The Effect of Legislation on the Development of Coal Mining Industry

Kazem Oraee, PhDProfessor, Stirling University, Stirling, UK

Nikzad Oraee-Mirzamani, MScDoctoral Researcher, Imperial College, London, UK

Arash Goodarzi, MScResearch Fellow, Ministry of Labor and Social Affairs, Tehran, Iran

SME Annual Meeting 2013

• Coal reserves in Iran estimated in excess of 5 Billion tons

• Annual coal production merely 2 Million tons

Lack of development of the industry has limited production, despite growing demand for energy

The existences of numerous legislations are thought to have a detrimental effect on coal mining activities to the extent that some business entities have become uneconomical in many areas

Coal is valued for its energy content

Coal production grew by 55 per cent(1990- 2010)

Globally, only around 15% of hard coal production is exported

Economic growth has created a growing need for dependable and reliable supplies of energy

-Electricity generation

-steel production

-and a variety of processes

are depended on coal production in the world

Coal provides 30% of global primary energy needs

At current production levels

Proven coal reserves are estimated to last 118

years, with recoverable reserves in around 70

countries

Proven oil and gas reserves are equivalent to around 46 and 59 years

Iran produces 2 Million tons (average) of coal annually from relatively small underground mines

while proven and probable coal reserves are estimated to be in excess of 5 Billion tons

Most of the production in Iran is produced from relatively thin, locally steeply-dipping seams, and is destined for the steel industry

The energy market in Iran is complex

Iran’s Energy policy is completely controlled by the government,

leading to a market with many advantages and disadvantages

Iran has rich deposits of oil and gas and ranks second in the world in natural gas and third in oil reserves.

It has the potential to become an energy superpower but the country's energy sector is hindered with countless serious problems .

According to BP Statistical Review Data, Iran owns 15.9% of natural gas and 9.1% of oil reserves in the world.

The main export of the country is oil. It has a share of 75% in country’s exports .

FE

accounting for 1.9% of the global energy consumption, by just over 1% of the global population.

Iran’s energy consumption is notably higher than international norms. It is 6.5 times that of the global average.

Iran is the world's eleventh largest energy consumer.

China US

Russia

IndiaJa

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Canad

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German

yBraz

il

South Korea

France Ira

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Saudi A

rabia UK

Mexico Ita

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500

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1,500

2,000

2,500

3,000

2,61

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686

559

478

330

306

267

263

243

229

217

198

174

169

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World's 15 largest energy consumers in 2011

Iran is the world's e

leventh largest energy consumer

1.9% of the global energy consumption, by just over 1% of the global population.

Iran GDP: 330 Billion USD

UKGDP: 2,200 Billion

USD

Composition of energy by resource is mainly restricted to oil and gas.

Country Oil Natural Gas Coal Nuclear Energy

Hydro electric Renewables

Iran 38% 60% 0.3% 0% 1.2% 0.1%

Total World 33.1% 23.7% 30.3% 4.9% 6.4% 1.6%

China consumes around 3% of its coal reserves every year .

In comparison, Iran consumes around 0.0004% of its coal reserves every year.

Coal resources not being used to their full potential.

Country OilNatural

Gas CoalNuclear Energy

Hydro electric

Renew-ables Total

Australia 45.9 23.0 49.8 0 2.4 2.2 123.3

Canada 103.1 94.3 21.8 21.4 85.2 4.4 330.3

China 461.8 117.6 1839.4 19.5 157.0 17.7 2613.2

France 82.9 36.3 9.0 100.0 10.3 4.3 242.9Germany 111.5 65.3 77.6 24.4 4.4 23.2 306.4

India 162.3 55.0 295.6 7.3 29.8 9.2 559.1

Iran 87.0 138.0 0.8 0 2.7 0.1 228.6

Japan 201.4 95.0 117.7 36.9 19.2 7.4 477.6

South Korea 106.0 41.9 79.4 34.0 1.2 0.6 263.0

UK 71.6 72.2 30.8 15.6 1.3 6.6 198.2US 833.6 626.0 501.9 188.2 74.3 45.3 2269.3

Total World

4059.1 2905.6 3724.3 599.3 791.5 194.8 12274.6

Consumption by fuel in 2011 (Million tons oil equivalent)

after United States and Russia

Produced 150 billion cubic meters of natural gas in 2011 (990 million barrels oil equivalent)

Iran is the third largest consumer of natural gas in the world

nearly all of which was consumed in Iran

1980

1982

1984

1986

1988

1990

1992

1994

1996

1998

2000

2002

2004

2006

2008

2010

0

50

100

150

200

250

mill

ion

tons

oil

equi

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nt

Iran’s energy consumptionDomestic demand for energy in Iran has grown rapidly

1980: 40.7

2010: 223

5.5 tim

es in

creas

e

in 30 ye

ars

1980

1982

1984

1986

1988

1990

1992

1994

1996

1998

2000

2002

2004

2006

2008

2010

0

2,000

4,000

6,000

8,000

10,000

12,000

14,000

World’s energy consumption

1980: 6630

2010: 11978

Doubled in

30 ye

ars

Nevertheless, domestic consumption is increasing and new energy recourses are required.

Iran is rich in coal resources but the availability of cheap oil and natural gas has made coal mining uneconomical.

Thus the only way to increasing the utility and efficiency of coal mining operations in a short timeframe is through regulatory reform.

Judicial precedence and history is an essential part of legal studies

Mining law does not find its place in Iran’s legal history

1872: Naser-al-din Shah Qajar granted

the first major concession to exploit all mineral resources including petroleum, coal and metals, with an exception for

precious stones

Baron Julius de Reuter

History

1938

1952

19571983

1998

2011

After the Qajar era:First Mining Act

First regulatory reform: economic development program, aimed at developing the country’s mineral resources

After the Islamic revolution of 1979: anti-capitalism

Mineral recourses are the property of the State who had

the exclusive right to exploit resources, unless an official

license were obtained from the

government A change in policies towards making new investments and improving infrastructure facilities

Policy makers have taken a U-turn and

changed the regulations in order to attract

investment from the private sector

Mining is a significant contributor to the growth of global global GDP

Since 1985 over 100 countries have modernised their

respective mining regulations to attract investors

Historically, the objective of laws on mining

to facilitate the exploitation of resources

develop the mining industry

protecting national interests

Iran’s Greco-Roman legal system benefitsfrom a recently codified constitution

It is supreme and all affairs of the country are run in accordance with its principles.

Enacted in 1979Revised in 1989

•Structure of the economy and financial affairs:•Public / Cooperative / Private SectorArticle 44 of constitution

Public Sector

• all large-scale industries such as exploitation of major mineral deposits will be publicly owned and administered by the State

Private ownership of land does not contain within it proprietary rights of the material beneath its surface

Article 45

• Natural resources belong to the state, giving the government the exclusive right to control mining activities

• Promote small scale mining• But due to government-owned monopolies, activities

of private mining firms are narrowing to aggregates

The purpose of the Mining Act of Iran:

A monopoly to exploit all rich deposits

Ow

ned & operated by G

overnment

Article 81

• Only persons of Iranian nationality (be it legal or natural persons) are entitles to hold mining licenses

• Granting concessions to foreigners to create companies dealing with exploitation of the country's mineral resources is absolutely forbidden

Even though liberalization of trade,

globalization of the economy and promotion of

foreign investment are the founding principles

of a modern economy.

The Mining Act is based on the Articles 44 and 45 of the constitution

It contains 36 Articles in 4 chapters

Article 3 establishes four categories of minerals:

Construction materials

Metals, none metals, coals, decorative and

precious stones

Petroleum-derived substances

Radioactive materials

Only the government is allowed to operate

Private sector companies are authorized to operate

Exploration rights are granted on a first come, first served basis.

• Traditionally, private mining companies were not able to cope with the high costs associated with mine explorations .

• Valuable deposits have been discovered by government-owned entities exclusively.

Second Chapter: Exploration

Article 2:• Ministry of Industry, Mine and Commerce has exclusive

authority to manage all activities related to exploration and exploitation of mines.

• Only “competent authorities” are authorized to discover mines

to transfer these rights to investors or private companies through exploration and exploitation LICENCES .

- members of Iranian Mining Engineering Organization (who are classified only based on academic expertise).

But the legal scope for a competent authority is limited to

- a few public sector organizations such as the Organization of Geological Survey

Second Chapter: Exploration

Use It Or Lose It

• Iranian mining companies face many technical and financial difficulties

• Exacerbated by the short time interval between exploration and exploitation licenses.

Article 8:• Holders of discovery license can submit their application for

discovery of the mineral to the government within a maximum of one year after the issuance of the discovery license

- Equipping with machinery: over 7 years (2000-2006)

Example:Tabas Coal Mine

- Exploration: 30 years

Tabas is an area in the east of Iran which contains a vast amount of coal reserves

The rate of production is so low that with the current rate, these reserves will last for more than 400 years!

Recoverable: 400 million tonsReserve: 1 billion tons

Annual production (Concentration Coal): Less than 1 million tons

Investment: more than $300 million (USD) by public sector operators

Article 9:• “Exploitation license is an official and binding document which

specifies the period of exploitation according to the mine’s identity card and the approved exploitation plan which and can be extended, transacted or transferred to third parties including a right to benefit from the mine by the license holder and includes a guarantee by the holder to comply with the related requirements.”

Note 1: • Banks are encouraged to gage the exploitation license

as a pledge to lend• Reality: banks rarely invested in the mining sector!

• Higher rate of royalty will allow more revenues, which the Government can then use for modernizing state-operated mines

Article 14:• Imposes a royalty obligation on mineral interests

extracted from public lands

But even this royalty is too low in proportion to the relevant corporations’ profits in Iran

• Royalty of coal extraction is less than $0.5 (USD) per ton

• While the price of coal is more than $60 (USD) per tonne (19 Feb 2013)

• Traditionally foreign investment in the Iranian mining industry has been low

• Many mines have been left undeveloped across the country due to shortage of capital

Investment Policy Framework

Investment regime:• A large State-owned fund• Centralised planning

Foreign Investment

Promotion and Protection Act (Amended 2002)

Guaranteed by the government against non-

commercial risks

To make a joint venture

To make direct investments

To repatriate their capital and capital gain in

foreign exchange

NEW Foreign Investment Promotion and Protection Act (Amended 2002)

All foreign investments made through a buy-back contract scheme in the mining sector

Laws regulating the mining industry must be harmonized with new Foreign Investment Promotion and Protection Act

According to Mining Act:

Labour Act was enacted in 1990, with purpose of:• Promoting employment;• Protecting labour rights; AND• Allowing enterprises to grow and compete in the

modern economy

In contrast:• Half of annual coal production is mined by un-

mechanized methods, while• Wage costs account for over 60% of the total cost

Framework of Labour Regulations

Labour Act, Article 5:• Hours of work shall not exceed six hours per day or 36

hours per week in mines (8 hours less than other jobs per week)

Social Security Act, Article 76, Note 2:• Miners aged of 50 or over who have worked at least 20

consecutive years (or 25 non-consecutive years) under difficult working conditions may become retired and earn pension

• Employers must pay half of the pension allowance (due to early retirement rights)

• Impose high costs on mining companies

The economic progress of the US has historically been linked to the use of coal from its abundant coal resources.

Coal mining is one of the most extensively regulated industries in the United States

Meeting all the requirements is arduous and time-consuming, even for the most efficient and well-managed companies

US legal system can be used as model for Iran’s legal reform in mining law

Undevelopment in Coal Mining

Lack of a clear and proactive government

policy

Intrusive Regulatory System

Strict Governmental Control

A Policy of Privatizing the Smaller Mines

Absence of Foreign Investment

Lack of adequate infrastructure

Insufficient financial support

(private and public)

Conclusion

Thank you

for your attention