The country has reworked its hydrocarbons contracts, but problems still remain for foreign investors
Despite the uncertainty surrounding sanctions in Iran, the country is trying to attract greater foreign investment in its oil and gas industry. The government is in the process of completely rewriting its hydrocarbons contracts to make them more agreeable to international oil companies and foreign investors.
“Iran is very confident that the sanctions will be removed by the end of this year, new negotiations are taking place as we speak in Vienna.
The Iran government is confident that by the time that sanctions are removed they will have the new contracts in place. They are confident that the new changes are sufficient to attract prime investors to go back to the country,” said Amir Kordvani, associate at Clyde & Co.
According to analyst firm Clyde & Co, Iran is claiming that the Integrated Petroleum Contracts (IPCs) will be different from the old buy back contracts in a number of aspects, the first of which is that the IOC will not be just a contractor any more.
According to the new contracts, the international oil company will be a partner with the Iranian entity as the project manager, and will form a joint venture with the NIOC.
Secondly, exploration, development and production phases will be accumulated into one monolithic project, which means that if the IOC gets to the production phase, whether it is oil or gas, the IOC will not need to enter into fresh negotiations. They can continue with production on the basis of the license that the company already has from the government.
“Another important feature is that the term of the new contracts is going to be longer, between 15 and 25 years. Some people talk about 15 and 20, I have heard 25. The payment formula they are going to come up with will be based on what they call EOR [Enhanced Oil Recovery], so the more production you get out of an oil or gas field, the more you get paid,” said Kordvani.
“However, production must meet international best practice, it must be efficient in the sense that in the best interest of the oil and gas industry and the reservoir must be preserved.”
The other factor that is going to affect payments to the IOC is the location of the field and the complexity or difficulty of development of operations. For example, if an IOC is to work in an offshore or remote area, it has a chance of getting paid more by the NIOC for development and operations.
“These are the ways that the government is trying to attract more investment for developing its depleting fields. Its depleting fields have not been touched for many years because of the particular location or some other [factors],” said Kordvani.
However, not only has Iran so far declined to make public the exact details of the IPCs, but it seems that analysts and industry experts already see holes in the country’s plan.
One of the key problems from an investor’s perspective would be that the NIOCs will own the product; the oil or the gas that the IOC is going to produce from these fields.
This means that the foreign companies will produce the oil and then hand it back to the government and at the end of the term. They will also hand back all the assets and know-how, as the ownership of that will be transferred to the government as well.
“This is a major problem, but from an Iranian perspective there is nothing that they can actually do. They have passed a few laws like the budget law, or they have amended the oil law just to make sure that they can enter into partnerships with foreign and private entities but they haven’t been able to get around the ownership issue, which is a very sensitive thing from an Iranian perspective,” said Kordvani.
In recent years, access to hydrocarbons opportunities has shrunk across the globe and many IOCs have become even hungrier for new reserves. The signature of very unfavourable contracts in Iraq is a good demonstration of such an appetite. The Ukrainian crisis is also forcing many governments to ease relations with Iran, according to The Boston Consulting Group.
“Many European, but also US IOCs, will be forced by their government to take a position in Iran. Nevertheless, many IOCs, in the past, had very negative experiences with Iran’s buy back contracts, not only for the unfavourable conditions of the contract, providing very limited access to reserves.
Many IOCs experienced losses because the Iranian shareholders [NIOC] did not approve capital expenditures, even after long negotiations,” said Cristiano Rizzi, partner and managing director, The Boston Consulting Group.
“I am sure many international oil companies will consider the risk of having an NIOC as a technical partner and the risks they will bear, particularly for approval of contract.”
According to Clyde & Co, Iran is hoping to launch the new agreement by the end of 2014 in London. The analyst firm said that it is very important for foreign entities, even at this time when sanctions are still in place, to start thinking about a strategy in Iran.
“Companies need to look at who they want to speak to in Iran, what steps they want to take in the country, what sort of microsectors they want to look at. All these things should be taken into account. If you are serious about doing business in Iran, it might be the right time to at least put in place a mid-term strategy for doing business in that country,” said Kordvani.
