High quality global journalism requires investment. Please share this article with others using the link below, do not cut & paste the article.
Iran has revealed a new model of oil and gas contracts to lure back international oil companies, offering more flexible terms on price fluctuations and investment risks to make the sector financially attractive to foreign investors.
Details of the new contract framework were unveiled during a two-day conference in Iran attended by oil executives from European and Asian companies including Total, Statoil, BP, Royal Dutch Shell, Repsol, Sinopec as well as companies from India, Pakistan and Oman. An energy adviser from the UK government was also present, according to a western diplomat.
The Iran Petroleum Contract puts an end to a two-decade old buyback system that prevented foreign companies from booking reserves or taking equity stakes in Iranian companies. Under some circumstances, the new model allows reserves to be booked, but foreign companies would still not own oilfields.
The National Iranian Oil Company will have exclusive ownership rights over resources.
High quality global journalism requires investment. Please share this article with others using the link below, do not cut & paste the article.
“We do not claim that this is an ideal and flawless scheme but it can address the needs of both National Iranian Oil Company and international oil companies,” said Bijan Namdar Zanganeh, Iran’s oil minister.
Oil companies welcomed the new contract but said the devil remained in the detail. Some aspects of the new framework — such as allowing companies to book reserves — were about catching up with practices already adopted elsewhere as many countries in the region seek foreign investment.
“Most of the Middle East has already taken that step,” said one western oil executive. “They are moving in the right direction. But it is still to early to say whether it is enough.”
Reserves are used by investors as a tool to judge the value of oil companies.
High quality global journalism requires investment. Please share this article with others using the link below, do not cut & paste the article.
Another western oil official said the contract seemed “well-studied” and “the homework was well done”. But he added that it did not clarify whether disputes could be referred to international arbitration.
The Islamic republic, which has the world’s largest gas reserves and fourth-biggest oil reserves, plans to increase its oil production capacity to about 5m barrels a day by the end of the decade from about 1mb/d since sanctions were introduced in 2012.
The new model, some details of which have been disclosed over the past year, is supposed to increase foreign companies’ profits by basing the fee on the risk of the fields, allowing contracts to last for up to 25 years and putting no ceiling on capital expenditure.
The IPC, according to Iranian officials, is a risk service contract by which the Iranian and foreign contractors will bear the risks of the operation. However, a reward system envisaged would entitle contractors to a fee per barrel that would be paid as profit to the company and contractors will also be entitled to an increase in profits in face of dramatic oil price fluctuations.
The buyback scheme proved hugely unpopular with multinationals and deterred investors even before US and EU sanctions over Iran’s nuclear programme were tightened in 2012.
Some representatives of international companies said they had to assess the details more precisely.
The long-awaited conference has been overshadowed by uncertainty over how international banks will react to the implementation of July’s landmark nuclear agreement with world powers. It is not yet clear whether US sanctions will affect major businesses with interests in the US when international restrictions are lifted early next year.
“Banks have openly told us that they will be the last to enter Iran’s market,” said a western oil executive at the conference. “Our problems are about returns and being able to operate.”
High quality global journalism requires investment. Please share this article with others using the link below, do not cut & paste the article.
The absence of US companies or their subsidiaries at the conference is a reminder of the continuation of US restrictions as well as opposition inside Iran to alleged US “infiltration” — a new term used by hardliners opposed to opening up the country after the nuclear deal.
“We did not oppose their presence. They can come and use this opportunity,” Mr Zanganeh said of US companies, adding that he had not heard of any opposition.
When asked if American companies would attend a future conference, possibly in London in February, he said: “I hope so.”
Iranian oil executives confirmed to the Financial Times that holding this week’s conference in Tehran, rather than in London, was a response to domestic political infighting.
“As you see there are no American companies here now and it does not make sense for such a conference not to have Americans,” said an oil ministry official.
Iranian officials at the conference reminded international companies of the importance of domestic participation in joint ventures in almost all future projects under the IPC — in a clear move to allay concerns in Iran about foreign exploitation of the country’s natural resources.
“This is supposed to be a conference to lure international companies but the minister highlights ‘resistance economy’ and how Iranian companies should be strengthened,” said an Iranian oil businessman. “Domestic pressure on the oil ministry and continuation of hostility towards the US are creating obstacles.”
Iran is expected to initiate about 50 oil and gas projects at the Tehran conference but it is not clear when the companies will be able to bid or start direct negotiations.
Additional reporting by Peggy Hollinger in London