August 21, 2013
The man appointed to run the most vital ministry in the Iranian government has more than three decades of experience in the inner sinews of the Islamic Republic, with a track record of turning limitations into opportunities and using less confrontational rhetoric than other Iranian officials.

Bijan Namdar Zangeneh's resume is almost as long as the Islamic Republic's. In 1980, he became Deputy Minister of Culture and Islamic Guidance, in 1983, he was appointed minister of Construction Jihad and in 1988, Minister of Energy. In the latter position, Zanganeh reconstructed and rehabilitated dams and electrical grids that had been destroyed during the war with Iraq and created the biggest company building power plants in Iran. When he left the power sector in 1997 to become Minister of Petroleum—a post he served in until 2005—Iran's power shortage problems dating from the Iran-Iraq war were almost solved.

Sometimes called the Sheikh al-Vozara (Sheikh of Ministers) and the "father" of Iran's petroleum industry, Zangeneh will need all his experience and skill to deal with an energy industry under massive sanctions and limitations.

Psychologically, Zangeneh and his team were from day one accustomed to working under the pressures of war, sanctions, and declining buyers. From 2004-2005, when I worked in the National Iranian Oil Company International—
the division that sells Iranian crude oil and production—our managers often reminded us of their experiences producing and selling crude oil during the eight years of war with Iraq.

Iran's oil personnel and managers became adept then at navigating hurdles and blockages. For example, shipping Iranian oil through the Strait of Hormuz and Persian Gulf, with the high risk of being targeted by Iraqi missiles, was one of their formative experiences. Finding new markets and destinations for Iranian oil after the US stopped purchasing Iranian oil in 1979 was another challenge they overcame.

Of course, the first sanctioning of Iranian oil came long before the Islamic revolution in the late 1940s and early 1950s. A dispute over pricing and compensation with the Anglo-Persian Oil Company (later to become British Petroleum) led to the creation of the National Iranian Tanker Company (NITC), the biggest tanker company in the Middle East and the fourth in the world. Iran realized then that if it had its own fleet, sanctions would have less effect.

Under the shah, Iranian oil production peaked at nearly 6 million barrels a day in the late 1970s. It hit a post-revolution high in 2005, reaching 4.2 million barrels a day. That figure has plunged to 2.56 mb/d as of July 2013, as a result of the unprecedented regime of sanctions against both the oil and banking sectors. Numerous fields and wells are also suffering from natural decline. According to the US Energy Information Administration, the natural rate of decline at live Iranian oil fields is about 400,000-700,000 barrels per day annually.

During the Zangeneh's previous tenure at NIOC, Iran had various plans for sustainable production, including new field exploration, development of current fields, a workable plan to increase the recovery factor, and the injection of natural gas into oil wells to boost production. However, under the administration of Mahmoud Ahmadinejad, lack of technological capacity and capital investment, along with general mismanagement, prevented Iran from achieving a level of sustainable oil production. Still, if sanctions had not been imposed, Iran's current production would be around 3.7 mb/d.

Part of Zangeneh's plan offered to the parliament for his new term in cabinet of President Hassan Rouhani is to boost crude oil production to a sustainable level. His record from 1997-2005 suggests how he will try to achieve this.

During his prior term in office, Zangeneh emphasized developing Iran's shared oil and gas fields. The development of South Pars Field, the huge shared gas field between Iran and Qatar, in particular was a top priority. Zangeneh started developing ten phases of the field. By the time that he handed over the petroleum ministry in 2005, five phases of the field were completed and the other five were more than 60 percent developed. Development of South Pars expanded Iran's domestic natural gas network, bringing fuel to most Iranian homes as well as boosting Iran's export capacity. However, Ahmadinejad's government did not allocate resources to this field until 2009, and in his second term tightening sanctions prevented further development. Thus none of the five remaining phases have been completed.

Another major plan Zangeneh implemented during his previous time in the petroleum ministry was to add value to exported petroleum products by processing them primarily in the downstream chain. For example, Zanganeh massively expanded Iran's petrochemical industry: in 1997, annual petrochemical production was worth $1 billion; it is now worth $18 billion. In 2005, outgoing President Mohammad Khatami's energy team handed over nine petrochemical factories that were almost completed. They were not finished, however, until long after their 2006 competition date. Investment in and development of Iran's downstream sector has always been part of Zangeneh's strategy, and will continue to be part of his new team's plan. Since sanctions largely target Iran's crude oil and natural gas exports, expanding downstream capability could increase the share of non-oil petroleum products in the economy.

It should also be remembered that Zangeneh's energy diplomacy successfully broke the Iran-Libya Sanctions Act of 1996 and attracted roughly $15 billion investment. Total of France was the first major company entering Iran and investing in the Siri A and E projects after ILSA went into effect. Zangeneh and his team attracted this investment with buy-back contracts, a unique upstream investment regime which, compared to the production-sharing system, is far more attractive to foreign investors. Technology transfers to Iranian companies have also been part of the buy-back system, which allots a maximum of 49% of a project to foreign investors and 51% to an Iranian company. The foreign company is contractually required to transfer technology to the Iranian partner. Petropars and the Oil Industries Engineering and Construction Company
are examples of Iranian private companies which were active in upstream oil and gas projects with major investors and that gained expertise and knowledge from their partners.

In May 2013, Iran for the first time offered a production-sharing contract (PSC) to an Indian consortium to invest in its upstream industry. Such contracts allow oil companies to more quickly recoup their investment expenses than the buy-back arrangements Iran had previously favored. The "magic" of the PSC helped Iran ink a deal to develop the Farzad-B gas field located in the Fars block of the Persian Gulf. This field is estimated to possess up to 21.68 trillion cubic feet (tcf) of natural gas with recoverable reserves of about 12.8 tcf.

Particularly under the current sanctions, a buy-back system is simply not profitable enough to attract major international companies and levels of investment. However, if sanctions loosen in the near future, production-sharing contracts could increase investment flows into Iran and facilitate the development of such fields.

The current comprehensive set of sanctions targeting investment, procurement and technology transfer as well as exports of Iran's oil, natural gas and petrochemical products are the main challenges that Zangeneh and his team face. Most of the major oil companies that were active in the Iranian energy industry, such as Total, ENI and Shell, started leaving during Ahmadinejad's presidency due to sanctions, higher investment risks and the low profitability of buy-back contracts. At that time, Iraqi energy resources opened up and presented a new field for international investment. Major oil investors quickly lost their interest in Iran's fields.

Ahmadinejad's diplomacy and rhetorical style also played a major role in prompting sanctions. He appointed people with direct links to the Iranian Revolutionary Guard Corps (IRGC) in key positions such as Minister of Petroleum, and on the boards of NIOC subsidiaries. Coupled with the tightening international sanctions, this created unprecedented problems for Iranian companies to work with international partners.

Despite the level of current sanctions, there is a good chance that Zangeneh and his team can more successfully use oil diplomacy to convince investors to reconsider the Iranian oil industry. If Rouhani's team succeeds in nuclear negotiations, with the effect of relieving the pressure of sanctions, having Zangeneh and his team in office will give Iran's energy industry a chance to breathe again.

Sara Vakhshouri is the president of SVB Energy International and a former adviser to the director of the National Iranian Oil Company International.

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