Why is the New Oil Contract Model Not Being Implemented?

Ali Kardar, the CEO of the National Iranian Oil Company, states that the first oil tender based on the new oil contract model (known as IPC) for the development of the Azadegan field has been postponed for several months. This delay in the new oil contract tenders is not new, as tenders have been postponed multiple times before. However, the CEO of the National Iranian Oil Company now claims that the reason for this delay is to give foreign companies enough time to study the field. International oil companies and their legal teams have certainly been able to review the new oil contract model (IPC) during this long period. Concurrently with this statement from the Iranian Ministry of Oil, Patrick Pouyanné, the CEO of Total France, announces the company's intention to invest one billion dollars in the development project of Iran's South Pars gas field. This Total executive states, "This (the South Pars gas field development project) is worth the risk of a one billion dollar investment because it creates a very large market. We are fully aware of some risks and have considered the possibility of the return of sanctions. We must also take regulatory changes into account." Iran's need for massive investment in the oil industry is significant. The oil industry is a specialized sector that is high-risk, requires advanced technology, and is based on massive investment. Therefore, it is not surprising that a few global firms dominate this industry. Only these global firms, with their experience, financial capabilities, technological expertise, and high-risk tolerance, have the capacity for large-scale investment in this industry. Iran's oil industry was once somewhat self-sufficient in terms of investment and even served as a driver for investment in other sectors of the Iranian economy; however, it has lost this capability due to a decrease in Iran's share in international oil markets and falling oil prices. Given the decline in oil revenues in recent years, along with the misallocation of financial resources, and consequently insufficient infrastructure investments, Iran's oil industry has become worn out and lacks the capacity to compete, especially in shared fields with neighboring countries. The oil industry is both capital-intensive and specialized. Therefore, it cannot be expected that domestic institutions can solve its problems in terms of massive financial supply, new technology, or organization and management; thus, Iran needs the participation and investment of large multinational oil firms. In this context, Bijan Zanganeh, Iran's Minister of Oil, recently announced that the Iranian oil industry needs 200 billion dollars in investment, of which 130 billion dollars will be spent in the upstream sector and 70 billion dollars in the downstream sector. Masoud Hashemian, the Deputy Minister of Oil for Commerce and International Affairs, also announced at the Kish Energy Exhibition that a 200 billion dollar investment in the country's oil industry is forecasted in the sixth development plan, stating, "With the lifting of sanctions, it is expected that an economic leap will occur in our country regarding investment." The attractions and repulsions of investment in Iran's oil industry are evident from the statements of oil and energy companies, particularly European firms, which do not hide their interest in investing and operating in Iran. However, it should also be emphasized that, according to the managers of these firms, the entry of such a large amount of capital into the oil industry is accompanied by difficulties and requires a long time. An economy that has been distanced from the global arena for a long time must be prepared for many changes to rejoin it. Laws and regulations related to intellectual property rights, banking laws, insurance regulations, and currency regulations are not compatible with the current global conditions and do not encourage investment in Iran. The new oil contract model (IPC) solves some of the problems related to the entry of capital and multinational firms into Iran's oil industry and makes long-term investment in Iran more attractive. However, this is not the key to solving all problems. During the time since the drafting of the oil contracts (IPC), various actions have been taken by government opponents, including hardliners and "fire-at-will" groups, to prevent the implementation of these contracts. This internal struggle within the government was also responsible for the recent postponement of the unveiling of these contracts in London. There are still some oppositions to the implementation of these oil contracts (IPC), and the opposition faction is trying to show foreign observers that the government lacks authority in managing the country's affairs. One possible reason for the delay in the tender is this. However, this is not the only problem; laws and regulations related to intellectual property rights, banking laws, insurance regulations, and currency regulations are also not compatible with the current global conditions and do not encourage investment in Iran. At the same time, there are real obstacles to attracting investment in Iran. Therefore, a necessary condition for the implementation of oil contracts (IPC) and similar contracts is the political and economic stability within Iran. If internal tensions within the government regarding the implementation of oil contracts (IPC) escalate, the political risk of these contracts will increase, and their attractiveness to foreign investors will diminish. For this reason, it is likely that investors may prefer other countries' oil industries over Iran. However, the problem is not limited to this. In the current situation, despite the implementation of the JCPOA with the establishment of a new government in the White House, political risks from regional and external tensions have also increased the risks of internal tensions. Regional and international tensions act as a repulsion for investment in Iran. If previously nuclear sanctions were the main cause of capital flight and the repulsion of foreign investment, it now seems that the conflict between Iran and its regional rivals—such as the Saudi Kingdom—and the tensions between Washington and Tehran have raised the political risk of Iran's economy, particularly its oil industry. Thus, although the implementation of the JCPOA has resolved a significant issue for Iran's economy, the expansion of regional tensions has become a threat to foreign investment. In such circumstances, it is natural that the repulsive political risks of Iran diminish the attractiveness of the new oil contract model (IPC).