20-Year Contracts on Offer

Legal/Contract Advisor
20-Year Contracts on Offer 20-Year Contracts on Offer

Iran will pitch more than 50 oil and natural gas projects to 335 domestic and international companies at a conference in Tehran on Saturday as it prepares for the end of the economic sanctions and a new era of normal trade with the outside world.

According to informed sources 1,300 delegates are due to attend the two-day gathering that will be addressed by Oil Minister Bijan Namdar Zanganeh and his senior aides. The government hopes multinationals will commit at least $100 billion of the $185 billion that it says it needs to develop the vast oil and gas sector. Sepidar Karimi, a Tehran-based oil analyst says in a report (see Page 5) “the new plans are prepared and agreed upon by both parties” before operations begin. The new projects will change the dynamics and lead to “profit maximization,” she says.

Iran will offer a new framework for oil deals, officially known as the Iran Petroleum Contract, to be negotiated project by project, rather than a uniform contract for all projects, Amir Hossein Zamaninia, deputy oil minister for international affairs, said last week. The IPC will include almost 20 projects related to discovery and exploration, while 30 projects are designed to boost extraction from oil and gas fields by implementing enhanced oil recovery techniques.

A second conference is scheduled to be held in London on February 22-24 for a thorough presentation of the multibillion-dollar oil and gas projects.

Following last week’s Third Summit of Gas Exporting Countries Forum, national and international oil majors convene in Tehran in a conference to unveil Iran's long-awaited new oil contracts.

Iran, fourth on the global list of top oil reserves holders, is also planning to lift the curtain on more than 50 oil and gas projects worth $185 billion during the two-day event opening on Nov. 28.

More than 1,300 individuals from 335 companies, including 183 domestic and 152 foreign firms from 45 countries have officially registered to attend the conference, according to the head of Oil Contracts Revision Committee, Seyyed Mehdi Hosseini.

With a view to a potential window for the removal of financial and energy sanctions, and in the light of international oil companies' disfavor of Iran’s contractual framework, the country is now bent on reforming its regulatory regime to bring in further foreign investment and expertise to its oil industry.

Buyback arrangements that were hitherto utilized in Iran's oil and gas industry were widely unpopular for they were based upon a defined scope of work, a capital cost ceiling, a fixed remuneration fee and a defined cost recovery period.

In a move to confront the contractual disadvantages of this lucrative industry, the Cabinet approved and communicated a directive on the general structure of upstream oil and gas contracts in early November that lays the groundwork for the new Iran Petroleum Contract model at hand.

In the new framework, development plans are prepared and agreed upon by both parties prior to the commencement of operations, which will be modified during the production phase in accordance with updated oil price forecasts, reserves estimates, field behaviour, capital and operation cost, as well as other determinant factors.

Thereby, reform brings about dynamic profit maximization, allowing the operator to make optimal decisions through different phases of operation and to revise its decision based on optimal production quantity or new well drilling or development plan.

Likewise, a critical adjustment made on new oil contracts is the introduction of an Open Capital Expenditure (Open Capex), whereby capital costs are flexible in keeping with the actualities and behavior of the field or reservoir as well as actual market conditions.

The IOC is remunerated for all costs it will incur in the course of executing its contractual obligations. Reimbursements are made either through part allocation of the field’s production–not exceeding 50% of the field’s total output–or from revenues generated thereby based on the selling price of products at such date.

All operations of the contractor shall be performed in the name and on behalf of the National Iranian Oil Company as of the contract’s effective date, and all the properties such as buildings, goods, equipment, wells and underground and overhead infrastructure will be owned by NIOC from the same date.

A Joint Contract Management Committee will be established to supervise all operations and make the final technical, financial and legal decisions within the agreed contractual framework. The committee consists of an equal number of representatives of the IOC, as the contractor, and NIOC, as the employer, with each side having equal voting rights.

A Joint Operating Agreement, or Joint Operating Company may be established under the full control and supervision of the IOC and in partnership with competent Iranian companies for the implementation of all related operations. Any such joint venture or partnership must conform to Iranian laws and regulations on foreign partnership. In the IOC, management positions are arranged in rotation, such that they are gradually handed over to the Iranian side.

To encourage the IOC to employ state-of-the-art technology and knowhow in the exploration, development and production phases, the IPC provides for a floating incentive fee, relative to the risk factors, the production capacity of each field or reservoir and the incremental production rate derived from each project.

The fee will be based on the international price of oil and gas condensate and or regional or contractual price of gas, as the case may be, and is paid at the daily price for every barrel of oil, or every thousand cubic feet of gas, or every barrel of gas condensate as of the commencement of the first production until the termination of the contract.

The IOC’s knowhow and managerial skills shall be transferred to its Iranian partner(s) through the establishment of research and training programs, the cost of which will be reimbursed as part of direct capital costs.

As opposed to short buyback contract terms ranging from five to seven years, the IPC model offers longer contract duration, which should not in any case exceed 20 years from the date on which development operations commence. The provision is aimed at encouraging the IOC to employ all methods and technologies that would result in a maximum and sustainable production, including, inter alia, enhanced and/or improved oil recovery methods.

Extended contract terms allow for much longer cost recovery after first production, and a greater level of certainty and incentive for the IOC to invest large sums and utilize advanced technology in the project.

Regarding exploration contracts, the IPC stipulates that the development and production phases may be integrated and linked to the exploration activities, should a commercial field or reservoir is discovered at the risk of the IOC.

 “The release of IPC and project opportunities is the most eagerly awaited licensing event in the Middle East since the Iraq licensing rounds in 2009,” Wood Mackenzie, a leading global energy research and consultancy group, said in a report on Thursday.

An amendable scope of work, an Open Capex, floating remuneration fee and an extended cost recovery period are among the most important revisions made to the new contract model with the aim of providing more advantage over regional competitors, such as Iraq, which is reportedly in talks with IOCs about possible changes in its oil contracts.