The recent price slump has radically changed the investment
landscape for oil companies. OPEC has signalled that it will not be
cutting production and the prospects for global economic growth are
weak. While it is not the most auspicious time to seek billions of
dollars of investment into oil and gas projects, Iran has no choice
but to do just that. Iran's oil and gas sector has been starved
of capital for years and the country is in desperate need of
revenues in hard currencies.
The search for foreign investment
The closest analogue to Iran's search for foreign investment
can be found in Iraq. The most notable similarity between the two
countries' upstream sectors being the use of a risk-service
type model to govern investments and operations.
Iraq's decision to use risk-service contracts was initially
subject to heavy criticism. International Oil Companies (IOCs) much
prefer a production sharing contract model that gives them direct
access to hydrocarbons. IOCs did not want to set an unwelcome
precedent in Iraq by agreeing to the risk-service contract model.
Nonetheless a number of the world's leading oil companies (such
as BP, ENI, ExxonMobil, Oxy, PetroChina, Shell, and Total)
ultimately accepted such terms and invested billions of dollars
into Iraq as a result. Iran would no doubt be happy with such an
The New Iranian Petroleum Contract
In November 2015, Tehran hosted companies from over 40 countries
to hear about its plans for the oil and gas sector. Iran appeared
to acknowledge that some of the criticism of the risk-service
contract model by IOCs was justified and announced that the more
favourable terms of a new Iranian Petroleum Contract (IPC) will
govern future foreign investment in the upstream sector.
Concerns about the IPC
In light of Iraq's experience and the current market
dynamic, the allocation of oil price risk under the new IPCs will
come under particular scrutiny. Simply put, IOCs will expect higher
rewards for assuming higher risks so Iran will need to approach
this issue with appropriate commercial sensitivity.
Other concerns with the IPC include the extent of the influence
of the Iranian joint venture partner over operations and whether
this might blunt IOCs' effectiveness in deploying its capital
and know how. It is also unclear how IOCs can effectively protect
themselves against the risk that sanctions snap back, especially if
this not treated as a force majeure event under the IPC.
Is the prize big enough?
The National Iranian Oil Company (NIOC) announced that IOCs can
expect the IPC to be finalised during June or July 2016. IOCs will
be invited to bid for contracts shortly thereafter. Nearly 50
projects available for licensing have been identified and the
Ministry has said hundreds of billions of dollars are required to
reinvigorate Iran's oil industry. Although this may seem
ambitious, history has proven that IOCs are willing to invest huge
sums of money regardless of legal and regulatory uncertainty,
market risk and challenging security conditions. That is, if the
prize is big enough.
With the second largest reserves of gas and the fourth largest
reserves of oil worldwide, it is likely that Iran's prize
certainly is big enough.
Major features of the IPC
Features of the IPC, as compared to the position under the
risk-service contract, is set out in the table below:
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