Ali Ghasemi
Following recent remarks by the head of Iran’s Securities and Exchange Organization about the possible listing of the National Iranian Oil Company (NIOC) on the stock market, the debate over financing the oil industry through capital markets has resurfaced.
This discussion comes at a time when Iran’s economy remains under sanctions pressure, fiscal constraints, and a growing need for investment in aging energy infrastructure.
Maintaining production capacity, developing joint fields, and modernizing facilities require massive capital injections. Yet the traditional financing structure—largely dependent on government oil revenues, NIOC’s internal resources, and domestic bank loans—has made the sector highly vulnerable to oil price volatility and export shocks.
In financial terms, the cost of financing (or cost of capital) refers to the return that lenders and shareholders demand in exchange for committing funds to a company’s projects.
It includes both the cost of debt (interest rates on loans and bonds) and the cost of equity (expected returns by shareholders). The weighted average of these components determines whether large-scale projects are economically viable. The higher the cost of capital, the fewer projects can pass the profitability threshold.
Studies by international institutions such as the International Monetary Fund show that state-owned enterprises often face systematically higher-than-optimal costs of capital. Weak transparency, limited corporate governance, and heavy reliance on public and bank debt increase perceived risk premiums.
However, research on partially privatized infrastructure firms suggests that stock market listing—combined with stronger disclosure requirements and market oversight—can reduce perceived risk and lower financing costs.
To understand the potential impact of listing oil companies, one must examine the existing model. For decades, oil and gas investment in Iran has been financed primarily through government budgets and NIOC’s own revenues—essentially “financing oil with oil.”
When oil revenues decline, investment in field maintenance and development is typically the first area to be cut. To compensate for fiscal limitations, Iran has relied on buyback contracts and later IPC contracts, under which contractors finance upstream development and recover costs plus a fixed return from future production.
While this project-based model reduces upfront government spending, it still ties financing to future oil cash flows and does not fundamentally diversify capital sources.
Domestic banks and the National Development Fund have also played major roles, creating significant explicit and implicit public liabilities. Heavy reliance on debt and quasi-fiscal resources has contributed to higher interest rates and increased pressure on government finances.
In recent years, policymakers have attempted to diversify financing mechanisms by introducing instruments such as payment commitment certificates, revenue-backed securities, and commodity-based certificates linked to oil output. However, the success of these instruments depends heavily on transparency and investor confidence.
Potential Structural Reform
Against this background, listing parts of the oil industry on the stock exchange is seen as a potential structural reform. There are several channels through which such a move could reduce financing costs.
First, stock market listing requires regular financial disclosure, independent audits, and greater accountability, thereby lowering information asymmetry and risk premiums. Second, it allows companies to diversify funding sources through equity issuance, bonds, sukuk, and project-based securities, reducing dependence on state budgets and bank credit. Third, greater private participation could ease fiscal pressure on the government, potentially lowering equilibrium interest rates in the broader economy. Fourth, partial listing may reduce perceived political risk for foreign investors, as publicly traded firms are generally viewed as more transparent and professionally governed.
However, major legal and structural obstacles remain. Under Iran’s Constitution, underground natural resources are exclusively state-owned, and NIOC functions as a sovereign representative rather than a conventional commercial entity.
Legal interpretations of Articles 44 and 45, along with oil contract structures such as buybacks, are designed to preserve state ownership of reserves. Privatization policies have historically focused on downstream subsidiaries rather than upstream core assets.
Moreover, past privatization experiences often resulted in ownership transfers to quasi-state entities rather than genuine private investors, limiting improvements in governance and efficiency.
Sanctions and geopolitical risks further complicate the picture. Even in a scenario of partial sanctions relief, attracting large-scale foreign capital would require improved regulatory stability, stronger governance, and clearer legal frameworks.
Ultimately, listing the oil industry represents an opportunity to redesign Iran’s oil financing architecture—moving away from excessive reliance on oil revenues and bank debt.
If accompanied by genuine governance reform, transparency, and competitive safeguards, partial privatization could lower financing costs and open new channels for domestic and foreign investment. Without such reforms, however, stock market entry risks becoming merely a symbolic shift in ownership, leaving the fundamental problem of high financing costs unresolved.
