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Iran's potential for gas exports and petrochemical production, in view of depleting international oil resources, has gained increased significance. The present government's all-out endeavor to mobilize the industry through the domestic private sector and international participation in investment is understandable.

The following is the second part of the interview with Seyyed Mohsen Yahyavi, Tehran's representative in parliament and a member of the parliament's Oil Commission, who elaborates on the issue:

Q: Are there any legal impediments to the improvement of the oil industry which need to be cleared?

A: Considering the rapid development in the oil industry throughout the world, we feel, more than ever before, the need to keep up to date and adapt with changing trends and to increase the competitiveness of out Oil Industry in the international market. Evidently, some of our regulations concerning this industry are outdated and limit our competitiveness in international fields.

Presently, we are facing two main problems: The articles of association of the National Iranian Oil Company (NIOC) and other companies affiliated to the oil ministry, and NIOC's lack of independence to stabilize prices and sell its four main by-products. According to the present regulations, the duties of the oil ministry and the NIOC have become intermingled, with one section of NIOC's headquarters actually performing ministerial duties as well as their own. These conflicting duties have caused the oil ministry to involve itself in the executive affairs of the affiliated companies instead of prescribing general policies and guidelines for them. In fact, under the present system, the Oil Minister is also acting as the managing director of the NIOC.

In a new draft of articles of association for NIOC which has been endorsed by the majlis Oil Commission the duties of the Oil Ministry as a policy-maker and NIOC as an executive arm of the ministry have been segregated and defined to some extent. Regretfully, the new bill which could serve as a model for other oil ministry-affiliated companies has remained undecided on the Majlis floor. The articles of association of companies affiliated to the oil ministry must be drawn in such a manner as to give them the incentive to lower their operating costs, upgrade their products and enhance the efficiency of their work-force.

Q: Considering a deficit of 15000 billion rials in this year's budget, how do you assess oil revenues? Is it true that the deficit was due to an error by the Majlis in setting a correct base- price for oil?

A: An evaluation of the production and export of crude in 1376 (March 21, 1997/March 20, 1998) compared with the approved budget figures shows that the volume of exported crude versus the average price of oil is the basis for oil revenues. Meanwhile the volume of export depends upon the volume of crude production and the amount of crude allocated to domestic refineries.

Therefore, in order to have a picture of the role of oil revenues in the budget deficit, it is necessary to analyze the following points and figures:

a. Oil Production and the Approved Budget:

1) A comparison of the average performance of the 1375 budget with the present budget figures shows that inland oil production needed to be increased by an average of 110 thousand barrels of oil per day (bpd). On the other hand, a comparison of the average production in 1375 with the average production in Esfand (Feb. 19 - March 20, 1997) indicates a decline of 104 thousand pbd between March 21, 1996 - March 20, 1997. This shows the gradual decline of oil output in major oil fields which is compensated for by the drilling and exploitation of new oil wells each year.

Expert estimates have put the decline in output from inland oil wells at between 180 to 200 thousand bpd. Therefore, in order to achieve the targets set in the 1376 budget, besides compensating for the losses thereof, it was necessary to make up for the 110 thousand bpd decline in crude output from inland wells. According to these estimates, it was necessary to boost production by (110+200)x1.10=341 thousand bpd crude by digging some 110 new wells. Taking into account NIOC's previous performance and the company's limited facilities, such a boost of production in inland wells was deemed impossible.

2) A comparison of the performance of the last five months of oil production in inland areas proves that the above targets were not met in the 1376 budget because the average daily inland oil output in the first 5 months of 1376 (from March through July 1997) was 124 thousand bpd short of the targeted figures. The shortage in offshore wells during that period was about 13 percent, or 73 thousand bpd. Thus we have had a total shortage of oil output from inland and offshore wells amounting to 197 thousand bpd. during the first 5 months of the current Iranian year, compared to target figures in the budget.

3) Some calculations have revealed that had 60 new wells been dug and exploited, the country could have halted the natural decline of oil in Mordad (August/September) and stabilized it over the next 7 months. In such a case the average inland daily output in 1376 would have been 136 thousand bpd short of 1376 budget figures. Assuming a predicted 73 thousand bpd offshore oil shortage (during first five months of the year) the average shortage of daily production of oil in 1376 would have been 209 thousand bpd.

4) with the full commissioning of the Bandar Abbas refinery in the first six months of 1376 and the repair of refineries during that period, the average daily allocation of crude to refineries will be only 8 thousand bpd less than the 130 thousand pbd decline, compared to the targeted figures . But should changes be made in the amount of oil input to Bandar Abbas refinery, the average annual supply of oil to the refineries will be reduced only by 50 thousand pbd.

5) Based on the calculations made in items 3 and 4 above, we will have an annual shortage of 209 thousand bpd oil, and 50 thousand pbd of oil supplied to refineries. Thus we can expect an average shortage of 159 thousand bpd in exported oil compared to the approved budget.

b. Oil Prices and Oil Revenues:

1) The government proposed an estimated 17.5 dollars per barell of oil for this year's budget which figure was approved by the Oil Commission and, in the open session of the parliament, by the deputies. This was due to the fact that during the process of approving the budget the price of oil was higher than the set figure, and some deputies believed that the rising trend would continue. However, the Majlis Research Center believed that the present hike on oil prices was due to the arrival of the cold season, and was therefore temporary and doomed to fall. It was believed that the 17.5 dollars per barrel was not a reliable figure, but that since it had been suggested by the new government, the deputies had approved it in order to show their good will. In fact some deputies had tried to set the oil prices at a figure even higher than that presented to the Majlis, but this move was opposed by the majority of the law makers.

2) Present studies have revealed that the price of exported oil during the first half of the current Iranian year was only I dollar lower than the predicted figure in the budget. An expert study has shown that the same trend will continue into the second half of the year. Therefore, instead of 17.5 dollars per barrel an average of $ 16.5 is expected to materialize for the rest of the present year.

Based on estimates for the nation's crude export capabilities, there will be a shortage of 159 thousand bpd against the budget targets, and therefore instead of gaining an income of 15.97 billion dollars, only 14.1 billion dollars will be earned by the country; this shows a decline of 1.87 billion dollars. If this figure is multiplied by the 3000 rials exchange rate, the result is a shortage of 5610 billion rials which represents part of the 1376 budget deficit. However, it is not clear whether this figure is included in the 15 trillion rials budget deficit or not. If it is, approximately one third of the budget deficit will be due to the nonrealization of anticipated oil revenue.

c. Government's Non-Oil Revenue :

Last year, with the government's increased reliance on non-oil exports, much effort was made to increase income tax and the tax achieved from the government's profit-generating activities. During the years 1374 and 1375 (1995 to 1996 ) the total revenue from income tax, and income from profit generating activities, accounted for between 29.7 and 40.7 percent of the government's general income. The proportion of general revenues in the 1376 budget was predicted as 47 percent. The relatively high rate of income from non-oil products in 1376 is an important matter to take note of since the total general revenues of the budget for 1376 had been predicted to rise to 74,818 billion rials, showing a 34.5 percent growth compared to that of the preceding year.

Meanwhile, some 35,186 billion rials revenue was predicted from tax and profit generating government activities and the total income from the export of oil and the sale of foreign exchange at the export rate for 1376 was predicted as 39,632 billion rials, showing a growth of 20.2 percent compared to a year ago.

The reason for the lack of realization of revenue in the first half of the year was mostly due to the lack of realization of income tax or income from government owned profit-generating activities. Only a small portion of the budget deficit was due to the non-realization of oil revenues. Further to this, it is anticipated that between 10,000 to 12,000 billion rials of the projected tax and other economic incomes, will not to be realized by the end of the current Iranian year.

As previously mentioned, only a small portion of the budget deficit was caused by low returns from exported crude. Therefore, it is obvious that the major portion of lack of realization of revenue in the general budget was due to the failure of the government to collect taxes. A study of income tax figures for 1376 reveals that of 9669 billion rials increase in income tax (or 89 percent growth compared to last year's budget), some 525 billion rials increase of income was predicted from non-government companies; 365 billion rials from employee salaries; 670 billion rials from the increase of customs and commercial charges; 600 billion rials from the increase in fees for the registration of orders for foreign goods and 478 billion rials from the increase in government owned company taxes. Besides this, two major increases were predicted from paragraph D, Note 8, of the budget and from the balance of the price of goods and services under Nots 5 of the budget law (amounting to 4700 billion rials).

All in all, a total of 7290 billion rials tax increase was anticipated in the budget. Also, an unexpected sum of 2,250 billion rials was predicted from the income of the sale of participation shares, whereas the total of the stocks sold by the government in that year amounted to only 300 billion rials. Even if the projected oil revenue was achieved, the 1376 budget had called for the sale of 6.9 billion dollars at the export-exchange rate (3000 rials), and the income from the balance of the free- exchange and the floating-exchange (3000 - 1750=1250) was expected to rise to 8600 billion rials, which an increase of 3600 billion rials compared to the approved figures for 1375 budget.

The total increase in the taxes and sale of participation shares was 8240 rials compared to those of the preceding year which, coupled with increased revenue from the sale of foreign exchange, would have amounted to 11,840 billion rials. Expectations of income from other articles of income tax and the sale of goods were likewise inflammatory and unrealistic. In any case, the performance in the first half of the current Iranian year showed that many of these increased incomes were not realized. For example, the stagnation in the stock exchange market during the last 6 months was inevitably an impeding factor in the sale of government - owned stock to the bourse, which had been predicted to amount to 2250 billion rials. Also, the recession affecting the private sector in the past few months has prevented the government from collecting its predicted tax revenues. As a result, the deficit in the income tax and the income from the sale of goods and services in the 1376 budget amounted to a formidable figure which was due to the non - realization of the 89 percent predicted growth in income tax for 1376 compared to 1375, where the predicted growth should have been fixed at between 15-20 percent.

Q: what are the prospects for foreign investment in oil exploitation? Are such foreign loans not reminiscent of old concessions and colonialism?

A: It has been predicted that foreign investment in the oil industry will be on a buy- back basis. In such contracts, the foreign investor, in return for his investment and the supply of equipment and machinery, will receive part of the product of the joint venture as repayment for the loans and the interest thereon.

By concluding buy back contracts, developing countries are able to connect with international capital markets and thereby upgrade and develop their level of technology and eliminate industrial and economic backwardness. In this way, the country can import necessary technology in the form of know, machinery and software. In addition, since in Iran's case the bulk of rials capital required in the oil sector for the purchase of necessary machinery and technology is very high, by conducting buy- back transactions, Iran can procure the required capital and sell its products to foreign investors. Such loans will also relieve the burden on the Iranian. In view of all this, the difference between buy- back contracts and other contracts with regard to foreign investment is self evident.

Of course the question the volume of profit in the buy- back contract is an important matter to take into consideration and the amount of interest must be calculated fairly. For example, against a 2 billion dollar loan for the development of the South pars Gas project, the French TOTAL company is demanding 80 thousand bpd liquefied gas for a period of 7 years. Should we calculate the price of each barrel of liquefied gas at 16 dollars, the total value of liquefied gas delivered to TOTAL will amount to 3. 2704 billion dollars. In other words, TOTAL is asking for 3. 2704 billion dollars in return for a 2 billion dollar loan.

This high rate of interest can be justified at a time when we are facing US sanctions against investment on Iranian oil and gas. Of course it is the general policy of industrial nations to lower the price of oil so that the exporting countries will have no capital to invest in their oil fields or the required technology to exploit their resources. As a result of this financial shortage oil, exporters are bound to seek foreign capital, which is granted in a number of ways and on a variety terms. On the whole, the foreign investor prefers to own part of the joint venture. In such ventures, for as long as the oil and gas well is productive, the investor will be a partner in the oil well; whereas in the buy -back system, the foreign investor owns no part of the well and once invested capital and interest is received, the investor leaves the premises.

Q: Do the US D'Amato and Helms Burton laws threaten the development of the oil industry of foreign investment in Iran?

A: The objective of the US sanctions against Iran was to impede the development of our oil industry. With the conclusion of various oil contracts in recent months and the participation of international companies in the NIOC's tenders, as well as the announcement of their readiness to initiate such projects, these sanctions have been effectively deactivated. In fact, it has been American companies who have been forced to abandon the field and therefore suffer the consequences of their absence from the scene. In the meantime, various Asian and European nations have predicted very slim chance of success for such extraterritorial sanctions.