Advantages and Risks of Iran's New Oil Contracts

After months of keeping the details of the new oil contract confidential, which Iran claims to have drafted for foreign companies and intends to allocate 50 oil and gas fields under this contract known as 'IPC' to foreigners, the nature of this contract has finally been announced. Contrary to foreign expectations, Iran has reserved the sovereignty over hydrocarbon reserves for itself, but the new contract has advantages over previous contracts that were purely contractual and 'buy-back' types. Iran states that it needs $185 billion in investment in the oil and gas sector over the next five years. Now, Eshaq Jahangiri, the First Vice President of Iran, has communicated the government's resolution regarding the general conditions, structure, and model of upstream oil and gas contracts, and the conditions of the new contract have been published in a notification on the official website of the Research Center of the Iranian Parliament and the government's information portal. However, the government's resolution is only the initial legal basis regarding the generalities of the new contract model, and complete details will be introduced at a conference scheduled for next week. This contract primarily focuses on maximizing the use of companies' capital, their knowledge and technology, and binding these companies to prudent and optimal production from the country's oil and gas resources. The contract will be long-term (20 to 25 years), and repayments will occur over a longer period based on production levels, providing an incentive for foreign companies to engage in prudent production. Repayment of investments and project development will occur after the production phase. Ownership rights over oil and gas fields remain with the National Iranian Oil Company, and the commitments created in the contract are not guaranteed by the government, the Central Bank of the Islamic Republic of Iran, or state banks. The repayment of all direct, indirect, financing costs, wages, and operating expenses according to the contract is contingent upon allocating a portion (up to fifty percent) of the field's products or revenues from the execution of the contract based on the current selling price of the product. Thus, the contracting company will own a portion of the produced oil and will sell it themselves, which will also be beneficial for Iran. The contract states that all risks, costs, and expenses in the event of failure to discover a commercial field or reservoir, failure to achieve contractual objectives, or insufficient product from the field or reservoir to amortize the financial obligations created will be the responsibility of the contracting company. In the exploration section, the minimum obligations include various necessary operations such as geological studies, gravimetry, seismic surveys, drilling, reservoir assessments aimed at discovering a commercial field or reservoir, and making the minimum necessary investment for these operations within the time frame specified in the contract, which is committed by the second party of the contract (the foreign company). The second party's commitment to prudent extraction from oil and gas reservoirs throughout the contract period using modern and advanced technologies and necessary investments, including implementing enhancement plans or increasing recovery factors in line with the complexities of the field or reservoir, is also one of the contract clauses, and a reward is provided to incentivize foreign companies for improving prudent production. This will lead the foreign company to exert all its efforts to maximize extraction from oil fields. Typically, only a portion of the reserves of each oil or gas field is extractable, referred to as delicate extraction. For example, the recovery factor of Iranian oil fields is about 20 percent, meaning 20 percent of the oil reserves are normally extractable, but this factor can be increased with technology and prudent measures. Thus, both Iran will produce more oil in the long term, and the contracting company will gain more profit. One of the serious risks for foreign companies is the potential disruption of the nuclear agreement between Iran and the six world powers and the return of sanctions, which have forced Iran to reduce its oil production by up to one million barrels per day. The new Iranian contract states that if the Ministry of Oil decides to reduce or halt production for any reason other than technical reasons related to the field or reservoir, the priority for such a reduction will be from fields or reservoirs that are not committed to repayment, and if this decision is made regarding the field or reservoir subject to the contract, it should not affect the repayment of costs and wages owed to the contractor. However, this is one of the risks of sanctions, and it is still unclear how foreign companies will handle their share of the oil produced from Iranian fields with renewed sanctions on Iran's oil and financial transactions and insurance. In every contract, domestic companies, with the employer's approval, participate as partners with the foreign company, and by being involved in the execution process of the contract, the transfer and development of technical knowledge and managerial and reservoir engineering skills to them is facilitated. The second party of the contract is obliged to provide a technology transfer and development program as part of the annual operational financial plan. The operation and execution of the project will be alternated between the foreign and domestic companies, and this is a requirement for the foreign company to transfer technology and information to the Iranian company for field development. One of the advantages of Iranian fields is the low production cost, estimated at an average of $5 to $8 per barrel of oil. On the other hand, it is still unclear how competitive this contract will be against 'production-sharing' contracts or Iraq's new contracts known as 'fee per barrel'. Some neighboring countries of Iran, such as Azerbaijan, are signing production-sharing contracts in such a way that part of the oil field's reserves becomes the property of the contracting companies. The cost of oil production in Iran is almost similar to that of Iraq, and Iran's new oil contract is also quite similar to Iraq's new oil contract, in that instead of cash payment, a percentage of the produced oil is given to the contracting company, and rewards are considered for the contracting company for producing more than the planned program and high prudent measures. The type and characteristics of the oils produced by Iran are also largely similar to those produced by Iraq. In Iraq, the contracting company can permanently be the project operator, but in Iran, it must sign a partnership contract with a domestic company, and the project operation is alternated between these two companies. However, Iran has advantages over Iraq, the most significant being greater security and larger oil and gas reserves. Iran's oil reserves amount to 158 billion barrels, and its gas reserves reach 34 trillion cubic meters. The domestic workforce in both countries has nearly the same wages, but Iran has many industrial advantages that allow it to produce and sell some of the required equipment domestically at low prices.