Prospects of Iran's New Oil Contract Model

A two-day conference introducing Iran's new oil contract model has begun with the participation of 137 foreign companies. Bijan Namdar Zangeneh, Iran's Minister of Oil, expressed hope that the new model would attract $25 billion in foreign investment for Iran's projects. Iran plans to allocate 50 oil and gas projects to foreigners under this contract, and according to Iranian officials, one-third of these projects will be offered as integrated, meaning they will include all stages of exploration, development, and production. Previously, Iran granted its oil contracts based on 'buy-back' agreements, where the foreign company acted solely as a contractor and handed over the project after reaching the production stage to receive its profit. However, the new contracts are for 25 years, and the general mechanism is that the foreign company will provide all the necessary capital and technology for the project, and after reaching production, it will own a percentage of the produced product (up to 50%) as long as oil and gas are extracted from the field. This type of contract is not new; it is quite similar to the mechanism in Iraq's new oil contracts, which have led to an increase in Iraq's oil production by half a million barrels per day this year, with an expected daily increase of 200,000 barrels next year. Iraq pays foreign companies a fee for each barrel of oil produced, but under Iran's new contract, the foreign company will receive part of the produced oil or its equivalent in price based on the current oil price. It should be noted that Iraq's contracts were concluded when oil prices were nearly three times the current price. In a conversation with Homayoun Falakshahi, a senior analyst at the energy consulting firm Wood Mackenzie, he believed that attracting $25 to $30 billion in investment through the new contract is 'very optimistic,' as Iran must compete with other investment opportunities worldwide, and concerns about the potential return of sanctions and the fate of Iran's sanctions law, which is set to expire on December 31, 2016, may slow negotiations. He stated, 'Although some specifications of Iran's new oil model are similar to the previous buy-back model or the oil contracts of Iraq, it also has several notable innovations, including increased flexibility and interaction. The wage payment system based on oil prices seems to be the most significant advantage of this contract.' Competition with other projects for attracting investment comes at a time when the International Energy Agency estimates that global investment in oil and gas projects has decreased by 20% ($200 billion) this year due to falling oil prices, and this decline is expected to continue into next year. Meanwhile, many countries, including some of Iran's neighbors like Azerbaijan, are offering very attractive contracts to foreign companies, such as 'production sharing.' In these types of contracts, the foreign company becomes the owner of part of the field's reserves and can include these reserves in its asset list. However, according to Iranian laws, transferring ownership of field reserves to foreigners is prohibited. Falakshahi noted that the sensitivity of projects to oil prices largely depends on the floating wage payment mechanism. 'Even if a contract is signed soon, it will take time for companies to invest in the country. The first foreign investment is not expected before the second half of 2017. Significant impacts on production will not be observed before 2020.' Iran may not be in a hurry to launch new projects, as the country currently has excess oil production capacity but has closed its oil wells due to sanctions. Before the sanctions, Iran produced 3.7 million barrels of oil daily, of which 2.2 million barrels were exported. However, with the imposition of sanctions, Iran's oil exports decreased by one million barrels per day, and Iran had to close its wells in some fields. Iran is waiting for the lifting of sanctions to reactivate these fields. Meanwhile, according to OPEC's assessment, member countries of this organization currently produce up to 1.8 million barrels daily above global demand, and reports indicate that Iraq sells some of its oil types at a steep discount of $30 to maintain its share in global markets. Nevertheless, in a conversation with An-Louis Hitel, head of oil research at Wood Mackenzie, he believed that Iran is fighting with its main competitors, namely Saudi Arabia and Iraq, to maintain market share. He stated that if global economic growth remains around the current level, global oil demand in 2016 will increase by approximately 1.2 million barrels per day; 'Considering the expected annual decline in production from non-OPEC countries in 2016, our analysis indicates that there is room for an increase in Iran's production in 2016. However, if Iran's production growth rate exceeds expectations, it will exert significant pressure on oil markets, which may lead to a new price floor. Just as low oil prices will affect non-OPEC oil supply in 2016 and 2017, it is reasonable for Iran to gradually increase its lost production over the next two to three years. This will have a much lesser impact on reducing oil prices and can help respond to demand growth.' What is certain is that Iran, with 158 billion barrels of recoverable oil reserves, ranks fourth and with 34 trillion cubic meters of gas reserves, ranks first in the world. The fundamental advantage of Iran's new oil contract is that the foreign company is required to find a domestic partner in Iran, and project operations will be alternated between the foreign company and Iran, allowing Iranian companies to practically become familiar with the necessary knowledge and experience to utilize advanced technologies for project development. Additionally, the contracts are for 25 years, providing the foreign company with sufficient motivation for sustainable and optimal production from the fields to receive its share from every barrel of oil produced over more than two decades. In any case, we must wait for the announcement of separate tenders for each of the 50 projects that Iran has planned for foreigners to see how the new oil contract will fare in attracting investments.