01 Dec 2015

Iran Petroleum Contract

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The Iran Petroleum Contract (IPC) was revealed (in part) at a conference in Tehran 28/29 November 2015. The IPC will draw to an end nearly two decades of a buyback system that prevented foreign companies from booking reserves or taking equity stakes in Iranian companies.

Under certain circumstances, the IPC allows reserves to be booked, but foreign companies would still not own oilfields. Accordingly, the National Iranian Oil Company (NIOC) has exclusive ownership rights over resources.

The new model, some details of which have been disclosed over the past year, is supposed to increase foreign companies' profits by basing the fee on the risk of the fields, allowing contracts to last for up to 25 years and putting no ceiling on capital expenditure.

The IPC, as announced, is a risk service contract by which the Iranian and foreign contractors will bear the risks of the operation. However, a reward system envisaged would entitle contractors to a fee per barrel that would be paid as profit to the contractor and contractors will also be entitled to an increase in profits in face of dramatic oil price fluctuations.

The IPC will launch as joint ventures for crude oil and gas production with international companies being paid a share of the total output, officials said. Foreign investors will be required to form a joint company with an Iranian partner to carry out exploration, development and production operations.

The Iranian partner in the joint venture must have a majority stake of at least 51 percent. International investors must team up with local partners that the Iranian government selects.

The Iranian Oil Minister, Bijan Namdar Zanganeh, said consultations with international companies led to the new contracts, which would initially be four years in length, extendible for a further two years.

Iran will have between five and seven years to pay back initial sums invested by the foreign companies but cooperation and development in commercially viable fields could go on as long as 25 years. Historical buy-back agreements were limited to seven years, which wasn’t enough time for companies to make adequate returns on their investments. Under the IPC companies that come up empty-handed after exploring for oil or gas can search for fuel in nearby areas. Under buy-backs, they had to stick to development plans agreed upon before work began and were barred from exploring new areas.

Details of the new contract framework were unveiled during a two-day conference in Iran attended by oil executives from European and Asian companies including Total, Statoil, BP, Royal Dutch Shell, Repsol, Sinopec as well as companies from India, Pakistan and Oman. An energy adviser from the UK government was also present, according to a western diplomat. There was no official attendees from the United States.

Some aspects of the new framework — such as allowing companies to book reserves — were about catching up with practices already adopted elsewhere as many countries in the region seek foreign investment.

Reserves are traditionally used by investors as a tool to judge the value of oil companies.

Historically Iranian O&G Contracts have recourse to Iranian Law, and specific Oil and Gas Iran Legislation. Given that the IPC will require a joint venture structure with a 51% Iranian partner, we assume that the choice of law position will remain the same, but it was not made clear at the conference whether disputes could be referred to international arbitration or not.

Iran will pay foreign oil companies larger fees under the new contracts to provide greater incentives to investors.

The new investor contract will give companies a share of the oil they produce and let them sell it globally, said H.E. Seyed Mehdi Hosseini (Oil Contracts Restructuring Chairman). International companies will be paid in cash or in kind based on a fee per barrel. Iran would reduce the fee if oil prices fell by more than 50 per cent and increase it if prices rose by a corresponding amount.

Iran’s old buy-back deals paid companies a fixed fee regardless of how much oil they produced and offered them no incentive to exceed output targets. Buy-backs also paid no compensation to companies that spent more than budgeted amounts to develop a field.

Under the new contracts, the NIOC won’t limit capital spending and will approve budgets on a yearly basis, though companies still won’t receive a higher fee if they produce above their output targets, Hosseini said.

Companies will be able to negotiate directly for some contracts, and Iran could sign its first deal as early as March or April 2016, it was announced. Iran won’t allow foreign companies to escape their contractual obligations if the US or another party re-imposes unilateral sanctions, said Dr. Seyed Mostafa Zeynoddin, an adviser to the committee (and former Legal Director at NIOC). If the UN restores sanctions, a company could claim force majeure if unable to execute a contract, he said, but it would not lead to an automatic termination of the IPC.

Iran is preparing to start the bidding process for oil and gas rights by the next Iranian calendar year starting March 21 2016. Companies will be asked to make bids based on a per-barrel development fee. NIOC will announce other terms when it starts the tendering process in the next four to five months, where there is a further conference in London planned for 22-24 February 2016.

At Stephenson Harwood we will be discussing at a forthcoming seminar in January the terms of the IPC and implications for companies looking to contract under them.

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James Willn

James Willn
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