IPC to Replace Buy-Backs in Oil Deals

IPC to Replace  Buy-Backs in Oil DealsIPC to Replace  Buy-Backs in Oil Deals

The Oil Contracts Revision Committee (OCRC) was established after President Hassan Rouhani' took office in mid-2013 to help attract foreign investment in the key oil and gas sector that has been undermined under the current buy-back framework.

"Foreign oil companies are no more willing to work under the buy-back system, which imposes rigid conditions," Seyyed Mehdi Hosseini, head of OCRC said in an interview with ISNA at the weekend.

Under the buy-backs, the contractor develops the field and the National Iranian Oil Company foots the bill comprising capital expenditure (CAPEX), operating expenditure (OPEX) and accrued bank charges. The contractor then receives an agreed remuneration, and the money paid for the services allows the operator to buy a share of the produced hydrocarbon.  

International oil companies (IOC) feel that the buy-back model is prone to huge potential losses because they have very limited options to put a ceiling on capital costs. Additionally, the way that the contracts are structured means that at the time of signing, long term pre-defined operating targets are set that normally do not take account of the prevailing market conditions, new drilling plans, reserve estimates, financing costs, etc.

"Moreover, the buy-back model is also not competitive compared to contractual models in neighboring countries such as Iraq, Qatar, Turkmenistan, Azerbaijan, and Kazakhstan," Hosseini said. "Competition was and is a primary concern of the oil ministry in deciding to revise the contractual framework."

The ministry has "invited IOCs with experiences in Iran, and are aware of the shortcomings, to offer advice on ways  to draft the new model. We have studied contractual frameworks of 33 different countries, and after extensive research the new Iran Petroleum Contract (IPC) was drafted."

Turning Point

In the new contractual model drawbacks of the buy-backs have been removed, creating a new investment framework as part of the drive to encourage western businesses. Introduction of the IPC marks a turning point in the way that the oil and gas industry can acquire the much needed know-how and technology to develop its fields.

The IPC aims to attract foreign capital, services, know-how and technology, integrate the exploration and production phases, and reduce the investment risks by offering more flexibility in investment costs, while also emphasizing on jobs and domestic potential.

 "It tends to be closer to international models, despite the [legal] restrictions," Hosseini said, with reference to concessionary models employed by majority of oil and gas producing countries.

Under the IPC, a foreign partner will be required to meet the Iranian local content requirement which will be 51% of the contract. Accordingly, the National Iranian Oil Company (NIOC) will set up joint ventures for crude oil and gas production with IOCs which will be paid with a share from the output.

The IPC is very flexible and takes into consideration issues such as type of operation, physical areas, and fields being jointly owned with other states, Hosseini asserted.

"Foreign investors are encouraged through incentives, for example, there will be higher reward if a company participates in development of joint fields," he noted.

Unlike the buy-back regime, there will be no pre-agreed rate of return on invested capital. Both the NIOC and the contractor will estimate the rate, and once agreement on the rate of return is finalized, investments will begin.