Total's Return to South Pars: The Beginning of a New Era?

With a twenty-year contract for the development of Phase 11 of the South Pars gas field, which will be finalized in Tehran on Tuesday, July 2, the French company "Total" returns to Iran's oil and gas fields at the head of a tripartite consortium. This consortium includes "Total" (with a 50.1% share), the Iranian company Petropars (19.9%), and the China National Petroleum Corporation (30%). South Pars, along with its Qatari section known as the North Dome, is the largest gas field discovered in the world. According to Iranian resource assessments, the development of Phase 11 of the South Pars gas field will cost $4.8 billion, and its final gas production (equivalent to 370,000 barrels of oil per day) will be allocated to the domestic market of Iran. The return of "Total" to the South Pars gas field can be seen as a turning point in Iran's relationship with international oil and gas companies in the post-JCPOA era. The significance of the finalization of this contract can be summarized as follows: 1) The return of the first Western oil and gas giant to Iran - Following the signing of the Joint Comprehensive Plan of Action (JCPOA) in July 2015 and especially after its implementation began in January 2016, the Iranian Ministry of Oil hoped to attract European and Asian oil giants, and even American companies in the long term, back to Iran after a long absence. The enthusiasm of Europeans and Asians regarding a country that possesses the largest gas reserves (more than Russia according to British Petroleum) and the fourth-largest oil reserves in the world was not insignificant. Some foreign companies advanced to the stage of signing preliminary agreements with Iran, including the Anglo-Dutch company "Shell" for the development of the Azadegan South and Yadavaran oil fields and the Kish gas mine. The Russian company "Gazprom" also reached preliminary agreements with Iran for the exploitation of two fields in the west of the country. However, the transition from preliminary agreements to final agreements faced various obstacles, including fears of the U.S. judicial system and the dangers posed by U.S. sanctions on Iran's entire foreign economic relations. The French company "Total" also signed a preliminary agreement with Iran regarding the development of Phase 11 of South Pars last November. However, in February of this year, Patrick Pouyanné, the CEO of "Total," conditioned the final signing of this contract on the extension of the suspension of U.S. nuclear sanctions against Iran. With the extension of this suspension by the Trump administration in May, the path for Total's final agreement with Iran, which will be signed in Tehran on Tuesday, July 2, was paved. With this event, the first major international oil and gas company resumes its activities in Iran after many years, which could pave the way for the entry of other European and Asian companies into the country's oil and gas fields. 2) The introduction of new contracts in Iran - The gas contract that will be signed in Tehran on Tuesday, July 2, is based on Iran's new oil contracts (IPC). With the introduction of Iran's new oil contracts, the old model based on "buy-back" will presumably be phased out. The contracts known as "buy-back," which Iran proposed to foreign oil companies since the revolution, had little appeal for them. In fact, since Article 81 of the Iranian Constitution prohibits granting concessions to foreigners, the Islamic Republic resorted to buy-back, where ownership of oil and gas reserves and oversight over them is entirely in Iran's hands, and the foreign party only acts as a contractor, responsible for all stages of project implementation, and after commissioning, takes a portion of the production as remuneration and financial benefit. In the 1990s and 2000s, Western oil companies reluctantly accepted buy-back, but today, given the significant changes in the global energy market, they can turn to better conditions for new resources, including oil from Iraq or unconventional oil in the U.S. Given this situation, the Islamic Republic decided to propose a new legal basis under the title of "Iranian Oil Contract" to international oil and gas companies, which offers advantages over "buy-back," including a longer duration and greater benefits for these companies. However, the new model of Iranian contracts is still not attractive enough from the perspective of oil companies. Total's participation in Phase 11 of South Pars is based on the new model of Iranian oil contracts and provides a suitable condition to test this new legal experience and its impact on Iran's international economic relations. 3) Total's acceptance of significant risk - Total's return to Phase 11 of South Pars is certainly not without risks for the company. In a general assessment, investment in the crisis-ridden Middle East region, including the Persian Gulf, carries significant risks. On the other hand, despite the extension of the suspension of nuclear sanctions by the United States (which occurs every few months), the hostility of the Trump administration towards the JCPOA remains strong. The first phase of the contract involves the construction of two platforms, drilling thirty wells, and creating two major gas pipelines, costing a total of $2 billion. Of this amount, $1 billion will be provided by "Total." Doubts arising from Washington's future policies weigh heavily on this contract (as well as other international contracts with Iran), and senior officials of "Total" have repeatedly emphasized this "risk." Patrick Pouyanné, the CEO of "Total," recently stated, "We must live with a degree of uncertainty." But he also added, "Accessing a huge market is worth accepting a $1 billion risk." In this context, the risk stemming from internal opposition to Iran's new oil contracts should not be overlooked. In fact, the opposition of factions known as "principlists" in the Islamic Republic to Iran's new oil contracts is not less than their opposition to the JCPOA. Seyyed Ahmad Alam al-Huda, the representative of the Supreme Leader in Razavi Khorasan Province, recently stated: "They are signing contracts with American (??) and French companies that will take ownership of our oil wells. Such a thing has not happened except in Saudi Arabia." Critics of Hassan Rouhani's government compare the new oil contracts to the "disgraceful Turkmenchay Treaty." They argue that the new contracts violate the Islamic Republic's constitution, breach higher laws and the rights of the National Iranian Oil Company, contradict the principles of resistance economy, and lead Iranian experts to foreign companies, etc. Despite these criticisms, the Iranian Ministry of Oil considers the new oil contracts finalized and declares them the legal basis for its relations with oil and gas companies.