New Oil Contract Attracts Int’l Interest

New Oil Contract  Attracts Int’l InterestNew Oil Contract  Attracts Int’l Interest

With the announcement of a nuclear deal with the West and the prospect of sanctions relief within a year, Iran is looking to revitalize its oil and gas industry.

Tehran wants to increase oil production from its current level of about 3 million barrels per day to 4 million bpd within six months of sanctions removal. And its longer-term goal is to raise production levels even higher than they were prior to the sanctions—roughly 6 million bpd.

Iran will likely need much more time to achieve that level of production, Stratfor's website said in a report. To develop new oilfields and new technology, Tehran needs access to investments worth more than $100 billion.

In November, Iran will unveil a new contract model designed to make it worthwhile for international oil companies to enter into joint ventures in Iran.

Under the new Iranian Petroleum Contract, a foreign company would have several years to explore and develop fields followed by 15 to 25 years of production rights, according to Stratfor, a global intelligence company.

During that time, the National Iranian Oil Company would pay the firm, based on the complexity of the field, the production volumes and the price of oil.

A contract model of this type differs significantly from the buyback contract that Iran used over the past two decades. Under the buyback contracts, a foreign oil company funds the initial investment for the energy project and the NIOC then reimburses the foreign firm in cash for its operating costs. Then, after a negotiated period, the NIOC takes over operations entirely.

Such contracts are largely uncompetitive for international oil companies. Because the amount the companies receive from the Iranian government is dictated by the terms of the contract, rather than the number of barrels sold, foreign firms do not benefit from growing production levels or rising oil prices, and they have no opportunity to recoup any lost capital if costs surpass their original budget.

Under the new terms, the amount the Iranian government pays foreign firms would be based on the price of oil and the amount of oil produced, which would incentivize the firms to increase production and even exceed the output target. If firms go over budget in developing and operating fields, they have a chance to regain some of that capital from sales.

The new contract model would also change the relationship between foreign companies and oil reserves. Under the old model, international oil companies cannot claim rights to reserves because Iran's Constitution requires that the state retain ownership of oil reserves until they are actually extracted.

This is important because international oil companies boost shareholder confidence by showing they have rights to a particular field.

The new IPC may give Iran an advantage over its competitors in the region, as none of the Persian Gulf states offers similar joint venture models. Already, several international oil companies, including Royal Dutch Shell, France’s Total and Italy’s Eni, have expressed interest in the new contract.  The success of the IPC model will depend on the specific fiscal terms of the deal, which have not yet been announced.