Iran Petrochemicals Report Q2 2012

The Iranian government’s ambitious plans for a 37mn tpa increase in petrochemicals capacity in 2010-
2015 look set to be dashed by a combination of slower domestic growth and a crippling international
sanctions regime, according to BMI’s latest Iran petrochemicals report.

Iran is finding it increasingly difficult to acquire technology and raise finance due to the tightening
sanctions regime, which has prompted South Africa’s Sasol to seek an exit from its Sasol Arya joint
venture (which has 1mn tpa ethylene capacity), and withdraw from plans for a methanol facility. Global
technology licensers have stopped doing business with Iran in order to maintain business interests in the
US. Meanwhile, the complexity of raising finance from abroad as a result of the sanctions regime has
deterred global banks. The sanctions have undermined business with European firms, which are insisting
on approval of contracts by the European Commission.

The lack of involvement by majors will make it hard for Iran to diversify beyond its narrow portfolio of
petrochemicals products, particularly speciality and niche markets. As such, there is an increasing
likelihood of further feedstock shortages caused by lack of progress in upstream developments,
technological failures and defective equipment.

BMI believes that the Kavyan crackers that will feed the West Ethylene Pipeline and its Dena Region
Ethylene Pipeline spur will come onstream in 2012, with combined capacity of 2mn tpa. However, it
remains to be seen whether they will achieve full capacity utilisation, with the 11 downstream projects
along the pipeline routes yet to be completed. Total capacity of these planned downstream projects would
include 2.24mn tpa HDPE and 600,000tpa of LDPE. Projects due to be completed by 2016, such as the
14th olefins complex in Firouzabad with 1mn tpa ethylene capacity, the 15th olefins complex in Genaveh
with 500,000tpa of ethylene and the 17th olefins complex in Ilam with 607,000tpa of ethylene, could be
significantly delayed under the sanctions regime. Meanwhile, the 12th olefins complex has been
postponed and will be configured. However, the 16th olefins and methanol complex is already being
constructed by Bushehr Petrochemical Company as part of phase two of the Pars SEZ at Assaluyeh.
Completion of the plants, with capacity for 1mn tpa ethylene and 1.65mn tpa methanol, is due in 2014,
although past experience has shown that delays could push commercial production back.

The average operating rate across the Iranian petrochemicals industry was around 85% of installed
capacity of around 55mn tpa in Q112. Further expansion of capacity threatens an over-supply situation,
although some segments in the Iranian market, such as HDPE pipe and film grades, have been buoyant.
As such, external markets will be crucial to absorbing increasing Iranian output, but these markets are not
as healthy as they once were and Iran is faced with heightened competition.

This quarter, Iran has fallen two places from fourth to sixth place in BMI’s Middle East and Africa
Petrochemicals business environment ratings, with its score falling 1.2 points to 56.4 points due to a
decline in its financial risk rating. This puts it 0.4 points behind Israel and 4.0 points ahead of South
Africa. Although its capacity is growing, Iran’s score is being held back by a poor and deteriorating
investment climate. With the state sector dominating the petrochemicals industry, Iran’s market risks
score is low, with high levels of economic and political risk pulling down its score. In order for an
improved score and ranking, Iran needs a more positive political risk outlook and a breakthrough in terms
of the regulatory regime. This looks unlikely on a short- to medium-term view.