Feedstock Pricing Formula Gets Gov’t Backing

Feedstock Pricing Formula Gets Gov’t BackingFeedstock Pricing Formula Gets Gov’t Backing

The undisclosed formula for setting the price of natural gas as feedstock for petrochemical units officially got the backing of First Vice President Es'haq Jahangiri on Thursday.

Despite the discretion of oil officials in not revealing details of the new formula, an official at the Association of Petrochemical Industry Corporation claimed each cubic meter of gas as feedstock will cost 8.5 cents under the new pricing scheme, Tasnim News Agency reported.

The new price would be an improvement over the previous price of 13 cents per cubic meter, although the new formula has not been officially announced yet.

Jahangiri reportedly said the pricing scheme is reasonable and would guarantee a profitable investment in the petrochemical sector, according to Mehr News Agency.

Economy Minister Ali Tayyebnia and head of Management and Planning Organization and government's spokesperson, Mohammad Baqer Nobakht, have also endorsed the new formula.

Mohammad Ali Rejali, vice president of APIC, said the new formula may cut losses for petrochemical units, but is not attractive enough for foreign investors.

"An 8.5-cent [per cubic meter] price for feedstock can weather the crisis, but prices should be adjusted downward even more," Rejali said.

"When oil was trading at $120 a barrel, the price of feedstock was 13 cents per cubic meter but with $30 oil, feedstock tariffs have merely reduced by 5 cents."

Unlike investors' penchant for lower feedstock prices, an official at Tehran Chamber of Commerce, Industries, Mines and Agriculture said last month tariffs should be revised from 13 cents to 35 cents per cubic meter to put an end to "the unlawful advantage of semi-government industries from using inexpensive feedstock".

Iran is planning to attract $70 billion in petrochemical investments after the lifting of sanctions and boost output from $60 million tons a year at present to double and triple that amount by 2021 and 2025, respectively.

However, Rejali said that to achieve this ambitious target, a price change for feedstock cannot single-handedly woo internationals into making investment in Iran.

"They demand a competitive business environment while total [production] costs should be taken into consideration," he said, adding that there is a long way before foreign investors embrace Iran's post-sanctions petrochemical sector.

The price of feedstock is a decisive factor for domestic and international companies exploring investment opportunities in the Persian Gulf country's promising energy market.

A definitive formula would help companies devise long-term investment plans. But the possibility of sanctions getting back in place as well as competitive feedstock prices offered by Persian Gulf neighbors are challenges facing Tehran in raising investment in the petrochemical sector.

According to reports, feedstock prices vary from 6 to 8 cents in the Middle East.  

Negotiations with international petrochemical companies gained momentum after Iran and world powers reached a watershed deal in July that limits Iran's nuclear program in exchange for the lifting of decades-long sanctions expected in the next few days.

Rejali also underlined high interest rates of banks and the National Development Fund of Iran as a hurdle against foreign direct investment in petrochemical projects.

"The NDFI and banks draw 8% and 2% interest from investors, respectively, but the global rate of interest is 1-2%," he said, adding that Iranian banks' rates of interest stand at 24-30%, while global rates are 2-3%.