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Iran’s Oil Production Could Take A Serious Hit If This Happens

Offshore Qatar Field

One of the world’s most anticipated oil and gas plays just had a major setback. With officials appearing to do an about-face on opening up prime exploration ground to foreign operators.

The place is Iran — a spot that’s been on the radar for petro-majors globally since the lifting of Western sanctions.

But it now looks like the potential here might not be as straightforward as initially thought.

That’s because of comments made by a key official in Iran’s oil sector — the new managing director of Iran’s state-run National Iranian Oil Company, Ali Kardor. Who said Monday he may seek to change Iran’s petroleum contracts — in a way that won’t be popular with most foreign companies.

Kardor told an energy ministry press agency that Iran’s oil fields could be developed using “buy-back contracts”. A phrase that has a bad taste for managers in the global oil and gas sector.

That’s because Iran used to utilize buy-back contracts for foreign partnerships on its oil and gas fields. With these contracts specifying that foreign firms get paid a set fee for each barrel they pump — but that such firms can’t book ownership of in-ground reserves. Related: Abu Dhabi To Create $135 Billion Oil Giant

Former operators in Iran such as Eni and Total have said these buy-back contracts resulted in huge losses. And so observers across the oil and gas sector were very encouraged the last several months when Iran’s government said they would discard the buy-back model. And instead go with the more-regular production sharing contract (PSC) used worldwide.

Iran’s officials had been talking about PSCs as recently as a few weeks ago— when they said they would unveil details on the new contracts this month. And so this week’s revelation that buy-backs might be returning was surprising in the utmost.

Even sources in the Iranian government told Reuters they were puzzled by the comments from managing director Kardor. With some observers attributing the flip-flop to hardline opposition against President Hassan Rouhani, who has been in favour of moving to a PSC model for new oil projects.

Whatever the reason, these events raise serious doubts over the attractiveness of Iran’s upcoming bid rounds. Watch for more direction from the government on which model they will use for contracts on new projects.

Here’s to keeping it clear

By Dave Forest

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  • Spiro Vassilopoulos on July 06 2016 said:
    This is the very same musical saw that the Iranians were playing at the National Iranian Oil Company (NIOC) conference in the summer of 1998 - I was there. The NIOC (sic. Iranian government) considers their oil and gas reserves as generational assets. So, they offer buy-back contracts but that is a fantasy as far as Western oil companies are concerned. Unless they can book reserves, western interests simply turn up their noses at anything else NIOC might offer up. Earlier this year there was another NIOC conference planned in London. After numerous enticements from the conference promoters to attend, I finally had to say to them that "I have plenty opportunities to lose money here in the US, but thank you just the same for considering me". Apparently, for the reasons mentioned in this article, along with internal squabbling at NIOC, this year's London conference was cancelled. Maybe they should increase the Chinese numbers already there. They have abundant intellectual capital that they gleaned (that is a diplomatic word) from us and the Europeans plus an infinite number of slaves to do the work. in closing, the Iranians are an intelligent lot, and instead of trying to get the Americans to come back, they can and should develop their own oil and gas reserves.

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