The country has the world's second largest gas reserves and fourth largest crude oil reserves. The new contract is considered
a thinly-veiled attempt to build a standalone petroleum sector in anticipation of decade-long sanctions being removed from early next year
But US restrictions that fall outside the scope of July’s historic nuclear pact means the country cannot benefit from US technology.
At an exclusively-attended conference in Tehran on November 28 and 29 the Ministry of Petroleum and national oil company NIOC verbally released the key provisions of the Iranian Petroleum Contract (IPC), which has been designed to replace the controversial buyback agreement.
NIOC is expected to release the full model IPC at a London conference being planned for February. If not then, when the first tenders are put out for 50 blocks next March.
For foreign oil majors and financiers, the IPC significantly improves their rights to involvement during the production phase and their ability to recover costs. However its local content requirements, express provisions regarding the transfer of technology and know-how, and mandated partnering with a local entity through a joint venture are clearly aimed at strengthening Iran’s local capabilities.
According to Joanna Addison, partner at Herbert Smith Freehills in Doha, these will not be nominal requirements.
“During recent years, particularly in light of the sanctions, local companies have been developing and producing certain fields, so it is critical for Iran that they are involved in ongoing development of the sector, and that the workforce is trained,” she said.
“I think it will be critical for foreign investors to try to exceed the minimum being asked. I think if you are tendering, those are the companies that will be looked on more favourably,” she said, adding: “I think Iran wants to develop a properly standalone, fully functioning independent sector.”
- At a tightly-monitored event in Tehran late last month, Iran unveiled the key provisions of its new model oil & gas contract - the IPC - which will replace the much-criticised buyback starting next year;
- For foreign developers the IPC seems to be a significant improvement on its predecessor; they can maintain involvement during the production period, benefit from more non-fixed remuneration fees, are incentivised to develop more difficult fields and their right to recover costs isn't capped;
- There are gains for Iran too, through local content requirements and the transfer of know-how and technology; the latter will be a problem if US technology is involved, due to sanctions that fall outside of the JCPOA;
- No formal documentation was released at the Tehran event, however it's hoped that the full model IPC will be released at an official event in London next February.
The government is trying to facilitate this by incentivising foreigners to develop riskier or more mature fields. Under the IPC, the developer’s remuneration fee – its main form of compensation from the state – will be larger for brownfield, higher risk and smaller fields, as well as when enhanced oil recovery operations are undertaken.
“It was a huge concern in Iran that the [buyback] contracts didn’t incentivise that, and that Iran might be reliant on foreign investment for years to come without having its own independent industry,” said Addison.
But this will run into problems when American machinery is involved; US sanctions regarding exported technology are not covered by the joint comprehensive plan of action (JCPOA) agreed by Iran and six global powers on July 14.
Shearman & Sterling partner and former in-house counsel at Shell Anthony Patten said that could be an issue. “If you want to build an LNG plant that uses, for example, GE turbines or a design of US origin, then that will be a problem,” he explained. It could, however, be possible to get around this with specific licensing approval from the Office of Foreign Assets Control (Ofac).
Skeleton of an IPC
The Ministry and NIOC’s launch of the IPC was sketchy on details, and counsel agree it’s impossible to assess until the full model agreement is seen.
“People were expecting more information in Tehran but only a general presentation was provided. So I think there is probably a lot of internal positioning with NIOC and the Ministry on this,” said Patten.
Nonetheless, foreign investors have clearly made some gains under the IPC.
Iran wants to develop a properly standalone, fully functioning independent sector
First, they will be able to operate the fields during production. Under the buyback, it was the operator only during exploration and development; once commercial production started, NIOC took over meaning it essentially carried out production of the hydrocarbons.
According to Shearman & Sterling counsel Dan Feldman, who attended the conference in Tehran, this is one of the most significant changes under the IPC. “That turns the investment analysis away from one based on financing and more one based on investment in the long-term and development of the relationship and allows investors to make better use of their skills,” he said.
Second, the remuneration fee will no longer be fixed, but rather will be calculated based on production rates, meaning there is an upside for more successful operators.
Third, recoverable costs aren’t capped at a level agreed at the time the IPC is signed, but rather via an annual budget agreed with NIOC.
Together, these go a long way in addressing investors’ major gripe under the buyback. “Essentially the contractor invested its money upfront for exploration and development, and was only able to recover once there was production, such recovery and payment of the remuneration fee being dependent on how the NIOC operated the field,” said Addison. “That was one of the biggest concerns that we saw.”
Other key changes include a longer term (for the life of the contract as well as the period of which costs can be recovered), plus incentives for higher-risk and harder to develop fields which are worked into the remuneration fee.
Buyback problems not addressed in Tehran include reserve bookings. For listed operators, it’s important to be able to reveal how quickly they are replacing reserves as it’s an important indication of their value.
As foreigners are prohibited from owning unproduced oil, the remuneration fee has always been paid in a way that can’t reflected on oil companies’ balance sheets; which is viewed as a negative compared to other jurisdictions.
“That constitutional prohibition is still going to be there going forward, so we don’t know how the IPC will be structured so as to allow for booking,” said Feldman.
There’s also a question mark over the extent to which JV partner will control the operator. During the IPC consultation phase it seemed that the key positions would be appointed by the foreign investors, and overtime it would, naturally, be run as a standalone company.
But that wasn’t announced at the Tehran event, either.
These two issues – reserve bookings and control over the JV – are of prime importance to foreign investors. They are top of the list of provisions that need clarifying at the Ministry and NIOC’s February event in London.
“As by that stage we would hopefully be close to – if not past – implementation day so there would be a lot of enthusiasm to get going on things,” said Feldman.
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