Behrooz Akhlaghi March 25 2002 Overview (March 2002) International Law Office Dr Behrooz Akhlaghi and Associates | Energy & Natural Resources - Iran Behrooz Akhlaghi Energy & Natural Resources Background Third Five-Year Plan Executive Guidelines BackgroundIran is the second largest oil producer in the Organization of Petroleum Exporting Countries (OPEC), and holds 9.3% of the world's oil reserves (96.4 billion barrels of recoverable oil) and 17.6% of its gas reserves. Iran's economy relies heavily on oil export revenues (about one-half of the state budget and 80% of the country's hard-currency earnings). In the government's third five-year development plan for the energy sector, which runs from March 2000-March 2005, the aim is to attract more than $15 billion in oil, gas and petrochemical investment.Iran in hoping to attract this foreign investment by creating a more favourable investment climate. This will involve the implementation of a variety of measures, including: constitutional changes such as amendments to the Law for the Attraction and Protection of Foreign Investment; reduced restrictions and duties on imports; the creation of energy free-trade zones; and increased protection of foreign investments.Since worldwide demand for crude oil is rising rapidly and the need for OPEC members to step up production is becoming more urgent, it is crucial for Iran to increase its production levels while at the same time controlling consumption levels. To this end, Iran has begun to update its energy policies to provide for the efficient and sustainable development and production of energy, in order to meet world demand and preserve its national interest.The following policies and guidelines provide insight into the current and future positions on energy production for the period between March 2000 and March 2005.Third Five-Year PlanThe five-year plan aims to: encourage the diversification of resources for the provision of primary energy, reduce domestic consumption of crude oil and preserve Iran's market share in the worldwide demand for crude oil, by: increasing gas supply for domestic consumption; using nuclear energy and renewable energy sources, as well as promoting hydroelectric power; and investigating how to optimize use of coal resources; introduce centralized decision-making and increase cooperation with regard to energy issues; optimize energy consumption and energy saving by establishing an Energy Saving Fund and taxing a certain percentage of income obtained through energy sales. The funds will be used to implement plans and projects for energy conservation in buildings; draft and implement guidelines on the efficient use of energy, and reduce energy intensity in various sectors; and regulate energy consumption in such a way as ensures that its average growth rate does not exceed the average growth rate of gross domestic product during the specified period. This will be achieved by: standardizing energy consumption in equipment and appliances manufactured locally and abroad; introducing an energy pricing system which takes account of actual production costs, the base crude oil and natural gas price, and the actual costs of transportation and distribution, as well as social equity and environmental issues; implementing progressive, seasonal and regional prices for peak energy consumption in order to regulate energy usage at peak times; financially balancing resources with consumption until the end of five-year plan (with the aid of government subsidies, where necessary); gradually cancelling energy subsidies during the five-year plan; preserving oil and gas reserves by halting production from gas caps and preventing gas flaring, as well as through gas injections; maximizing production from offshore fields, reservoirs with gas collection networks and fields which are shared with neighbouring countries; installing gas condensate refineries; upgrading the quality of petroleum products, reducing losses and using best available technologies; implementing environmental standards in relation to the production and consumption of all types of energy; developing exploration activities (with priority given to oil fields) in such a way that the new reserves compensate for what has been produced in the same period; continuing to delegate certain activities in various sectors (eg, product distribution) to non-governmental companies; and conducting necessary research and investigation in the areas of production, consumption regulation and energy saving. Executive Guidelines The Council of Ministers has approved executive guidelines which reflect the third five-year plan's policies. The key features of the guidelines include the following: In order to manage, supervise and control the subsidiary companies involved in the exploration and production of natural gas and crude oil, the National Iranian Oil Company will be run by the Ministry of Oil as a specialized holding company. The specialized holding company in the electricity sector will be the Iranian Electricity Generation and Distribution Management Company. The number of regional electricity companies will be reduced in proportion to the number of regional network control centres, and electricity distribution companies will be established accordingly. Planning and policy-making in the electricity sector will be centralized in the Ministry of Energy. The nuclear safety system is to be tightened and promoted, and will be supervised independently. The nuclear safety system must be established independently of the executive activities of Iran Atomic Energy Organization. Companies affiliated with Iran Atomic Energy Organization will gradually be transferred to the private sector during the five-year period. Sideline refinery activities, including the production of lubricants, tars and containers, as well as maintenance services, shall be transferred to cooperatives or the private sector during this period. Subsidiary and service activities relevant to oil products and their distribution and transportation shall be transferred to cooperatives and the private sector by means of lease, final transfer, contractor agreements and the like. Coal mining activities will be transferred to the non-government sector, and the necessary facilities for the construction of coal-burning power plants will be provided with due consideration to environmental and economic issues. Repair, maintenance, transportation and other sideline services provided by energy companies will be transferred to the cooperative and private sectors. Contractor and consultant services contracts entered into by companies affiliated with the energy sector will be concluded under equal terms and conditions. Research relating to the industrial production of solar water heaters, ovens and wind pumps will be promoted, and their use will be encouraged. Various promotional initiatives, training programmes and energy pricing systems will be introduced to encourage the public to conserve energy. The use of international financial credits for the development of new energy projects will be authorized. Research activities will be expanded and joint research with centres in other countries will be supported. Experts will be authorized to benefit from opportunities for further training offered by international organizations. The Ministry of Oil and Energy will be required to establish and support private-sector energy consultant companies which will promote the reduction of energy consumption in industrial production units, service centres and residential units. For further information on this topic please contact Behrooz Akhlaghi at International Law Office Dr Behrooz Akhlaghi and Associates by telephone (+98 21 873 21 38) or by fax (+98 21 873 41 29) or by email ([email protected]).