The present, pragmatic leadership in Iran realised a couple of years back that economic sanctions wouldn’t be crippling the Islamic Republic forever. So, even while Tehran was making hard negotiations with the P5+1 group over its disputed nuclear programme, it had set to work to revive the instrument that would bestow upon the economy the power to lure desperately needed investments in its oil and gas sector.
On August 3, state media reported that Iran’s cabinet had approved the final model of the Iran Petroleum Contract (IPC) – a charter allowing the government to welcome back international oil majors, who had been compelled to pull out of Iran’s booming energy market in the wake of Western sanctions, by offering them lucrative deals to reinvest in exploring and extracting the Islamic Republic’s vast oil and gas reserves. IOCs re-entering Iran, with their proven energy sector technologies, would also help Tehran achieve a pre-sanctions level of crude production in its quest for regaining its share of the consumer market, with current output and export figures standing at 3.85mn barrels per day (bpd) and 2.74mn bpd, respectively.
So what is the IPC all about? According to an English interpretation of the Farsi document by law firm Clyde & Co, “the parties to the IPC will be the state-owned National Iranian Oil Company (the NIOC) and a consortium of oil companies (the contractor). As expected, the IPC will be a risk service contract. The contractor bears all the risks of petroleum operations. The contractor recovers its costs and is compensated by a service fee only if petroleum operations are successful. In contrast to production sharing contracts, the contractor is entitled to a fixed fee rather than a share of production. The fixed fee may be paid in kind in oil. The IPC will be governed by Iranian law.
“The IPC regulation provides that there will be three types of deals: a contract for exploration, development and production (Exploration Terms); a contract to develop existing discoveries (Development Terms); and a contract for improved/enhanced oil recovery at existing fields (IOR Terms). The Development Terms and IOR Terms will be focussed on improving recovery rates from the relevant field and we assume that the service fee will only be payable if the contractor meets certain production targets. Because of the fixed upside and potentially extensive downside of exploration for the contractor, service contracts are more typically used for brownfield projects and very rarely used for exploration projects.”
Furthermore, “the IPC regulation provides that each contractor must form a joint venture between one or more IOCs and an Iranian entity. According to the IPC regulation, the purpose of this joint venture is to facilitate technology transfer. The NIOC has pre-qualified eight Iranian entities who can serve as joint venture partners.”
Muhammad Fadhil of ICIS MENA told Oil & Gas Middle East: “All segments will receive varying levels of interests but Iran’s untapped reserves will mean interest will be high for exploration and development. In the near term though, IOR will also be an active space for foreign investors keen to see medium-term returns.”
Since Iran emerged free from the yoke of sanctions in January this year, a multitude of Asian and European nations and their oil majors have rushed back to do business with Tehran. This most notably includes Japan, which has promised to invest $10bn in Iran; South Korea; CNPC and Sinopec from China; India’s ONGC; Russian majors Rosneft, Gazprom and Lukoil; Eni from Italy; OMV from Austria; France’s Total; Anglo-Dutch giant Shell; and British Petroleum.
Although informal trade talks are gathering steam and MoUs expressing willingness to invest continue to be signed between Iran and international stakeholders, the latter remain uncertain of the benefits of picking up projects in the Islamic Republic, as details and prospects of oil and gas fields are murky.
The launch of the IPC, which now includes “150 major and minor amendments”, according to state media, had been periodically delayed due to the government’s circumspection in framing the regulations and deals to be contained within the contract, and mostly because of the stiff protests it faced from hardline factions both inside and outside the parliament, which were strongly opposed to the foreign partnership clauses, and have been especially demanding the insertion of the so-called ‘buy-back system’ of the 1990s, under which foreign firms were barred from owning stakes in Iranian companies. Even so, Iran’s top authority, Supreme Leader Ayatollah Ali Khamenei, said last month that no new oil and gas contracts for international companies would be awarded without necessary reforms.
What is making investors sceptical is the fact that the IPC’s draft has not yet been ratified by the parliament. Elements within the official establishment have sought to allay qualms over whether the IPC will ever secure the approval of the assembly, with member of the Parliamentary Energy Committee, Ali Gol-Moradi, saying that the parliament had endorsed the outlines of the new model of oil and gas contracts, and that the decision was taken after a recent closed-door session, addressed by Oil Minister Bijan Zangeneh.
However, the government seems to have already assumed a conciliatory tone with regards to the IPC, in a bid to appease the radicals, with Zangeneh saying that further amendments would be made to the framework, as per recommendations of the parliamentary committee, which include a programme to expedite exploitation of the fields common with Iran’s neighbouring states, raising the coefficient of recovery, technology transfer, and sovereignty over reserves.
Investors and industry analysts alike remain unconvinced by the conservative approach adopted by Iran’s authorities in issuing the IPC, and the apparent obscurity in the endorsement process. OMV’s CEO, Rainer Seele, told Reuters: “This process is still ongoing; this is taking quite a long time. We have not yet defined a clean framework for the projects that are interesting for us. We can make an investment decision only when we really know what the framework and the conditions are.”
Claudio Descalzi, Eni’s CEO, told Bloomberg TV: “We are in discussions with the Iranians. I don’t exactly know when we can sign a contract since there are still discussions in Iran and we are waiting like other companies.”
Energy experts that were contacted by this magazine are of a similar opinion, and even say that the lack of a clear roadmap might hurt Iran’s global ambitions. “It is possible that the licensing round might focus on investment in existing infrastructure upgrades, and defer the grant of new exploration and production rights until the model IPC is finalised,’’ Niazi Kabalan, an oil and gas expert at Pinsent Masons, said.
“There is still an appetite to invest in Iran across many parts of the oil and gas community. While the licence round signals support for overseas investment, the lack of clear terms means plans may well be put on ice for the short term. The model petroleum contract must be finalised if Iran truly wants to realise its global ambitions.”
His colleague Jason Rosychuk, an oil and gas senior associate at Pinsent Masons, said: “After months of discussion and exploratory talks, these developments [surrounding the IPC] will be seen as a positive step by the [global] oil and gas industry. But further confirmation on the status of the IPC is still required before the question can be put to rest. While many western IOCs have been poised to re-enter the prodigious oilfields in Iran, progress has been delayed – despite the lifting of many sanctions in January – due to uncertainty surrounding the status of the IPC. Final confirmation would allow IOCs to begin in earnest to enter the Iranian market and return Iran to its status as a global oil player.”
The IPC is believed to be a long-awaited step in the right direction, as it will help clear the air of apprehension to a great extent, and generate optimism among the global investment community. On a positive note, Amir Hossein Zamaninia, the Iranian Deputy Oil Minister for International Affairs and Trade, announced that the Islamic Republic would ink deals with foreign majors, as per the IPC, by the end of the present Iranian calendar year on March 20, 2017, according to state media.
“The initial framework of these contacts has been ratified by the cabinet and the intended projects will be put out to tender after being enacted by the parliament,” he said, although without mentioning a timeline.
The government in Tehran hopes IOCs will pump as much as $50bn a year into Iran’s energy industry, by virtue of the IPC. It is quite clear, therefore, that Iran is yearning for foreign funds to breathe life into its ageing oil and gas fields and the associated crumbling infrastructure, so it is inevitable that the IPC will see the light of day eventually. The only question that remains for the international community is when this might actually happen.
