The Constitution and Foreign Investment in the Oil Industry

Radio Farda - Bloomberg News has reported that Iran is preparing new contracts in the oil sector to create better conditions for the entry of major companies into its oil fields. Roya Karimi Majd asked Fereydoun Khavand what features the new contracts might have compared to the old ones. Fereydoun Khavand stated that in the 1990s and 2000s, Iran signed contracts with major international companies to attract them to participate in oil and gas projects, known as 'buy-back' contracts. In these types of contracts, the foreign company acts only as a contractor, receiving a portion of the production as a fee and financial benefit after the project is launched. However, oil companies do not want to be just contractors. Their preferred contract is 'production sharing,' which allows them to take a more significant role in exploring, exploiting, and preserving oil resources and, more importantly, to record the reserves under their control in their balance sheets, thus increasing their stock value. The issue here is that the so-called 'production sharing' contracts conflict with Article 81 of the Iranian Constitution, which prohibits granting any concessions to foreigners. It seems that the Iranian Ministry of Oil has found ways to circumvent Article 81 in its new contracts, or at least in the drafts of these contracts provided to representatives of oil companies. What reactions have the drafts of Iran's new oil contracts received from major Western companies? There is no doubt that Iran needs massive foreign investments to rebuild its ailing oil industry; according to Mr. Zangeneh, the Minister of Oil of the Islamic Republic of Iran, about $200 billion is needed. Under these circumstances, there is no choice but to offer new contracts that are attractive to major energy giants, at least compared to what, for example, Iraq offers. It appears that the drafts of the new contracts are quite similar to 'production sharing,' but efforts have been made to resolve their irreconcilable conflict with Article 81 of the Iranian Constitution. It seems that representatives of major Western companies have welcomed this development, although their doubts about the success of the Iranian Ministry of Oil's initiatives in this area remain. Why are Western companies still skeptical about the outcome of Iran's initiatives regarding new oil contracts? At least for two reasons: first, the entire matter is tied to the nuclear file, and if it does not lead to a final agreement, there will be no participation from the West in Iran's oil fields, even if the best type of contract is offered to them. The second reason for the skepticism of Western companies is that they still do not know whether the oil company's initiatives in offering new oil contracts have the agreement of all factions of the Islamic Republic.