Iran’s oil&gas sector relies on bonds

Iran's national budget bill for the next calendar year, which starts on March 21, has envisaged issuing $40 billion in bonds by state-run entities, $15 billion of which will be used to finance oil and gas projects.

The bill was submitted to the parliament by President Mahmoud Ahmadinejad with two months delay.

Considering the decrese of foreign investments in Iran because of international sanctions as well as increase of liquidity which has hit the unprecedented figure of $310 billion (five times increase in 6 years), Iran issued 13.7 trillion rials (some $950 million) in bonds in the current calendar year (began on March 21, 2011), but just $250 million of the bonds were sold.

Iran refers to the low interest rate as the main reason for the low public demand for the bonds, which held 17 percent in profit (4 percent lower than the country's official inflation rate). So, the Central Bank increased the interest rate to 20 percent last week.

Iran says that the decision was effective. Unlike the first round of issuing the bonds for the South Pars gas field, when 84 percent of the bonds did not sold, some $1 billion of the bonds were issued and totally sold for the second time on Saturday. Moreover, the Oil Ministry has proposed the Central Bank to issue more $410 million in bonds.

The Oil Ministry has recently announced that it will issue $2.5 billion in bonds by the end of the current calendar year, in the hope to accelerate the implementation of the South Pars gas field projects.

The South Pars gas field is jointly held by Iran and Qatar. The Iranian section, which is divided into 29 phases, holds around 14 trillion cubic meters of natural gas. Iran's total gas reserves amount to 34 trillion cubic meters. The country's daily natural gas production and consumption are estimated at 554 million cubic meters and 551 million cubic meters, respectively.

So far, 8 phases of the South Pars gas field have come on stream, each phase with the total output of 25 million cubic meters. Phases 9 and 10 have yet to be fully operational despite being inaugurated three years ago. The two phases are projected to produce at full capacity through drilling five new wells by the next three months.

Three basic problems

One of the main problems for selling the bonds is the inflation rate of above 20 percent and the daily depreciation of rial. Within the past one month, dollar price in Iran's free market rose to 18,000 rials from 13,000 rials. So, buyers of the bonds may lose more in case rial is depreciated with regard to dollar.

The second problem is that President Ahmadinejad's administration injects $3 billion in cash subsidies per month, which makes absorbing a large amount of liquidity through selling bonds practically impossible.

The third problem is that buyers of bonds in past years may rush to the banking system for repurchasing the old bonds, which bear lower interests, along with receiving the bonds' profits and buying the new bonds.