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Iran working on new oil contract formula to draw foreign investors

Highlights

Iran is preparing a modified oil contract formula to attract foreigninvestment into its energy sector to improve on the terms of its so-calledbuyback contracts, deemed unattractive to oil companies even before thelatest international sanctions came into effect last year.

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Managing Director of the National Iranian Oil Company Ahmad Ghalehbaniwas quoted as saying in local media reports that the buyback contracts wouldbe replaced with a type of production-sharing contract.

The OPEC state introduced the buyback contract model several years agoas a way of circumventing a constitutional ban on production-sharingcontracts. Under the buyback formula, investors are repaid from the proceedsof a finished project at a previously agreed rate of return.

But the fixed rate of return and the length of the original contracts,which have been tweaked over the years, did not provide enough incentive forinternational oil companies who typically prefer to have equity shares andlonger involvement in upstream projects.

The third and fourth generations of the conventional buyback formula aswell as what officials have called "semi-production sharing agreements" arenew initiatives, officials said.

NIOC's director for legal affairs Mahmoud Reza Firouzmand said hisdepartment was still working on the new contract, particularly on the issueof guarantees for production targets that contractors would be committed toreach and maintain over a specified period of time.

"What we have in mind is to have a tailor-made basket of all types ofcontracts to enable us to enter into negotiations on the development offields and have diverse options," Firouzmand was quoted as saying by theDonyay-e Eqtesad newspaper on Wednesday.

Ghalehbani was quoted Monday as saying by the semi-official Fars newsagency that the new generation contract had not yet been implemented and thecurrent buyback model would apply to any future projects until the newcontract was ratified.

"These contracts have been put in the new law but the regulations arenot ready yet," he said, adding that the legal department of his company wasworking on it.

"The semi-production sharing agreements will be used for the sharedfields exclusively," said Ghalehbani, who is deputy oil minister for oilaffairs.

Fars referred to reports suggesting that the production-sharingcontracts had been discussed with Indian companies, among the few foreignoperators still active in Iran.

In mid-March, Iran's oil ministry said it had been given the green lightto introduce new, attractive terms to close deals with foreign companies. Themove followed a meeting between Iran's Foreign Minister Ali Akbar Salehi andRussian Energy Minister Alexander Novak.

Novak at the time referred to the need to change Iranian regulations toallow foreign company ownership in oil and gas field projects, which theIranian constitution does not allow.

Nearly all Western oil companies left the country several years ago,partly because of the unattractive terms of the buyback contracts and partlybecause of unilateral US sanctions in place at the time that set limits onthe amount of investment that could be made in Iran's energy sector.

Sanctions against Iran over its controversial nuclear program have beentightened since 2010, culminating last year in the imposition by the EU of aban on Iranian oil imports from July 1 alongside US sanctions that resultedin lower oil imports by Asian consumers from Iran.

Chinese state-owned oil companies are the only foreign operators withany significant projects in Iran though they appear to have made littleprogress in bringing on any significant new capacity in either the upstreamor the downstream sectors.

Iran's crude oil production and exports have slumped since EU sanctionscame into effect with current production at around 2.7 million b/d down byaround 1 million b/d over the 2011 average.

Iranian oil output had been in decline before then because of the ageand nature of its producing oil fields and officials have said thatdeveloping shared oil fields would be a priority in order to add capacity.

Iran has shared fields with Iraq, Kuwait, Saudi Arabia, Oman and Qatar.

Qatar is home the North Field that is an extension of Iran's giantoffshore South Pars gas field and Tehran has been concerned that rapiddevelopment of the North Field by Qatar might lead to depletion of South Parsgas reservoirs adjacent to the Qatari field.

--Aresu Eqbali, newsdesk@platts.com
--Edited by Kate Dourian, kate.dourian@platts.com, and Jonathan Dart,jonathan.dart@platts.com