Nowadays, petrochemical industry plays a vital role in human’s life. At the first, some of the most important pros of this industry in Iran are as follow: Accessibility to gas and oil rich resources and different kind of feedstocks, regional proximity to international waters, strategic geographical location and expert workforce. In addition, lifting of sanctions can have a significant impact on this industry. Regarding these advantages mentioned above it is not clear that why investors are uncertain to invest in this industry? The answer could be found in concerns of investors regarding feedstocks pricing method, as a result, firstly, this article gives an overview of feedstock’s statues and secondly, focuses on its pricing process in Iran compared to the world.

The most common feedstocks or raw materials in petrochemical manufacturing are Naphtha and light gas oil, which are derived from the oil refining process and some gases such as Ethane, Propane and Butane, which come from a complex mixture of hydrocarbons known as NGLs[1]. NGLs exist under the ground in a liquid form along with Methane and several substances in the liquid hydrocarbon mixture are found in gas form above the ground at normal temperature and pressure.

Unlike crude oil and petroleum products, natural gas doesn’t have any global pricing method because of its nature and various fields of quantitative and qualitative indicators, but it has a regional pricing based on its resources and consumption. In most countries which are the importer of crude oil, oil products and natural gas, there is a relationship between the cost of goods sold and selling price of the fuel and other factors such as local and national taxes and policies of employement and investment but from the energy economics point of view, such factors that mentioned above doesn’t apply for the countries that are major producers of fuel. As a result, the calculation methods of natural gas price are distinct from region to region such as Russia, U.S., Canada, Mexico, Qatar and Saudi Arabia and it doesn’t relate to the price of crude oil products in national or international markets.

Furthermore, using new technology to extract natural gas which is blocked in compressed layers of limestone (Shale gas) in the United States caused increasing of natural gas extracting and as a result, decreasing of feedstocks price, while the oil price had been risen. In the other words, with the development of shale gas technology, direct correlation of gas price and crude oil price has been changed.

The relationship between natural gas and crude oil price which is written by Ishaq Mansour Kiaee[2] in 2009, proves the above idea about independency of these two prices. Kiaee’s paper shows that natural gas price follows crude oil price only in the long-term, but short-term volatility will lead to significant changes in the relationship between natural gas and crude oil price. Weather conditions, seasonal fluctuations, level of reserves and a lag in producion can be pointed as the short-term volatility samples.

As a result, based on evidence and studies which discussed above, regional conditions are the main factors for determining the price of natural gas for feedstocks units. Also it is necessary to pay attention to average price of natural gas in neighborhood countries in order to maintain their competitive advantages. However in Iran there is an incorrect gas pricing method because the price of natural gas has been determined without considering the average price in the region. The average price of natural gas in Middle East and Iran is around 5 Cents and 8.5 Cents in 2016 respectively. As a result, investors would prefer to invest into Middle East Petrochemical Companies rather than Iran.

In the table below, the historical prices of natural gas in Iran has been shown:

Year 2009 2010 2011 2012 2013 2014 2015 2016
Price(Cents) 7 7 7 7 7 13 13 8.5

Source: Ministry of Petroleum

In 2013, Iranian Rial depreciated dramatically. Following the event, net price of natural gas decreased to lower than 3 Cents. Therefore, Ministry of Petroleum decided to revise feedstocks pricing model and they increase the price from 7 Cents to 13 Cents but it lead to a big loss for companies in this field. So natural gas price is amended again to 8.5 Cents in 2016. The aim of officials is to standardize the price of natural gas based on avaerage price of the region.

In the graph below, a comparison of natural gas prices in some regions around the world has been shown:

graph

Source: telegraph.co.uk/finance/newsbysector/energy

Now, there are 67 semi-finished projects with total capacity of 60 million tons in Iran’s petrochemical industry and half of which with less than 10% physical progress. Completion of these projects needs around 40 billion Dollar capital expenses and lack of adequate financial resources has been the main cause for unfinished projects during the recent years. By creating steady conditions such as making logical changes in feedstocksĀ price along with many pros, Iran petrochemical industry can be more attractive for investors and finally will lead to attract more domestic and foreign investment to complete semi-finished projects. A share of 67% of global export in petrochemical products in 2016 is the one sample for special position of Iran’s petrochemical industry in the world.

[1] Natural gas liquids

[2] MSc of energy economics at University of Tehran