem h-i11 have e-nogh drnf.culty in paying for itself, mucih less for the steel project. On the economic siUd hIweuVt.,I ciaiu i ]uimUUL! dor,,esicU gas AdeUii the p[.UIAlrt- is 1l1 encouraging. Under- various assunptions the rate of return varies from a low'X of 5. toa'e1rf 1] eret IU(W 01 *( L'U aL l11,1 l I.I .0 IU I . i7 I would have liked to apply the Uittle-Mirlees method of evaluation to this project;; this was not possible due to laclk of inform;ation 6a1le 3 BD L WI'CS A .D 'OST S XS. 197e/ 71I- I 597I 977 mLL ol-o dollarsi ; 'O S- Iter 's-. / O"neration anM Maintenaroce& i 2nvt-ment"' Net Cost/cenefit (AltEirnaive _-!) aain Sor Total- 3Beneir Outlays StEream 5;0': -. (5.:!) 1 6i/60 27.0 (27.'C) l¶966B/69 - - - - 162.3> (¶22.3( ) 19 9/170 - - - 143.4 (143.L) 190/7TI 224. 3.0D 0.5 3.5 20.6 79.6 (59-0) 971 /72 61 7 3.2 o.6 3.8 57T 73.5 (16.1) 1972'?) (C. I . 5 3 * 4 °*8 4.2 62 .7 7 . 4 1 97 76.1 3.5 1.0 2.5 1.,5 55.cl 26.5> 197i.J75< 99.65 3.6 1.1 2.7 9L. ,g. 52§OfI.9 1975/76 109.1 3.7 1.1 4.8 102.3 3.5 72.8 197$/77 11 5.2 3.8 1 .2 5.0 1100.4 110.l 1 9T7/78 122.3 3.9 1.2 5.1 117.2 - 117.2 19T8/79 129.1 .0? 1.2 5.2 123.9 _ 123.9 1979 /6310. I . I 53f 5 f 8 0 L~43C .1 1 ., 2 52.3 1 2.7 - 1 24. rIr mnestic sales vaL uea at NUG0 oucted orices. -nsed on a figure of $3> '- in 1970/7,ging u c to $30;l:;/yar by 1972/'7, and <370/km/,ear by 1979/&D or the totalt lengt of onair.ine (1,105 ); for fpur ines (some 660 In) the figures are l5C/kmn/y-ea /!Y' ai -r ind :P135,kn-,- e ar resd.eot-,I. 3/ s~ as zetaversa -:<. e, .o t free a. l tr be trL t eated in the idld art, wnere as ds are re Ov*-,ed. o r ts:sr tretent.r, t Ze onVsorzta.n iS waut in the 'or -- -eri~e -- 'E is )e z-~aia' ir, i-,e --'o r,! co f rer:oveu JJ JQ.z . L!~5C~r~n Table 4 EGONGiC RATE OF RErUR CALCULATION (In m iUoi ciollars) tnvestment Grc'ss Bea6fits Co_sts Outlay Alternative A.termative 0 & 14 In-t _ Net BEefits l/ _ _ _ I _ DE 0.50 1I,( 1 1 II II i _V c,A/6(,-' 5 ° _ _ (5.01) (5.o) (5.o) (5.o) (5.0) (5.0) 1967./68 27.0 - - _ _ (27 .o) (27.0) (27.0) (27.o) (27.0) (27.0) 1 968 /659 182.3 - - - (182.3) (1 82.3) (162.3) (0,8;2,3 (I82. )(I82.3) 1969/70 143i.4 - * -- - (143.4) (143.i;) ( 0 43,4) ( 4,:3 4)(143.4) (1 43.4) 1 970 7 / 71 75 .6 22. 5 2i4.9 3 .75 1.7 3.1 (6i.6) (62.3) (64. o) (5 8 .2 ) (5 .9) (6 l . 6) 1971/72 73.5 52.8 61.7 3.8 4.0 8.0 (2L,.,5) (28.5) (32.5) (15.6) (19.6) (23.6) 1972/7?3 62.7 62.7 74. 5 4.2 4.8 9.5 (4.2) (9.0) (13.7) 7.6 2.8 (1 .!9) 1973/74 55t.O 71.,9 86.1 bs5 5.5 10,9 12.1 6.9 1.5 26.6 21.1 15.7 1 9T7/75 40.00 82,2 99.6 L4.7 6.3 1 2. 5 37 .5 31.2 25.0 5 9 1±14.6 38. 4 1975/76 31 .5 88,8 109.1 LL,8 6.8 13.5 52.5 45.7 39.0 72.5 66.0 59.3 1976/77 T 92.,1 1115.4 5.0 7.0 14.0 87.1 80=1 73.1 110.4 103.4 96,4 1977/78 - 95,7 122.3 5.1 7.3 14 Li5 90.6 83e3 76.1 117.2 109.9 102.7 1978/79 -. 99.3 129,lv1 5.29 7.5 15.0 94.1 86,6 79,1 123.9 116.4 108.9 1979/80 103.0 136.0 5,3 7.8 15.6 97.7 89.9 82.1 130.7 122.9 115.1 15980/81 103.0 .13 . 0 5.±4 7.9 15.5 97. 6 F59.7 81.8 130.6 122.7 114.13 1931/82 - 103,,0 1365.0 5.5 8.0 16.0 97.l5 89.5 81.5 130.5 122.5 114.5 1 982/8 l, 103,0 136.0 5,6 8.0 16.0 97.14 89.4 81.4 130,.4 122. 4 11 4.4 1933/84 .- 103,,0 136. 0 5,7 o.o 16.0 97 3 89,3 Si .3 130,3 122.3 114.3 1 934/85; - 103,0 136.0 ;.8 8.0 16,0 97.2 89e2 p1.2 130.2 122.2 114.2 1 5/35/86 103,.0 1315.0 5.9 8,0 16.0 97.1 89.1 61.1 130.1 122.1 1 4.1 Econonic Bate of BtuiXL 86.2% 7'g.0% 5,7% 11. 8% 10.8% 9.S% T7 , -Pri=ce A=terae I, -ininua 0 & 14 II - Price Alternative 1, iainus 0 & M, shadcii rate for ilipts at $0, 50/1 JOOth3 III - Price Alternative I, u.nus 0 & 1, shadow rats for inputs at $1 .00/1 ,O cui3 IV = Price A-LtematiYe IIf, min.us 0 & H V = Price Alternative II, tmdus 0 f& 1, shacow rate for inputs at .5o/i ,om3 VI Price ALternativo II, mLnus 0 & 1, shadow rte for in)ut at :1.00/i ,oo Appendix IV A. O.)il Pact WtTi.th Libya (April 2, 1971) 1. Agreement is to remain in effect till 19T5. 2. Posted Price: raised fromi $2,55/barrel to $3.415/barrel. Of this, $3.20 is the permanent level, and $.25 is a freight premium, which would vary with e.g. opening of the Suez Canal and tanker availability - 3. Posted pice w ill be increased by 2 n perernt. a year. 4. Per Marc r 20, 1971 the posted price h.l be riri ~ce by $n.OW/inarrel as an inflation allowance; a furtlher $0.02/barrel will be added on J-nuary 1, 1972. t1 1- nn flU v k)J . cC|.1 Ai 1-ret e !'1;%02.0c'/arrel 4 in re se ; so lo 4t;-e place on January 1, of 1 973, 1 974 and 1 95'? (ii) Is the tax rate increased to 60 percent? (iii) Supposedly the overall posted price will reacch ap).2/ arrei in I>1975; it is not possAile to arrive at this amount from the presently available details of the agreement. Appendix IV Pafye 2s 13. C i Ison o' Tehir-an arldu Trl UL rUemflbs (US dollar per bar-rel) Persianl ul ___ -i'.,ya _ Before After Before After- 10/11 971 2/4j1971 Posteci Pr-ice 1.79 (13.07) 2.17 (.584) 2.55 (18.62) 35- (25.19) income Tax 5 55 55// 55 Il Annual 0.3104 3 Increase,s - + 0.05 (0.37) - 05 (0 37) Inflation 3/ ' '? Compensation 22 5514f (figures in parenthesis are for equivalent prices; 1 ton 7.3 barrel on average) 17-till OTtober .1970 .54rel (;l6.l3/ton) 2/ of which $0..25 the geographical premium ($1.83/ton) :3/ increa,,es effective on: Junie 1, 1971 and January 1 of the years 1973-1975 4/ on the basis price of .$3.20/barrel (.$23.36/ton)