The problem facing Iran’s oil industry is not just sanctions or a shortage of investment. It is a question of governance: who makes decisions, who signs contracts, who receives the money and, ultimately, who is accountable?
Iran’s oil industry is more than a collection of wells, pipelines and refineries. What turns those assets into an industry is an integrated chain of reservoir expertise, production planning, engineering, safety, financing, sales and accountability.
That chain has been badly fragmented. In the past two decades, especially under President Mahmoud Ahmadinejad, projects have been handed to military institutions, shares and assets transferred to pension funds and quasi-state bodies, and even oil cargoes used to cover budget shortfalls in organizations outside the Oil Ministry.
Unless a future Iran addresses that fragmentation, billions of dollars in investment and the most advanced technology could simply reproduce the old disorder on a larger scale.
From privatization to quasi-state ownership
The Ahmadinejad government accelerated the sale of state assets in the name of privatization, but much of the process did not produce an independent private sector.
Academic Kevan Harris has described the process as a form of pseudo-privatization: assets and privileges moved from one part of the state to pension funds, foundations, affiliated companies and military institutions without producing genuinely competitive markets, transparent ownership or public accountability.
In oil and gas, the Oil Ministry and its subsidiaries lost some of their practical authority over contractors, projects, procurement and, at times, the sale of oil.
One of the starkest examples was the decision to give oil cargoes to Iran’s police force to sell. Esmail Ahmadi-Moghaddam, then commander of Iran’s police, acknowledged in 2014 that during Ahmadinejad’s presidency the force had been given two oil cargoes to sell, with some of the proceeds intended to cover a salary shortfall.
The budgets of the police, ministries or pension funds should be recorded in the state budget and paid through the treasury, not financed by giving individual institutions a company, refinery, oilfield or oil cargo. Such arrangements erase the boundaries between owner, policymaker, client, contractor and seller.
Khatam al-Anbiya: one name, a network of interests
Khatam al-Anbiya Construction Headquarters is the economic and engineering arm of the Islamic Revolutionary Guard Corps, but it should not be understood as a conventional, integrated company.
It serves as an umbrella over numerous holdings, affiliated companies and subcontractors. Reuters reported in 2015 on the extensive network of companies linked to the IRGC and the difficulty of identifying their ultimate owners. A “contract with Khatam,” therefore, did not necessarily mean a clear chain of command, auditing and responsibility.
Under Ahmadinejad, the network received major contracts without effective competition. In 2011, Reuters reported that two pipeline contracts, each worth $1.3 billion, had been awarded to Khatam. Development of phases 15 and 16 of the South Pars gas field had also been awarded to the organization.
The result was multiple centers of power, allowing projects to be divided among different entities and responsibility to become diluted along the chain.
The consequences were technical as well as financial. Oil production requires reservoir engineers, drilling specialists, safety personnel and procurement departments to work under common standards and a coherent system.
Fragmenting projects among institutions with different missions and unclear accountability also fragments expertise and decision-making.
‘One sheikh in Bahrain, forty sheikhs in Iran’
I saw something of this problem during my own time working for Shell in the Netherlands.
I once asked the Dutch manager responsible for Iran why Shell had ended its activities in the country. I remember the essence of his answer like this: “We went to Bahrain because there we dealt with one sheikh; in Iran, we had to deal with forty sheikhs.”
Khatam might formally be the contracting party on a project, he explained, but another unit within the same network could then say it was responsible for security along part of the pipeline and demand a separate payment.
His point, as I understood it, was that instead of one accountable client, a foreign company could find itself dealing with multiple centers making separate demands for payment.
This is my recollection of an unrecorded conversation, not documentary evidence explaining Shell’s departure from Iran. The public record points principally to sanctions and political pressure: Reuters reported in 2008 that Shell withdrew from a planned Iranian gas project amid US pressure.
But sanctions and domestic disorder are not mutually exclusive explanations. Sanctions raised the cost of entering Iran; multiple centers of power raised the cost of staying.
The conversation illustrated the problem: when the contractual counterparty is known but the number of parties making demands is not, neither the true cost of a project nor responsibility for it can easily be calculated.
The Baku lesson
Another experience may offer a useful lesson for Iran’s future.
While working for BP, I travelled to Baku on a short assignment concerning contractor-selection models. An Azerbaijani colleague described how the country had used foreign partnerships after the collapse of the Soviet Union to modernize technology and develop its domestic workforce.
Azerbaijan did not hand its oil industry to BP. Under a production-sharing agreement signed in 1994, BP became operator of the Azeri, Chirag and deepwater Gunashli fields, while Azerbaijan’s state oil company SOCAR remained the principal domestic partner.
More important for Iran was the emphasis on local capacity. Training technicians, developing local suppliers and progressively replacing foreign personnel with Azerbaijani workers became part of the project. BP says it now directly employs around 2,380 Azerbaijani citizens, while Azerbaijanis have made up around 90% of its professional workforce in the country.
The lesson is not that Iran should hand management of its oil industry to BP. It is that an international operator can be selected for a particular project, targets set for training and localization, and domestic personnel left with greater technological knowledge and experience.
An architecture for Iran’s oil industry
Rebuilding Iran’s oil industry should begin with rebuilding its institutions, not redistributing the spoils.
Oil and gas should remain public assets. Parliament should establish the legal and financial framework, the government determine energy policy, and an independent professional regulator oversee licensing, safety, reservoir protection and environmental standards.
The referee must also be separated from the player. The National Iranian Oil Company should operate as a commercial and technical enterprise rather than simultaneously acting as regulator, client, partner, supervisor and arbiter of disputes.
Military and non-specialist institutions should gradually be removed from the industry. The process should be legal, audited and phased so existing projects are not abandoned.
Specific fields, refineries and infrastructure projects could instead be offered through transparent international tenders. Foreign companies could compete to operate or participate in individual projects, but no company or country should acquire a monopoly over the industry.
Contracts should be time-limited and contain measurable requirements for costs, production, environmental standards, Iranian employment and technology transfer, with extensions dependent on independent assessments rather than political connections.
Contracts, ownership, payments, costs, production and project revenues should generally be public, with auditing independent of the Oil Ministry, NIOC and contractors.
Contracts, ownership, payments, costs, production and project revenues should generally be public, with auditing independent of the Oil Ministry, NIOC and contractors.
Iran will also have to reassemble its human capital. Specialists inside the country, Iranian oil professionals abroad and a younger generation of engineers should be connected through a national program of training and succession. Foreign contractors should be required to build Iranian counterpart teams, not foreign islands inside the industry.
Rebuilding trust
Iran will need foreign investment and technology to restore production and modernize its refineries. But the need for capital should not be confused with surrendering sovereignty.
A homeowner can hire international architects and contractors without handing them ownership of the house. A future Iranian government can similarly benefit from competition among foreign companies while keeping ownership of resources, policymaking and ultimate authority in Iranian hands.
Iran’s oil can become a national asset again only when every contract has an accountable party, every project an auditable account and every decision a clearly defined legal authority.
The answer to the problem of “forty sheikhs” is not to create a new sheikh, Iranian or foreign. It is to build a single, transparent and professional system in which no commander, foundation, ministry or foreign company stands above the law.
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