INSIGHT: Resurgence of Iran gas price debate as politicians seek a rollback to formula

SINGAPORE (ICIS)–In mid-July, an official announcement from the Iranian government stated that the natural gas price for petrochemical producers was Iranian rials (Rls)70,000/cubic metre, up from Rls50,000/cubic metre.

The gas price-hike, now a serious challenge to the petrochemical value chain including urea, ammonia and methanol, is being debated.

THE PROPOSAL TO MOVE TO A PRICING FORMULA
On 18 July, Iran’s Minister of Economic Affairs and Finance, Seyed Ehsan Khandozi, proposed a gas-feed price formula.

According to the minister, the price of natural gas feedstock to petrochemical producers should be determined by a formula as such a mechanism can benefit the country and petrochemical companies.

The proposal will be presented to the government’s Economic Commission and will be decided within the next two weeks.

“We don’t agree with setting a fixed number for a long period of time for [the] gas price,” the minister said. “A formula for [the] gas price must be determined that fluctuates according to global and domestic markets and other variables. We suggest that the formula be stable for at least 3 or 5 years until the end of the seventh development plan.”

Stable economic decisions should be made so that the economy can be predictable and long-term economic activity can be planned, the minister added.

Several other ministries including the Ministry of Energy are also supporting the proposal for a formula, according to the economic minister.

According to government’s financial regulations, it has been proposed that the Ministry of Petroleum is obligated to determine the price of petrochemical gas-feed based on the weighted average of export income, imported as well as domestic gas sales, for maintaining the competitiveness of the price of manufactured products.

A fixed number cannot be determined according to these components and such a move contradicts the spirit of the government’s financial regulatory law.

It was also stressed in this year’s budget law that the government should adjust the petrochemical feed price to support industries. When it comes to industry support, the gas price should be decreased and not increased.

Methanol producers and the wider petrochemical industry welcomed the intention to calculate the gas price based on a formula.

GAS PRICE FORMULA HISTORY
The gas feed price formula for the petrochemical industry was first introduced in 2015.

it comprises 25% of the European hub price, 25% of the North American hub price, and 50% of the average of domestic sales.

Russia’s invasion of Ukraine caused gas prices in the European hub to rise sharply in H1 2022.

Petrochemical companies in Iran, due to the increase in global gas prices, requested that the European hub price should be removed from the formula because it was too high and pushing producers into loss.

As the formula practically lost its effectiveness in H1 2022, the government imposed a price limit of Rls50,000/cubic metre, which continued for a year until it was rejected in the latest budget consultations.

While gas prices globally have fallen sharply, petrochemical companies have requested tjhat the European hub price be removed from the formula and replaced with  a regional gas price.

It has also recommended the addtion of two conditions for the formula to comply with the regional gas price, which is a 60% bottom and a ceiling of 75% for the average weighted price of gas exported and imported in the country.

By modifying the formula, the gas price debate will be eliminated. The fomula will also provide investors with a long-term outlook and a predictability that will enable industrial development.

THE CHALLENGES
While the Ministry of Economy had proposed this formula in the seventh development plan bill for the next 5 years, this proposal was not agreed by members of the government’s economic commission in its initial review.

“Petrochemical feed rates were predicted based on energy resources and their expenditures according to the budget of 2022 and 2023 and the government did not intend to change it,” said Iranian government spokesman,  Ali Bahadori Jahromi

It seemed that the government’s decision on a gas price-hike would not be revoked.

After all, the increase in fuel and gas price is unlikely to cause all petrochemical companies to shut down, although their profitability may decrease.

Methanol makers suffer more than others, such as those producing ammonia and urea, but the government may provide support hrough other channels.

Iran has around 14m tonnes/year of methanol capacity and more that 8m tonnes of prodution was exported in 2022.

There is, however, a problem for new methanol makers who want to enter the market, as it becomes more difficult to obtain a permit for the production of methanol at a discounted feedstock price.

Due to the protests from the petrochemical industry, the task of determining the gas feed price remains unclear, and we have to wait and see what is ultimately decided in this regard.

If the proposal is eventually approved by the cabinet, the sector will see the return of the formula rather than a fixed price, but not the original formula due to its many problems.

Insight article by Keven Zhang

Thumbnail image: A natural gas refinery at the South Pars gas field on the northern coast of the Persian Gulf, in Asaluyeh, Iran – 16 March 2019. (By Vahid Salemi/AP/Shutterstock)