Will Iran's New Oil Contracts Come to Fruition?

An unofficial meeting of the Iranian Parliament to discuss the objections raised by representatives regarding the new oil contracts was held with the presence of the Minister of Oil on Sunday, August 21. According to domestic media, Behrouz Nemati, spokesman for the Iranian Parliament's presiding board, described the session as 'heavy.' These news agencies reported that during this closed session, representatives expressed strong criticisms against the new oil contracts. The question now arises: will Iran's new oil contracts come to fruition? The oil industry in Iran was once self-sufficient in terms of investment and was even considered the engine of investment in other sectors of the Iranian economy. However, with the decline of Iran's share in international markets, falling oil prices, and recent sanctions, the capacity of the oil industry has diminished. On the other hand, a significant portion of the financial resources of the oil industry has been wasted due to improper allocation to expenditures such as subsidies or rent-seeking activities. Therefore, this industry is no longer able to generate the necessary investment for maintaining and developing oil fields using its domestic resources. Consequently, the production capacity in this sector of the Iranian economy has not grown in line with regional and international competitors, and it is unclear whether Iran will be able to secure a suitable position in international markets even if there is a boom in the oil market in the future. For this reason, massive investment is required to rebuild and modernize this industry. The government expects that a significant portion of the investment for the development of oil fields will be provided by international investors. Afkhami Zarvani, director general of budget coordination and investment at the Ministry of Oil's Planning and Hydrocarbon Resources Supervision Office, states regarding the forecast of attracting $200 billion in investment within the framework of the sixth development plan: 'More than 70% of this investment will be sourced from foreign resources.' Masoud Hashemian, deputy minister of oil for trade and international affairs, also announces the forecast of $200 billion investment in the country's oil industry within the sixth development plan, stating: 'With the lifting of sanctions, it is expected that an economic leap will occur in our country in terms of investment.' Thus, in the post-JCPOA era and the lifting of oil sanctions, the government has attempted to encourage foreign investors to invest in this Iranian industry by offering new contracts and various incentives. However, foreign investors, considering the political and economic instability in Iran and international tensions, refrain from cooperating with the Iranian oil industry in terms of investment or contracting. The status of Iran's oil fields: Each oil reservoir has a specific useful life cycle; recovery is low in the early stages of the reservoir but gradually increases with the reservoir's maturity and decreases with its aging. Many of Iran's oil reservoirs are in the second half of their life cycle and are transitioning into the aging phase. Although the recovery percentage of fields and oil reservoirs is not uniform, there is consensus among oil industry experts that the oil recovery ratio from oil reservoirs is not satisfactory; in other countries, the recovery ratio is between 35% to 40%, which is over 10% higher than Iran's. With the continued use of inappropriate methods and reduced pressure in oil reservoirs, and without massive investment for updating oil industry technology, oil reservoirs will not be utilized optimally, resulting in decreased crude oil production efficiency and a reduced share for Iran in the global market. Misallocation of financial resources and insufficient investment for rebuilding, updating, and employing new technology are major reasons for the low recovery ratio of oil reservoirs. Investment in the oil industry during the current regime, especially in the last 10 years, has not been sufficient to solve the oil industry's problems. Naturally, such a situation will negatively impact the government's public budget, construction investment, economic growth, and Iran's international payment balance, affecting many economic variables. Oil investment in the post-JCPOA era: Although the lifting of sanctions is a positive step to encourage investors and attract foreign investment, there are other barriers to attracting investment in the oil sector. Some of these constraints are legal, while others are real. According to the constitution, non-Iranian enterprises active in the oil industry face significant restrictions on investing in Iran. Internal factions of the government each have their own interpretation of these restrictions and have so far failed to reach a stable agreement on how foreign investors can operate in Iran. This struggle is, of course, one of the problems that can hinder investment in Iran. Meanwhile, the Ministry of Oil has prepared new contract packages to attract Western enterprises and investors, as past buy-back contracts have lost their appeal to foreign investors due to changes in the oil market. After two years of work on a new contract known as IPC, this contract was unveiled last year; however, the government was forced to retreat due to criticism from opponents and accepted more than 150 changes at various stages, yet the opponents remain unconvinced. The opponents of the government claim that these contracts are detrimental to Iran and beneficial to foreign investors. However, behind these claims lies a power struggle among government factions, aiming to obstruct the government and turn this contract into a type of law to control the government. The opponents have no alternative to this contract, and if they were to gain control of the executive branch, they would implement a similar contract—or even one less favorable. The new oil contract, known as IPC, reflects the full capacity of the government's expertise and legal framework. This contract has not yet been presented internationally, and therefore it is uncertain whether it will be attractive to foreign investors. Furthermore, there is no contract that is absolutely efficient or absolutely inefficient. Rather, it is the competitive conditions in the market and Iran's managerial, organizational, and technical capabilities that determine the fate of contracts, not the demands of one party to the contract. Ultimately, while the contract is important, it is not the contract alone that attracts or repels investors from the Iranian economy; it is the daily realities and political and economic stability that are the main variables influencing foreign investors' decisions to pay attention to Iran. In conclusion, according to international reports, Iran's oil production is approaching the ceiling set for maximum crude oil production for the current year within the positive context of the post-JCPOA period. However, sustainable production increases require massive investment in the oil industry, which faces constraints. What emerges from the statements of companies in the oil and energy sector is that these institutions, particularly European enterprises, do not hide their interest in investing and operating in Iran. However, it should also be emphasized that, according to the managers of these enterprises, the entry of such a large amount of capital into the oil industry is accompanied by obstacles and 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. Furthermore, if oil prices continue to decline at this rate, there will be little incentive for Western enterprises to make substantial investments in Iran. One of the strategies to encourage international enterprises is to change oil contracts and grant more incentives to oil industry investors. The government's efforts to change old buy-back contracts have so far not been successful due to Iran's complex bureaucracy. However, even if this contract can successfully navigate Iran's bureaucracy, it is uncertain whether it will be attractive to international investors, given that Iran's economic environment suffers from high instability. According to the public relations office of the Research Center of the Islamic Consultative Assembly, the Economic Studies Office of this center announced that the average macroeconomic instability index over the past 23 years (1991-2014) shows that the instability of the macroeconomic environment in Iran is equal to (11.2), which is significantly higher than the world average (4.6) and even higher than the average of oil-exporting developing countries (7.4). Naturally, as Iran's instability index increases, the incentives given to investors must also increase. Such incentives are the cost of instability in Iran. But the question is whether Iran is ready to pay such a cost? In this context, the Iranian Minister of Oil announced the 'removal of issues with the new oil contracts' amid ongoing opposition to the new oil contracts. The government announced the issuance of new oil contracts, and the Ministry of Oil stated that the first new type of oil contract will be signed soon. Tokali stated that the new oil contracts would violate national sovereignty.