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Corruption in​ Iran’s Oil and Gas Sector SUMMARY OF FINDINGS

October 4, 2019 by  

Khosrow B. Semnani
Source: Where’s My Oil?

A. The Economic cost of Corruption and Sanctions
۱٫ The Nuclear Dispute: The Trillion-Dollar Conflict
Based on the Iranian Parliament’s social accounting matrix (SAM), economic models establish the cost of corruption scandals and sanctions to Iran’s economy during the presidency of Mahmoud Ahmadinejad to be in the range of 1 trillion dollars.

۲٫  Jobs: The Billion-Dollar Equation
Corruption is a form of divestment. Job creation models for countries comparable to Iran suggest that, depending on the sector, every $1 billion in lost oil revenues, if invested in Iran’s economy, could generate between 200,000 to 600,000 jobs.

۳٫ Jobs: The Trillion-Dollar Equation
According to Iran’s Minister of Labor, the cost of creating one job ranges from $6,000 to roughly $120,000. At $6,000, $1 billion can create more than 160,000 jobs. At $120,000, $1 billion can create more than 8,000 jobs. Even at $120,000 per job, a trillion dollars lost over the Ahmadinejad decade could have translated into more than 8 million well -paying jobs.

۴٫ The Employment Picture
The abuse of Iran’s oil revenues has eroded Iran’s industrial base. Corruption has had a devastating impact on workers. Despite an influx of more than $700 billion between 2006 and 2013, economists suggest the net total of job creation in Iran was zero. Despite oil prices at more than $1 00 per barrel, the flood of imported goods into Iran resulted in the bankruptcy of more than 2,500 industrial firms and the reduction of the work force in the industrial sector by more than 500,000.

۵٫ Youth Unemployment
With more than 60% of Iran’s population under 30 years old, unemployment among Iran’s youth between the ages of 15 and 29, stands at a staggering 21.8%, with the rate for women at almost 40%. As things stand, the labor market only creates 1 job for every 3 Iranian youths entering the labor market. By 2021, with a labor force of 42.5 million, 7.5 million people, or 17.6% of the population, will be unemployed.

۶٫ Corruption, Scandals and Jobs
Under the IFC model, the $2.7 billion Zanjani corruption scandal, cost Iran between 270,000 to more than 1 million jobs. Using the government ‘s $6,000 per-job estimate, 450,000 jobs could be created if these sums were reclaimed.
The $24.5 billion that Naftiran lntertrade Company, the NIOC’s offshore trading arm, withdrew from Iran’s sanctions windfall, if invested in the economy, would have created more than 4 million jobs at $6,000 per job and more than 200,000 at $120,000 per job.

B. Oil Heists and Accounting
Irregularities:
Sanctions Windfall and
Sovereign Wealth Fund
۱٫ No Accounting for Iran’s Frozen Funds
The Rouhani government and Iran’s Central Bank have still to provide a complete accounting for the status of Iran’s frozen funds. There are significant
discrepancies in the accounts, with the government failing to track, reconcile or account for at least $60 billion. According to former U.S. Secretary of State John Kerry, only $3 billion in Iran’s frozen reserves have made their way back to Iran by April 2016, raising questions about the Central Bank’s claims concerning the $27 billion-$29 billion in released funds expected to be returned to Iran.

۲٫ NIOC and Naftiran lntertrade
Company (NICO) $24 .5 Billion Audit’
The Central Bank, the NIOC and the State Audit Organization have failed to account for $24.5 billion in oil revenues withdrawn and spent without proper authorization by Naftiran lntertrade Company, the offshore oil trading arm of the NIOC.
۳٫ The Chinese Oil Contracts
and Concessions
The status of $22.5 billion in Iranian oil revenues held in China as guarantees for joint venture projects remains unclear. Although compared to the infamous “Treaty of Turkomenchai;’ the nature and legality of these contracts and concessions remain veiled in secrecy, as does the identity of the beneficiaries. To this day, it is not clear who sets up, controls and monitors these accounts on behalf of the Iranian people, in which banks. Nor is it clear which joint -ventures were guaranteed by $22.5 billion in Iranian oil revenues, and what goods and services, if any, were imported from China, and by which entities.

۴٫ The Domestic Banks
The government authorized the withdrawal of the rial equivalent of $10 billion in Iran’s frozen assets from the Central Bank, the bank admits. In 2015, the head of the Central Bank described the status of these funds, allegedly loaned to various Iranian banks, as being “in doubt:’ This raises grave questions about the health of Iran’s banking sector, the extent of corruption in Iran’s financial sector, the nature and condition attached to the loans, and the status of $1 O billion in projects on the verge of bankruptcy or default. To date, the Rouhani administration has not provided a comprehensive and transparent account as to how these funds were squandered.

۵٫ Iran’s Sovereign Wealth Fund
While much attention has focused on the pay of executives charged with managing Iran’s Sovereign Wealth Fund, the National Development Fund (former Oil Stabilization Fund), the crisis at the fund is much deeper than the scandal over inflated salaries and perks. The laws and rules regarding the deposit and withdrawal of funds from the account appear to have been skirted to facilitate the plunder of the fund for off budget pork barrel projects. Revenue Watch estimated that between 2005 and 2011, the OSF should have received $36 billion more than the government reported, and that between 2006 and 2011, the government withdrew more than $150 billion from the fund without clear economic justifications. To this day, Iranians are in the dark about the operation of Iran’s Sovereign Wealth Fund. The fund has scored a 1 out of 10 from the Sovereign Wealth Institute’s Transparency Index. The state of the NDF- anemic by all accounts-points to extensive systemic and structural weaknesses. Such levels of corruption, neglect and mismanagement of oil revenues should be of grave concern to the government and the Iranian people given the need to protect the country against volatility in oil markets. A comprehensive review of the fund, including an audit of all deposits and withdrawals from its accounts, is a matter of national security.

C. Governance of the Oil and Gas Sector
۱٫ The Iranian People’s Blind Spot
Iran’s oil and gas sector has been kept in a collective blind spot. As reflected in the Zanjani case, the flows of information and data necessary for monitoring the movement of oil and funds through the sector have broken down. Despite questions from the media, the government and others in the oil and gas sector cannot account for billions in oil revenues. Similarly, the most basic information about the ownership structure, capabilities and performance of major players in the sector, such as Khatam al-Anbia, are not available. It is not clear how decisions are made, contracts vetted, investments allocated, projects monitored and revenues measured. Major economic plans and projects have stalled for decades. For Iran’s economy to recover, reclaiming and restoring the oil and gas sector must become a national priority.

۲٫ The Unknown: The Black Market
in Iranian Oil
Unknown quantities of Iranian oil are sold on the black market by oil mafia and other corrupt actors with little loyalty to the Iranian people. Entire tankers are unaccounted for. Such oil cartels pose a threat to the economic prosperity and national security of Iran.

۳٫ Energy Policy: Priorities and Policies
Iran’s political and economic priorities must focus on long term energy policy that is rational, not ideological or political. Iran’s nuclear program accounts for less than 1% of the country ‘s total energy use, with fossil fuels accounting for more than 99%. To have subjected Iran’s oil and gas sector, and the economy to massive sanctions, in the name of defending Iran’s right to enrich uranium, was economic suicide.

۴٫ Securing the Oil Supply
and Revenue Chain
Iran’s oil supply chain is highly vulnerable to corruption. The arteries connecting the physical flow of oil and gas out of the country to the flow of goods and revenues into the country have been slashed.
So also have the arteries governing investments in projects and plans for the development of Iran’s oil and gas sector. Restoring transparency and accountability to the oil and gas sector is essential for protecting Iran’s resources. I fan must sever its ties with the highly sophisticated international black market in oi l, a criminal underworld that is every bit as powerful as the illicit drug and arms market. Rather than keep the sector operating under a veil of secrecy that facilitates corruption and rewards impunity, Iran’s national security and economic future depends on access to information: multiple institutions checking, reporting, auditing and verifying data about prices, volumes, shipments, deliveries, payments and partners.

۵٫ Budgets and Treasury: Oil Allocations and Economic Malignancy
A significant portion of Iran’s oil revenues is not accounted for in Iran’s budget. Oil is allocated to actors ranging from parastatal organizations to revolutionary guard commanders and private consortia, all of which operate outside official channels. The Iranian treasury and Parliament do not control their budget, revenues or expenditures. This breach of sovereignty has serious implications as it opens the most sensitive sectors of Iran’s economy to nefarious players, oligarchs and militias. They not only abuse their political power to establish and expand monopolies that prey on Iran’s resources, they have an interest in amputating the Iranian people’s sovereignty by taking over the Iranian state on behalf of foreign interests. Some are directly implicated in grave human rights violations, money laundering, financing extremism, extortion, smuggling and other criminal and terrorist activities.

۶) Investments in the Oil and
Gas Industry
Corruption is a major cause of the decline of Iran’s oil and gas industry. To put it bluntly, the return on investments in Iran’s oil and gas projects and plans have been pathetic. Projects and plans are poorly conceived, managed, structured, funded and secured.
The outcomes are disgraceful. Iran sits on the world ‘s largest reserves of gas-the South Pars Fields- yet Iran’s National Gas company is nearly bankrupt. As the Crescent Petroleum corruption case has made abundantly clear, after spending billions of dollars in Iran’s oil revenues on the development of the South Pars Oil field, Iranian officials blame corruption at the NIOC for signing disastrous long-term contracts, with pegs binding Iran to sell its gas at one-fourteenth the market price.

۷٫ Policy and Governance
As the World Bank made abundantly clear in its review of Iran’s oil and gas industry, there is a lack of vision for the sector. For all practical purposes, the NIOC’s historic monopoly over the sector has been compromised and its professional cadres purged.
The sector has been opened to new players: corrupt and criminal actors and interest groups ranging from the Islamic Revolutionary Guard Corps (IRGC) and parastatal foundations to international and domestic consortia. The result has been the fragmentation and fractionalization of lran’s oil and gas industry-a severe constraint on the productive and operational capacity of the sector, with profoundly negative consequences for the future of Iran’s economy.

۸٫ Diminishing Returns: South Pars
Despite billions in alleged investments over decades, Iran, with the world’s largest gas reserves, has failed to tap into its potential as a gas superpower. Billions in oil revenues have vanished in South Pars only for the value of the entire field to be squandered through corrupt deals pricing Iranian gas at one-fourteenth its worth. Iran’s plans to pump 34 billion cubic meters per annum into its oil recovery program have been jeopardized due to shortsighted policies. As Iran’s situation has grown more desperate, that of other players has grown stronger. Qatar, which shares and exploits the same gas field has become an energy superpower.

۹) Diminishing Returns: Iran’s Oil Fields
Protecting the productivity of Iran’s oil fields is crucial to Iran’s economic future. Every year, the country ‘s oil fields lose between 8%-14% of their production level- a massive loss that can be forestalled by reinjecting 34 billion cubic meter per annum of natural gas into Iran’s oil wells. Yet Iran has missed its last two National Development Plans (2005-2015) to increase its oil recovery rate by 2%.
With 9.3% of the world’s total proven conventional crude oil reserves, every 1% increase in oil recovery rates translates into $80 billion more in revenues.  Instead of gaining ground, corruption in Iran’s oil and gas sector is compounding losses at a staggering pace. Iranian policymakers are putting entire generations at risk by making and then failing to properly implement recovery plan after recovery plan, decade after decade.

D. Political Risks of
Corruption
۱٫ Extremism
The link between extremism and corruption is incontrovertible. While the Iranian people were subjected to the most severe economic pressures, the Rouhani administration has accused an economic militia with ties to IRGC of engaging in corruption on a scale unprecedented in Iranian history. IRGC commanders not only assumed sensitive posts in Iran’s oil and gas infrastructure, they siphoned unknown sums of Iranian oil revenue into foreign accounts over which Iran has no control or jurisdiction.
Extremism, in the form of the nuclear dispute, allowed the thieves of state to subvert controls over the sale of oil in the name of bypassing sanctions. Such black-market activities threaten Iran’s prosperity and security. They also give the oil mafia an interest in perpetuating extremism: promoting and provoking crises, whether under the guise of defending Iran’s nuclear program or through inflaming domestic and regional conflicts.

E. From Denationalization
to Reclamation
۱٫ Transparency, Accountability and Control Virtually
All Iranians have a national obligation and an economic interest in reclaiming their oil by fighting corruption. The Islamic Republic’s revolutionary ideology must not become an instrument for the denationalization of Iranian oil. Iran’s oil and gas sector is a national treasure, with the Iranian people holding title to an asset that is worth trillions of dollars.
The process of reclaiming and salvaging the treasure depends on a robust anti-corruption campaign initiated at all levels of society. Iranian officials and institutions have a duty to protect Iran’s oil and gas sector, reserves, resources and revenues against the thieves of state. They must not only demand transparency and accountability but also establish and enforce policies, standards and metrics for restoring confidence in the governance, productivity and future. of the oil and gas sector.

۲٫ Audit
Addressing the open corruption cases, vast accounting discrepancies, and systemic gaps is crucial to restoring Iran’s sovereignty over its resources. As with the case of Nigeria, it is essential to initiate an independent audit of Iran’s oil and gas sector’s books and operations- particularly for how the sector was run under the presidency of Mahmoud Ahmadinejad.

۳٫ Judiciary and Parliament:
Prosecution of Corruption Cases
Iran’s judiciary and Parliament must not cover up corruption by high officials responsible for the governance of Iran’s oil and gas sector. All corruption cases in Iran should be prosecuted to the full extent of the law. The higher the official, the greater the breach of trust, the more grave the violation and the more important the need for complete investigation and accounting of the crimes. Yet, as charged by Ahmadinejad and others, the judiciary itself is corrupted, more often than not conducting investigations and trials with the intention of covering up rather than revealing grand corruption in the oil and gas sector.

F. Corruption by Design
۱٫ Corruption is Not Accidental
Corruption in the Islamic Republic is not accidental. It is structural and systematic-purposely and deliberately crafted to facilitate theft on a grand scale. While the spoils from corruption allow the Islamic Republic to survive, effectively rewarding and unifying the thieves of state for the plunder of Iran’s resources and revenues, it punishes the Iranian people by exposing their culture, health, economy and security to untold harm.

۲٫ Corruption is about Control
Corruption is an instrument of political and economic coercion and control-a rite of passage that separates insiders from outsiders. Bribery, extortion, kickbacks and embezzlement are not viewed as a violation of law or ethics, but as a necessary and integral part of Iran’s political and business culture. In such a system, without corruption, no one is secure in their property or person, and as such corruption is viewed as a necessity of life that guarantees survival, or, at the very least, prevents sabotage, extortion, confiscation and loss.

۳٫ Corruption is Embedded in Politics and Business
Bribery, extortion, kickbacks and embezzlement have become integral and implicit parts of Iran’s political and business culture. Virtually all economic transactions are subject to corruption, with regime insiders, fixers and gatekeepers collecting tolls and demanding “sweets” in exchange for issuing licenses, permits, deeds, titles and other services.

۴٫ Corruption is Systemic
Corruption is actively promoted through governmental and administrative structures, effectively weakening the fabric of civil society by encouraging opportunism and protecting a culture of theft premised on the violation rather than the protection of individual and collective rights. It threatens the Iranian people’s sense of national identity and solidarity by eroding the foundations of their character, with the quality of relationships and sense of community severely diminished.

۵٫ Corruption Negates
Traditional Values
Future generations are forced to grow up in an environment in which traditional values that serve as the legal and moral foundation for investment, growth, stability and security are negated.
Values such as trust, integrity, dignity, empathy, compassion and solidarity give way to greed, avarice, theft and fraud, with bankruptcy and dishonor as the likely outcome.

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