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Iran to adopt new contract for investors

The country will present what it hopes is a more investor-friendly contractual regime, but international oil companies are still wary of close engagement with the country

Iran's economy depends on attracting international oil companies and the government is trying to put in place something better than what is on offer in neighbouring Iraq. The terms will be presented at a conference in Tehran 28-29 November - not in London as originally planned. 

A senior former Iranian oil policymaker tells PE that the new model contract will explicitly not be framed as a 'buyback mark II', alluding to the unloved service contract model introduced in the late 1990s which failed to convince IOCs.

"The new contracts are designed to optimise what the IOCs do best, by giving them incentives at various levels, and offering equity participation once production gets started along with various provisions for write-offs," says Mehdi Varzi, founder of Varzi Energy and a former National Iranian Oil Company (NIOC) executive. "The key issue is that the reserves in the ground remain with the state, which is exactly in line with the terms production sharing agreements - and crucially in line with the Iranian constitution."

NIOC chiefs have put a lot of effort into getting the contract terms right, canvassing a wide range of opinion, including the IOCs. There will for example be no ceiling on capex levels, which the IOCs saw as a flaw in the old buyback contracts.

Contractors will be offered different stages of exploration, development and production as an integrated package, with an emphasis on enhanced and improved recovery. As consultancy Menas points out, the terms are set in a way that gives the contractor more profit, providing that they engage in transfer of technology and know-how to their domestic partners. The flexible terms take into account oil price fluctuations and investment risks.

"The fee per barrel that is paid as profit to the company? is flexible based on the risk which is considered. Higher risk, higher reward, lower risk, lower reward," Mehdi Hosseini, head of Iran's oil and gas contracts restructuring committee, told Reuters 21 November.

The risk/reward ratio is crucial for IOCs mulling Iranian entries. "The rate of return matters more than before as we are at $40/barrel. The big bonus is that Iranian extraction costs are very low," says Varzi.

The new deals would be awarded either through bidding rounds or direct negotiations. Iran is set to offer some 52 oil and gas projects, both virgin acreage and brownfield projects, including around 20 for exploration, and covering areas in the Persian Gulf and the South Caspian Sea. The contracts will last 20 years, potentially extendable to 25.

The success of Iran's outreach is not a foregone conclusion. Under the 14 July deal reached with the P5+1 states, Iran must curb its nuclear programme in exchange for an end to economic sanctions imposed on the country in 2012. It requires Iran to reduce the number of its installed centrifuges, which are critical to enrich uranium, from about 19,000 to 5,060. That process is believed to be well underway, according to verifications form the International Atomic Energy Agency. If all goes to plan that should allow implementation of sanctions relief by end-2015.

But with a formidable domestic lobby set firmly against the terms of the nuclear deal, the president, Hassan Rouhani, still faces significant hurdles in steering it to full completion. And on the other side, the risk of so-called 'snap-back' provisions taking effect if it fails is a threat to the majors, who remain cautious about Iran's opening. Pointedly, no major has chosen to sponsor the Tehran conference.

US-based legal obstacles, particularly those related to the processing of financial transactions, are one factor that worries IOCs and so the big conference in London, scheduled for February 2016, may have been framed as a means of buying the Iranians more time to get the deal right.

Getting Iranian oil to market

The other pressing challenge is to secure room for more Iranian oil supply. Production, currently 2.7m b/d, is some 1m b/d below where it was before full sanctions took effect in in 2012. In December, energy minister Bijan Zanganeh will inform Opec of plans to raise its crude output by 0.5m b/d as soon as the sanctions are lifted. Plans then call for another 1m b/d to be added within six months. Zanganeh says that once sanctions have been removed, Iran will ramp up its crude exports regardless of the price of oil and market fundamentals.

First things first, though. Zanganeh's initial challenge is to ensure that the soon-to-be-unveiled terms will be credible, hitting the cautious majors' sweetspots. Rouhani also needs some of the sanctions to be lifted before the February parliamentary elections. If they are not, his chances of consolidating his domestic support base could suffer a crushing blow.

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