United States: Potential Upstream Investment Under The New Iranian Petroleum Contract

The signing of the JCPOA regarding Iran nuclear sanctions may usher in a new era of major international investment in the Iranian oil and gas industry.

After months of intense negotiations, on July 14, 2015, the United States, European Union, United Kingdom, France, China, Russia, and Germany agreed to a Joint Comprehensive Plan of Action (JCPOA) with Iran regarding Iran's nuclear program that has the potential to open the Iranian oil and gas industry to billions of dollars of international investment.

The JCPOA may be the first step in a process of sanctions relief that could have a transformative impact on Iran and the international oil and gas industry. Amir-Hossein Zamimana, formerly part of the nuclear negotiating team and the Deputy Minister of Petroleum, has been managing discussions with selected major international oil companies (IOCs) and has announced that the energy sector will require at least $185 billion of investment over the next six years. With the world's fourth-largest proved crude oil reserves and the second-largest natural gas reserves, Iran may well become a highly attractive potential venue for IOCs seeking reserve replacement.

Even before the most recent round of sanctions was enacted against Iran in 2012, the terms and conditions offered by Iran to IOCs under the approved "buy-back" contract structure proved so onerous that many decided to exit the country based on the substantial economic losses they incurred. Recognizing the need to entice IOCs to reconsider investing in the country in connection with sanctions relief under negotiation, in late 2013 Iran formed the Oil Contracts Revision Committee (headed by Mehdi Hosseini) to prepare new, more favorable terms for foreign investors. While the government has not publicly released the full terms of the new Iranian Petroleum Contract (IPC), there has been substantial public discussion regarding the high-level terms that are expected to be included in the IPC, and selected terms have been provided to the IOCs.

Below, we discuss (1) certain terms of, and the challenges associated with, the current buy-back contract structure, (2) key IPC terms that have been discussed publicly, and (3) the timing and the potential roll-out of the IPC and sanctions relief.

The Current Buy-Back Contracting Structure

Foreign or private ownership of natural resources in the reservoir is forbidden under Iran's constitution. Instead, IOCs have been investing primarily through buy-back contracts that are disadvantageous compared to contracts offered by most other host governments, and that have ultimately proved to be unprofitable for many IOCs.

The buy-back contracts are essentially a constricted form of risk services contract. They allow the IOC to act as the operator of the field during the exploration and development phase, but provide that the National Iranian Oil Company (NIOC) takes over operatorship during the production phase. The NIOC uses proceeds from production to pay the IOC a set sum from production volumes, and the IOC is not compensated for boosting production. The terms of the contracts have been short, with a payback period for exploration and development expenses incurred by the IOC of five to seven years, giving the IOC only a short time to recoup its investment. The buy-back contracts cap the profit the investor can make per barrel of oil, irrespective of increases in the commodity price. In addition, the IOC must pay for any cost overruns beyond initial projections without reimbursement—which presents a challenge for large, complex projects where budgets often increase dramatically. Under this structure, the IOCs have been unable to book the applicable reserves, which is problematic for those IOCs for which reserve replacement is a significant concern.

The New Iranian Petroleum Contract (IPC) Structure

The proposed IPC framework is designed to address some of the perceived limitations of the buy-back contracting structure and result in economics that will incentivize IOCs to invest in some of the country's more challenging projects. The IPC structure is expected to be offered for investment in somewhere between 34 and 74 oil fields. The IPC terms have not been publicly disclosed and remain subject to change. That said, the following potential key features of the IPC framework have been reported in publicly-available sources:

  • Joint Venture Structure; Booking of Reserves: While still described as a services contract by Iranian commentators, the new IPC structure also has been described as a joint venture or partnership structure where NIOC or a subsidiary of NIOC would partner with the IOC. It has been reported that, under the IPC structure, foreign investors are expected to be able to book reserves on their balance sheets under some circumstances, even though title to the hydrocarbons produced will not be transferred as they would be under a typical concession contract or production sharing agreement (PSA) structure.
  • Participation in Production and Enhanced Oil Recovery Phases: The IPCs will offer much longer terms than were available to foreign investors under the buy-back contracts, lasting through the production phase and potentially through the enhanced oil recovery phase. This more than doubles the time periods offered under the buy-back contracts and provides the IOCs a much greater opportunity for cost recovery than the current buy-back contract structure.
  • Compensation: IOCs will be compensated per barrel produced, and the price per barrel and aggregate amount payable will not be fixed. The profit paid per barrel will vary depending on the risks involved and fluctuations in oil prices. The compensation may include an additional risk-reward element in which companies working in very high-risk fields will be paid more per barrel than companies working in low-risk fields.
  • Work Program and Budget: The IPC structure is expected to require submission of a work program and budget that will be approved by a joint venture development committee made up of officials from the partner companies and will allow for recovery of related costs. Cost estimates may be changed each year, but changes would be subject to NIOC's approval. If approvals are regularly obtained, this would eliminate one of the key risks with the buy-back contracts, which provided that cost overruns were not recoverable from future production proceeds.
  • Local Content; Technology Sharing: Under the IPC, the local content requirement may be 51%. High local content requirements have been challenging for IOCs in other countries with rapidly expanding oil and gas exploration and production industries. In addition, foreign investors will be expected to share technology and management expertise with their Iranian partners.

Timing of Roll-Out of the IPC and Sanctions Relief

While the final proposed terms of the IPC may be approved in Iran in relatively short order, it is expected that investment by IOCs in Iran's upstream oil and gas sector will not begin until well into calendar year 2016 due to the likely timing of sanctions relief under the JCPOA. Until sanctions relief under the JCPOA, IOCs, particularly "US persons" (as defined below), should continue to exercise caution in discussions and negotiations regarding investments in Iran.

Once the Oil Contracts Revision Committee led by Mr. Hosseini has finalized the proposed terms of the IPC, it will be submitted for approval by President Hassan Rouhani's cabinet. Shortly before the JCPOA was signed, Iran announced that it planned to release details about the terms of the IPC and the oil and gas projects available to be contracted at an investment conference in London in late 2015. Iran has delayed the conference, which was scheduled to occur in September 2015, once before, expressing a desire that it occur after the initial sanctions relief becomes effective so that the IOCs can more actively engage in discussions. Iran expects detailed negotiations with IOCs regarding specific fields (once permitted to commence) to take as long as six months.

The JCPOA is only the first step in unwinding the complex global sanctions regimes that restrict investment in the Iranian oil and gas industry. We provide a description of the terms of the JCPOA and the steps required for its implementation in our July 15 LawFlash " Joint Plan of Action Regarding Iran's Nuclear Program Announced." Assuming the requisite approvals are obtained, sanctions relief will be initiated after the International Atomic Energy Agency (IAEA) verifies that Iran has implemented key nuclear-related measures (Implementation Day). Implementation Day is not a fixed date known today, but may occur in December 2015 or later. Until Implementation Day, the current sanctions regimes remain in effect.

Notwithstanding the deal regarding the JCPOA, "US Persons" are still currently prohibited from entering into executory contracts for Iran-related transactions until US sanctions are lifted after Implementation Day. "US persons" means US nationals, US permanent resident aliens ("Green Card holders"), entities incorporated in the United States, individuals or entities in the United States, or entities established or maintained outside the United States that are owned or controlled by a "US person." For a "US person" to sign such an executory contract before Implementation Day would be dealing in property or an interest in property involving Iran or a Specially Designated National, which is prohibited by current US regulations as applicable to "US persons." The current Iran sanctions regulations expressly state that such executory contracts are property or an interest in property because they involve "contracts of any nature whatsoever, and any other property, real, personal, or mixed, tangible or intangible, or interest or interests therein, present, future, or contingent."

It appears that non-"US persons" (as defined above) having no US nexus (e.g., not incorporated in the United States or owned or controlled by a "US person"), not acting in or through the United States or a "US person" and otherwise not generally subject to US jurisdiction may enter into executory contracts with Iran without risk of exposure of an OFAC enforcement case for so doing. Even in these cases, potential non-"US person" investors in Iran are well advised to seek clearance from the relevant regulators that these contracts do not violate United Nations, European Union, or other non-US sanctions.

Summary

The signing of the JCPOA may usher in a new era of major international investment in the Iranian oil and gas industry by IOCs. While the terms of the IPC are not yet completed and remain subject to further approval, initial reports indicate that the IPC is likely to be substantially more beneficial to IOCs than the current buy-back contracting structure and has the potential to allow them to book the applicable reserves, which may generate increased interest in investment in the country. Assuming that the JCPOA is approved and the IAEA verifies that Iran has implemented key nuclear-related measures, investment could commence as early as calendar year 2016.

This article is provided as a general informational service and it should not be construed as imparting legal advice on any specific matter.

To print this article, all you need is to be registered on Mondaq.com.

Click to Login as an existing user or Register so you can print this article.

Authors
 
In association with
Related Topics
 
Related Articles
 
Related Video
Up-coming Events Search
Tools
Print
Font Size:
Translation
Channels
Mondaq on Twitter
 
Register for Access and our Free Biweekly Alert for
This service is completely free. Access 250,000 archived articles from 100+ countries and get a personalised email twice a week covering developments (and yes, our lawyers like to think you’ve read our Disclaimer).
 
Email Address
Company Name
Password
Confirm Password
Position
Mondaq Topics -- Select your Interests
 Accounting
 Anti-trust
 Commercial
 Compliance
 Consumer
 Criminal
 Employment
 Energy
 Environment
 Family
 Finance
 Government
 Healthcare
 Immigration
 Insolvency
 Insurance
 International
 IP
 Law Performance
 Law Practice
 Litigation
 Media & IT
 Privacy
 Real Estate
 Strategy
 Tax
 Technology
 Transport
 Wealth Mgt
Regions
Africa
Asia
Asia Pacific
Australasia
Canada
Caribbean
Europe
European Union
Latin America
Middle East
U.K.
United States
Worldwide Updates
Registration (you must scroll down to set your data preferences)

Mondaq Ltd requires you to register and provide information that personally identifies you, including your content preferences, for three primary purposes (full details of Mondaq’s use of your personal data can be found in our Privacy and Cookies Notice):

  • To allow you to personalize the Mondaq websites you are visiting to show content ("Content") relevant to your interests.
  • To enable features such as password reminder, news alerts, email a colleague, and linking from Mondaq (and its affiliate sites) to your website.
  • To produce demographic feedback for our content providers ("Contributors") who contribute Content for free for your use.

Mondaq hopes that our registered users will support us in maintaining our free to view business model by consenting to our use of your personal data as described below.

Mondaq has a "free to view" business model. Our services are paid for by Contributors in exchange for Mondaq providing them with access to information about who accesses their content. Once personal data is transferred to our Contributors they become a data controller of this personal data. They use it to measure the response that their articles are receiving, as a form of market research. They may also use it to provide Mondaq users with information about their products and services.

Details of each Contributor to which your personal data will be transferred is clearly stated within the Content that you access. For full details of how this Contributor will use your personal data, you should review the Contributor’s own Privacy Notice.

Please indicate your preference below:

Yes, I am happy to support Mondaq in maintaining its free to view business model by agreeing to allow Mondaq to share my personal data with Contributors whose Content I access
No, I do not want Mondaq to share my personal data with Contributors

Also please let us know whether you are happy to receive communications promoting products and services offered by Mondaq:

Yes, I am happy to received promotional communications from Mondaq
No, please do not send me promotional communications from Mondaq
Terms & Conditions

Mondaq.com (the Website) is owned and managed by Mondaq Ltd (Mondaq). Mondaq grants you a non-exclusive, revocable licence to access the Website and associated services, such as the Mondaq News Alerts (Services), subject to and in consideration of your compliance with the following terms and conditions of use (Terms). Your use of the Website and/or Services constitutes your agreement to the Terms. Mondaq may terminate your use of the Website and Services if you are in breach of these Terms or if Mondaq decides to terminate the licence granted hereunder for any reason whatsoever.

Use of www.mondaq.com

To Use Mondaq.com you must be: eighteen (18) years old or over; legally capable of entering into binding contracts; and not in any way prohibited by the applicable law to enter into these Terms in the jurisdiction which you are currently located.

You may use the Website as an unregistered user, however, you are required to register as a user if you wish to read the full text of the Content or to receive the Services.

You may not modify, publish, transmit, transfer or sell, reproduce, create derivative works from, distribute, perform, link, display, or in any way exploit any of the Content, in whole or in part, except as expressly permitted in these Terms or with the prior written consent of Mondaq. You may not use electronic or other means to extract details or information from the Content. Nor shall you extract information about users or Contributors in order to offer them any services or products.

In your use of the Website and/or Services you shall: comply with all applicable laws, regulations, directives and legislations which apply to your Use of the Website and/or Services in whatever country you are physically located including without limitation any and all consumer law, export control laws and regulations; provide to us true, correct and accurate information and promptly inform us in the event that any information that you have provided to us changes or becomes inaccurate; notify Mondaq immediately of any circumstances where you have reason to believe that any Intellectual Property Rights or any other rights of any third party may have been infringed; co-operate with reasonable security or other checks or requests for information made by Mondaq from time to time; and at all times be fully liable for the breach of any of these Terms by a third party using your login details to access the Website and/or Services

however, you shall not: do anything likely to impair, interfere with or damage or cause harm or distress to any persons, or the network; do anything that will infringe any Intellectual Property Rights or other rights of Mondaq or any third party; or use the Website, Services and/or Content otherwise than in accordance with these Terms; use any trade marks or service marks of Mondaq or the Contributors, or do anything which may be seen to take unfair advantage of the reputation and goodwill of Mondaq or the Contributors, or the Website, Services and/or Content.

Mondaq reserves the right, in its sole discretion, to take any action that it deems necessary and appropriate in the event it considers that there is a breach or threatened breach of the Terms.

Mondaq’s Rights and Obligations

Unless otherwise expressly set out to the contrary, nothing in these Terms shall serve to transfer from Mondaq to you, any Intellectual Property Rights owned by and/or licensed to Mondaq and all rights, title and interest in and to such Intellectual Property Rights will remain exclusively with Mondaq and/or its licensors.

Mondaq shall use its reasonable endeavours to make the Website and Services available to you at all times, but we cannot guarantee an uninterrupted and fault free service.

Mondaq reserves the right to make changes to the services and/or the Website or part thereof, from time to time, and we may add, remove, modify and/or vary any elements of features and functionalities of the Website or the services.

Mondaq also reserves the right from time to time to monitor your Use of the Website and/or services.

Disclaimer

The Content is general information only. It is not intended to constitute legal advice or seek to be the complete and comprehensive statement of the law, nor is it intended to address your specific requirements or provide advice on which reliance should be placed. Mondaq and/or its Contributors and other suppliers make no representations about the suitability of the information contained in the Content for any purpose. All Content provided "as is" without warranty of any kind. Mondaq and/or its Contributors and other suppliers hereby exclude and disclaim all representations, warranties or guarantees with regard to the Content, including all implied warranties and conditions of merchantability, fitness for a particular purpose, title and non-infringement. To the maximum extent permitted by law, Mondaq expressly excludes all representations, warranties, obligations, and liabilities arising out of or in connection with all Content. In no event shall Mondaq and/or its respective suppliers be liable for any special, indirect or consequential damages or any damages whatsoever resulting from loss of use, data or profits, whether in an action of contract, negligence or other tortious action, arising out of or in connection with the use of the Content or performance of Mondaq’s Services.

General

Mondaq may alter or amend these Terms by amending them on the Website. By continuing to Use the Services and/or the Website after such amendment, you will be deemed to have accepted any amendment to these Terms.

These Terms shall be governed by and construed in accordance with the laws of England and Wales and you irrevocably submit to the exclusive jurisdiction of the courts of England and Wales to settle any dispute which may arise out of or in connection with these Terms. If you live outside the United Kingdom, English law shall apply only to the extent that English law shall not deprive you of any legal protection accorded in accordance with the law of the place where you are habitually resident ("Local Law"). In the event English law deprives you of any legal protection which is accorded to you under Local Law, then these terms shall be governed by Local Law and any dispute or claim arising out of or in connection with these Terms shall be subject to the non-exclusive jurisdiction of the courts where you are habitually resident.

You may print and keep a copy of these Terms, which form the entire agreement between you and Mondaq and supersede any other communications or advertising in respect of the Service and/or the Website.

No delay in exercising or non-exercise by you and/or Mondaq of any of its rights under or in connection with these Terms shall operate as a waiver or release of each of your or Mondaq’s right. Rather, any such waiver or release must be specifically granted in writing signed by the party granting it.

If any part of these Terms is held unenforceable, that part shall be enforced to the maximum extent permissible so as to give effect to the intent of the parties, and the Terms shall continue in full force and effect.

Mondaq shall not incur any liability to you on account of any loss or damage resulting from any delay or failure to perform all or any part of these Terms if such delay or failure is caused, in whole or in part, by events, occurrences, or causes beyond the control of Mondaq. Such events, occurrences or causes will include, without limitation, acts of God, strikes, lockouts, server and network failure, riots, acts of war, earthquakes, fire and explosions.

By clicking Register you state you have read and agree to our Terms and Conditions