New Contracts Should Heed Oil Prices

New Contracts Should Heed Oil PricesNew Contracts Should Heed Oil Prices

Plunging oil prices should be taken into account when drafting Iran's new petroleum contracts, as capital return and profits are seen to be largely reduced, Mohammad Ali Khatibi, former director of OPEC affairs at the oil ministry, told ILNA Wednesday.

To encourage investment, oil contracts should be revised in line with falling oil prices which have more than halved since June, the official said.

Global oil prices have tumbled almost 60 percent since June, hitting near six-year lows as growing production and tepid global demand has caused a supply glut and prompted oil producers to scale back spending. However, the oil market has been experiencing a slight uptrend in the past few days, with prices surging 20 percent over the past five days. Yet, most analysts believe the recent increase in oil prices will be short-lived.  

Despite the constitutional restraints, oil contracts were redrafted stipulating far more favorable terms than those offered under the previous buy-back framework, whereby foreign companies were paid a fixed rate of return and did not own the assets and were contractors without rights to the fields.

New contracts will offer long-term durations of 20 to 30 years, and the foreign company is also entitled to a portion of oil produced from the project. The new contracts will allow investors to be involved in production, giving them far greater control and certainty over long-term revenue, while foreign ownership of oil resources is banned.

The foreign partner's share of oil production, however, differs from that of production sharing agreements whereby a fixed percentage of production revenue is made available for recovery of capital costs (with or without uplift), operating costs and exploration costs.

The new contracts, covering exploration and development operations, are expected to attract more than $40 billion in foreign investment. However, this is contingent on lifting of sanctions imposed on Iran's energy sector.

"International oil companies will not take part in Iran's oil and gas projects unless sanctions are lifted," Khatibi asserted.

Iran and the P5+1 group of major world powers are trying to meet a self-imposed extended deadline of the end of June to resolve the nuclear standoff over Tehran's nuclear program, which the West fears is aimed at developing a weapons capability - a charge Iran denies, saying the program is aimed only at peaceful purposes.