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Gaurav Agnihotri

Gaurav Agnihotri

Gaurav Agnihotri, a Mechanical engineer and an MBA -Marketing from ICFAI (Institute of Chartered Financial Accountants), Mumbai, is a result oriented and a business focused…

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Oil Companies See Better Investment Climate In Iran

Oil Companies See Better Investment Climate In Iran

In a bid to increase foreign investments in its oil and gas sector, Iran has introduced a new mechanism for its future oil and gas contracts.

In a conference that was held in Tehran on 28th and 29th of November, Iran provided preliminary details of the new contract framework. The conference was attended by 137 Asian and European companies that included Royal Dutch Shell, Statoil, BP, Total, Sinopec, Respol, Enel, Schlumberger, Eni, Lukoil, Rosneft, Daewoo, Impex and Technip.

Related: Tick Tock: Time Running Out for Struggling Oil and Gas Drillers

The new oil and gas contracts with foreign companies can be valid for 15-20 years and it could be extended to 25 years. Earlier contracts were of shorter duration and resulted in higher commercial and technical risks for foreign investors. The latest oil and gas contract system would be replacing the earlier created buyback model in which foreign contractors could not book their reserves and had to return the oilfield to the Iranian authorities. Apart from this, the new contract system, unlike the older one, would offer additional earnings and revenues to those who produce more oil than initially planned.

What can the new oil and gas contract system achieve?

"To continue to play the role (as a major oil supplier), we hope to enjoy working with reputable international oil companies under a win-win situation," said Iran’s oil minister Bijan Zanganeh during the conference.The Iranian government plans to raise close to $30 billion ($150 billion in next 5 years) in foreign investments through these new measures. The new contract system could offer greater flexibility to the foreign contractors against potential market fluctuations and other related risks. Under this new system, foreign contractors would have to form a joint venture with an Iranian company in order to run their operations and their revenues would be based on the risk category of that particular oilfield. Related: Oil Industry Cutting Again, But It Still Might Not Be Enough

This is also supposed to cover certain risks (commercial risk involved with oil price fluctuation) and increase transparency in operations. However, it is pretty clear that Iran would still have a fair amount of control over foreign contractors as these contractors wouldn’t actually own any oilfields. The two day conference that was held on November 28th was not attended by any U.S. based companies

Iran’s domestic oil contractors demand work guarantees from foreign investors

In another development that could affect the future of foreign investments in Iran, the domestic oil contractors of Iran are looking for work guarantees from foreign companies after they start their operations in Iran (after the removal of western sanctions). “We’re not concerned about the presence of foreign companies here; we are concerned about how they will operate here,” said Hasan Kazemi of the Society of Iranian Petroleum Industries Equipment Manufacturers. Iran’s government is organizing a seminar on 22nd and 23rd of February in Tehran in which they will highlight the new rules with regards to oil and natural gas production applying to foreign companies, which initiate operations in Iran after sanctions are alleviated. Related: Why Texans Might Soon Be Driving On Mexican Gasoline

Conclusion

Rather than asking for ‘guarantees’ from the foreign contractors, Iran must actually offer some specific ‘guaranteed returns’ to its foreign contractors. For a country that was under the shadow of western sanctions for its nuclear program since 2012 and which is ruled by a strict Islamic regime, the introduction of a new oil contract system and removal of a two-decade old buy back system could be an important step towards improving investor confidence and more importantly its overall business climate.

By Gaurav Agnihotri Of Oilprice.com

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