Iran has been eager to restart the full-scale development of its oil and gas reserves since the lifting of economic sanctions early this year, and its main tool in this endeavor has been the new Iranian Petroleum Contract (IPC).
Now, despite serious opposition from parliament, the government is hoping to attract US$185 billion in foreign investment in oil and gas production and refining, according to deputy oil minister for international affairs Amir Hossein Zamaninia.
The figure suggests Iran is really counting on this new contract with foreign companies: when the IPC was first presented to energy businesses last November, the amount of investments oil minister Bijan Zanganeh said he expected to flow into Iran was just $25 billion.
So, what’s so special about this new contract that Iran is pinning its hopes on? The old buyback system that the country’s government was using before the sanctions saw the state exercise more or less full control over the development of an oil field. The new IPC will see foreign oil field operators working in joint ventures with local energy companies and they will be paid in cash and crude for their services. Related: Cash Deprived Venezuela Can’t Pay For Oil Imports, Leaving Tankers Stranded
For many in Iran’s predominantly conservative parliament, this effectively means the state will be transferring partial ownership of the oil fields to foreign operators, which, they argue, is a violation of the constitution. Iran is pretty sensitive about oil field ownership, and this opposition eventually led to the cancellation of a conference that was to be held in London in February to unveil the IPC to international oil companies. The conference had already been postponed five times before it was eventually cancelled.
The IPC, according to Iran analyst Reza Yeganehshahib, does not violate the constitution, which stipulates that no foreign party has the right to own any part of “the Muslim community’s” property. The contract simply changes the way foreign oil companies are paid for their work on Iran’s fields—in crude extracted from these same fields, or in money from the sale of the crude. No right of ownership is stipulated in the new contract, and Iranian companies are to take 51 percent in every joint venture agreed under the new contract. Related: Clinton Campaign Pledges to Raise Fed Royalties for Oil Companies
While it’s true that foreign oil companies will, under the new IPC, be allowed to book oil and gas reserves, booking does not necessarily mean owning, even when the company actually does—partly or wholly—own the oil field it exploits. What could be a concern for these foreign companies, however, is that the IPC envisages long-term obligations, which will make it harder for the operators to withdraw from their joint ventures in Iran should the country once again become the target of economic sanctions.
This potential concern seems to be trumped by the upside that Iran’s oil and gas reserves offer – reserves that could be vital for international oil majors that have struggled to replace barrels that they have produced. Iran has proven oil reserves of 157.53 billion barrels of crude and 34 trillion cubic meters of natural gas, and is eager to ramp up production of both after years of underinvestment. The time will hardly ever be better for international E&Ps to step into Iran, whatever misgivings they might have with regard to the contractual framework they are being offered.
By Irina Slav for Oilprice.com
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