IRAN: IRGC COMPANY PROFITING FROM SOUTH PARS' WOES

C O N F I D E N T I A L SECTION 01 OF 02 RPO DUBAI 000541

SIPDIS

E.O. 12958: DECL: 2019/12/22
TAGS: PGOV IR ECON ENRG
SUBJECT: IRAN: IRGC COMPANY PROFITING FROM SOUTH PARS' WOES

CLASSIFIED BY: Vinay Chawla, Economic Officer, DOS, IRPO; REASON:
1.4(B),(D),(E)


1. (C) SUMMARY: On December 19 Rostam Qassemi, the head of the the
IRGC's largest business subsidiary (Khatamolanbia Construction
Headquarters, aka 'Qorb'),announced that a presidential economic
committee has agreed to transfer USD one billion in foreign
reserves to Qorb from Iran's Oil Stabilization Fund for Qorb's past
and future work on the 'South Pars' gas project. Qassemi said the
project's completion had been delayed due to non-payment by the
Pars Oil and Gas Company (POGC),a subsidiary of the Iranian
National Oil Company (INOC) and the overall developer for South
Pars. His comments follow his December 15 announcement that Qorb
would be shifting strategy to focus on 'key sectors' and would
limit its focus to large-scale projects, allowing smaller
private-sector firms to focus on projects Qorb deemed
'insignificant.' The government's unilateral decision to use
previously off-limits Oil Stabilization funds to pay Qorb
demonstrates the IRGC's increasing economic influence in the energy
sector, heightened by the weakened state of foreign investment.
END SUMMARY.

SHOW ME THE MONEY


2. (C) In a December 19 interview with official news agency Mehr,
Qorb head Rostam Qasemei said that the National Economic Council
(NEC) approved payment of USD one billion to Qorb for work on
Phases 15 and 16 of South Pars. (NOTE: South Pars is the world's
largest gas field and borders Qatar and Iran. Iran has divided the
field's development into 28 phases, each meant to produce
approximately 1 billion cubic feet of natural gas a day with
varying amounts of condensates, LPG, and sulfur. To date, it has
awarded 23 of 28 phases, of which five are online. END NOTE).
When asked about the slow progress on Phases 15 and 16, Qasemei
blamed delays on POGC's "financial problems" and suggested the
issue is systemic, hurting the development of a number of other
South Pars' projects. He said Qorb invested approximately half a
billion dollars to complete 43 percent of the project and required
full payment in order to continue. According to Qasemei, the NEC
agreed and the Central Bank of Iran is drawing up final payment
instructions.

QORB SUPER-SIZED


3. (C) The Qasemei interview followed his December 15 press
conference in which he articulated Qorb's "new strategy," saying it
would no longer "take part in small and medium projects." He said
the company's goal remained the same, i.e. to maintain a "presence
in risky projects" and "concentrate on areas controlled by foreign
companies in our country." However, the new strategy involved
taking a "presence in upstream and strategic industries."
According to Qasemei, small and medium-size projects will no longer
be part of the company's domain which will give "competent
private-sector firms more room for activity."

SOUTH PARS: BESET BY PROBLEMS


4. (C) South Pars development has been beset by delays due to
technical, contractual, and political issues since its 1990
discovery. Technically, the gas is high-sulfur and hard to
process. Contractually, the Iranian Constitution does not allow
foreign companies to own a stake in any field or participate in
production-sharing agreements. While some foreign companies have
signed deals to work within these constraints, Iran's worsening
political relationship with Western countries has discouraged
international energy companies from investing in South Pars. As a
result, Iran has looked to move development forward by signing
additional contracts with domestic companies and contractors to
develop different phases. Under Ahmadinejad, the process of
selecting domestic partners has become further politicized, with
Qorb becoming the government prime contractor of choice, and in
June 2006 Qorb won a no-bid contract to develop Phases 15 and 16.

BONDS THAT DON'T BIND


5. (C) Unlike foreign companies who provide their own capital for
hydrocarbon development and receive a return of profits after
production starts, awards to domestic contractors require they be
paid for completion of work. In order to finance these deals, the
government has attempted to issue bonds open to both domestic and
international investors. Given the worsening political situation,
the government has had little success selling these bonds though
they continue to announce offer dates on which they will become

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available. In October, for example, the government announced a plan
to issue bonds worth USD 1.5 billion. This was the second time
this bond was announced but not issued. On December 20, Minister
of Finance Shamseddin Hosseini announced "Iran is determined to
issue bonds worth 2.5 billion euros, which is expected to rise to 5
billion euros next year," and is seeking the assistance of the
Islamic Development Bank (IDB) "in distributing them in
international capital markets."


6. (C) COMMENT: Based on history, it is unlikely Iran will have
much success raising capital through the bond market to fund
domestic development of South Pars. A senior Ministry of Oil
official was quoted in October as saying that USD 40 billion is
required to develop the remaining phases in South Pars. Since no
bonds have been issued to date and no explanation provided for
their cancellation, it is unclear whether the general economic
climate and international pressure have prevented successful
issuance or whether it is an intentional Ahmadinejad policy to pull
their sale. Regardless, without revenue from bonds or any
appreciable foreign direct investment, INOC and POGC are in a far
weaker financial position, and successful completion of South Pars
projects' are further endangered. As is the case with
IRGC-affiliated consortiums winning numerous government
privatization bids recently, this direct payment to Qorb of USD one
billion demonstrates Ahmadinejad's continued favoritism if not
outright bribing of the ever-growing 'IRGC Inc.' END COMMENT.
EYRE