Energy Majors Line Up For Iran’s More Flexible Contracts

As promised, Iran has developed a new, more flexible model for its oil and gas contracts in an effort to win back international energy companies once sanctions are lifted, and the strategy seems to be working.

Executives from European and Asian companies were lining up on Saturday, the first day of the two-day Tehran Conference, to get in on the action. They included BP, Repsol of Spain, Royal Dutch Shell, Sinopec of China, Statoil of Norway and Total of France. Also seeking contracts were concerns based in India, Oman and Pakistan. Iran said U.S. companies were also welcome.

Related: An Unnoticed Casualty of The Commodities Price Drop

Iran has the world’s largest reserves of gas and the fourth-largest reserves of oil. It says it expects to increase oil production alone to about 5 million barrels per day by 2020, compared with the 1 million barrels per day today under the U.S. and EU sanctions that were tightened three years ago.

The new Iran Petroleum Contract (IPC) replaces the country’s previous buyback model, under which oil companies paid Tehran to develop and operate oil fields, and then ceded them back to the Iranian government. These old contracts were short-tem and risky, and often the companies didn’t make back their initial investments by the time the contracts had expired.

Companies that produced more oil than they had planned also made no money on this extra oil. The new IPCs, however, will have terms of 15-20 years and allow the companies the flexibility to recover their investments. Investors will be able to extract as much oil as they see fit, and be paid for it. Foreign companies also will have the option of extending their contracts to up to 25 years.

Related: Why The East African Oil Bonanza Remains A Dream… For Now

The old buyback model was not popular with international oil companies and was shunned by some potential investors even before the sanctions over its nuclear program were tightened in 2012. Even under the new IPC, foreign companies would not be permitted to own any of the oil fields they operate. That is the exclusive province of the National Iranian Oil Co.

“We do not claim that this is an ideal and flawless scheme, but it can address the needs of both National Iranian Oil Co. and international oil companies,” said Iranian Oil Minister Bijan Namdar Zanganeh.
Some delegates at the conference said they needed time to study the details of the new contract structure. One Western representative told The Financial Times that the framework was “a good step in the right direction and better than the buyback model.”

Another Western official, however, had some reservations, saying that the contract model was “well-studied” and that “the homework was well-done,” but also that it wasn’t clear whether disputes over the contracts could be resolved by international arbitration.

Related: Oil Gains Ahead Of OPEC Meeting, Dollar Caps Growth Potential

Seventy Iranian oil and gas projects worth $30 billion were offered to multinational oil companies during the conference as Tehran prepares to resume its status as a leading oil exporting country with the lifting of the sanctions, the result of a deal it reached in July with Germany and the five permanent members of the U.N. Security Council: Britain, China, France, Russia and the United States.
Despite some questions about the contract framework, it appears the projects have at least piqued the companies’ interest.

“We are interested to come back to Iran when the sanctions are lifted and if the contracts are interesting,” said Stephane Michel, Total’s director of Middle East exploration and production. “We have worked in this country for a long time, so we know specific fields on which we’ve worked.”

By Andy Tully of Oilprice.com

More Top Reads From Oilprice.com:

• ISIS, Turkey And Oil – The Bigger Picture: Interview With Pelicourt
• China Reshapes Energy Sector, Shifts Towards Market Economy
• Saudi Cash Crisis Intensifies As Interbank Rates Soar