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 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
Check to state you have read and
agree to our Terms and Conditions

Terms & Conditions and Privacy Statement

Mondaq.com (the Website) is owned and managed by Mondaq Ltd and as a user you are granted a non-exclusive, revocable license to access the Website under its terms and conditions of use. Your use of the Website constitutes your agreement to the following terms and conditions of use. Mondaq Ltd may terminate your use of the Website if you are in breach of these terms and conditions or if Mondaq Ltd decides to terminate your license of use for whatever reason.

Use of www.mondaq.com

You may use the Website but are required to register as a user if you wish to read the full text of the content and articles available (the Content). 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 & conditions or with the prior written consent of Mondaq Ltd. You may not use electronic or other means to extract details or information about Mondaq.com’s content, users or contributors in order to offer them any services or products which compete directly or indirectly with Mondaq Ltd’s services and products.

Disclaimer

Mondaq Ltd and/or its respective suppliers make no representations about the suitability of the information contained in the documents and related graphics published on this server for any purpose. All such documents and related graphics are provided "as is" without warranty of any kind. Mondaq Ltd and/or its respective suppliers hereby disclaim all warranties and conditions with regard to this information, including all implied warranties and conditions of merchantability, fitness for a particular purpose, title and non-infringement. In no event shall Mondaq Ltd 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 or performance of information available from this server.

The documents and related graphics published on this server could include technical inaccuracies or typographical errors. Changes are periodically added to the information herein. Mondaq Ltd and/or its respective suppliers may make improvements and/or changes in the product(s) and/or the program(s) described herein at any time.

Registration

Mondaq Ltd requires you to register and provide information that personally identifies you, including what sort of information you are interested in, for three primary purposes:

  • To allow you to personalize the Mondaq websites you are visiting.
  • To enable features such as password reminder, newsletter alerts, email a colleague, and linking from Mondaq (and its affiliate sites) to your website.
  • To produce demographic feedback for our information providers who provide information free for your use.

Mondaq (and its affiliate sites) do not sell or provide your details to third parties other than information providers. The reason we provide our information providers with this information is so that they can measure the response their articles are receiving and provide you with information about their products and services.

If you do not want us to provide your name and email address you may opt out by clicking here .

If you do not wish to receive any future announcements of products and services offered by Mondaq by clicking here .

Information Collection and Use

We require site users to register with Mondaq (and its affiliate sites) to view the free information on the site. We also collect information from our users at several different points on the websites: this is so that we can customise the sites according to individual usage, provide 'session-aware' functionality, and ensure that content is acquired and developed appropriately. This gives us an overall picture of our user profiles, which in turn shows to our Editorial Contributors the type of person they are reaching by posting articles on Mondaq (and its affiliate sites) – meaning more free content for registered users.

We are only able to provide the material on the Mondaq (and its affiliate sites) site free to site visitors because we can pass on information about the pages that users are viewing and the personal information users provide to us (e.g. email addresses) to reputable contributing firms such as law firms who author those pages. We do not sell or rent information to anyone else other than the authors of those pages, who may change from time to time. Should you wish us not to disclose your details to any of these parties, please tick the box above or tick the box marked "Opt out of Registration Information Disclosure" on the Your Profile page. We and our author organisations may only contact you via email or other means if you allow us to do so. Users can opt out of contact when they register on the site, or send an email to unsubscribe@mondaq.com with “no disclosure” in the subject heading

Mondaq News Alerts

In order to receive Mondaq News Alerts, users have to complete a separate registration form. This is a personalised service where users choose regions and topics of interest and we send it only to those users who have requested it. Users can stop receiving these Alerts by going to the Mondaq News Alerts page and deselecting all interest areas. In the same way users can amend their personal preferences to add or remove subject areas.

Cookies

A cookie is a small text file written to a user’s hard drive that contains an identifying user number. The cookies do not contain any personal information about users. We use the cookie so users do not have to log in every time they use the service and the cookie will automatically expire if you do not visit the Mondaq website (or its affiliate sites) for 12 months. We also use the cookie to personalise a user's experience of the site (for example to show information specific to a user's region). As the Mondaq sites are fully personalised and cookies are essential to its core technology the site will function unpredictably with browsers that do not support cookies - or where cookies are disabled (in these circumstances we advise you to attempt to locate the information you require elsewhere on the web). However if you are concerned about the presence of a Mondaq cookie on your machine you can also choose to expire the cookie immediately (remove it) by selecting the 'Log Off' menu option as the last thing you do when you use the site.

Some of our business partners may use cookies on our site (for example, advertisers). However, we have no access to or control over these cookies and we are not aware of any at present that do so.

Log Files

We use IP addresses to analyse trends, administer the site, track movement, and gather broad demographic information for aggregate use. IP addresses are not linked to personally identifiable information.

Links

This web site contains links to other sites. Please be aware that Mondaq (or its affiliate sites) are not responsible for the privacy practices of such other sites. We encourage our users to be aware when they leave our site and to read the privacy statements of these third party sites. This privacy statement applies solely to information collected by this Web site.

Surveys & Contests

From time-to-time our site requests information from users via surveys or contests. Participation in these surveys or contests is completely voluntary and the user therefore has a choice whether or not to disclose any information requested. Information requested may include contact information (such as name and delivery address), and demographic information (such as postcode, age level). Contact information will be used to notify the winners and award prizes. Survey information will be used for purposes of monitoring or improving the functionality of the site.

Mail-A-Friend

If a user elects to use our referral service for informing a friend about our site, we ask them for the friend’s name and email address. Mondaq stores this information and may contact the friend to invite them to register with Mondaq, but they will not be contacted more than once. The friend may contact Mondaq to request the removal of this information from our database.

Emails

From time to time Mondaq may send you emails promoting Mondaq services including new services. You may opt out of receiving such emails by clicking below.

*** If you do not wish to receive any future announcements of services offered by Mondaq you may opt out by clicking here .

Security

This website takes every reasonable precaution to protect our users’ information. When users submit sensitive information via the website, your information is protected using firewalls and other security technology. If you have any questions about the security at our website, you can send an email to webmaster@mondaq.com.

Correcting/Updating Personal Information

If a user’s personally identifiable information changes (such as postcode), or if a user no longer desires our service, we will endeavour to provide a way to correct, update or remove that user’s personal data provided to us. This can usually be done at the “Your Profile” page or by sending an email to EditorialAdvisor@mondaq.com.

Notification of Changes

If we decide to change our Terms & Conditions or Privacy Policy, we will post those changes on our site so our users are always aware of what information we collect, how we use it, and under what circumstances, if any, we disclose it. If at any point we decide to use personally identifiable information in a manner different from that stated at the time it was collected, we will notify users by way of an email. Users will have a choice as to whether or not we use their information in this different manner. We will use information in accordance with the privacy policy under which the information was collected.

How to contact Mondaq

You can contact us with comments or queries at enquiries@mondaq.com.

If for some reason you believe Mondaq Ltd. has not adhered to these principles, please notify us by e-mail at problems@mondaq.com and we will use commercially reasonable efforts to determine and correct the problem promptly.