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    Iran Petroleum Contract Revealed: The Risks and the Rewards

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Summary

After months of confidentiality around Iran’s new model of oil contract--the Iran Petroleum Contract or IPC--the details of the IPC have been finally disclosed

by: Iran desk

Posted in:

, Security of Supply, Iran, Caspian Focus, Greater Caspian News

Iran Petroleum Contract Revealed: The Risks and the Rewards

After months of confidentiality around Iran’s new model of oil contract, known as the Iran Petroleum Contract or IPC, the details of the IPC have been finally disclosed. Despite expectations, Iran has kept its sovereignty over its hydrocarbon reserves, but the new contract has some advantages over previous models, namely contract-based and buy-back advantages. 

Iran says it needs to invest $185 billion in its oil and gas projects over the next five years. First Vice President Es’haq Jahangiri has issued a communiqué on the government’s official website relating to the general conditions and requirements of the new model of contracts for upstream oil and gas industries.

At present, the government’s approval only outlines generalities of the IPC. Full details will be announced in a conference that is scheduled to be held on November 20.

The IPC highlights the need to maximise the utilization of capital and technology of companies. The contracts will be long term and repayments will be conducted over longer periods, which will incentivise foreign investors. The National Iranian Oil Company, or its subsidiaries, is referred to as “the first side”, which is also “employer” in the contract.

The "second side" (party) of the contract, also referred to as “contractor”, is a company or a group of companies, which will implement exploration, development, production, and operation of plans individually or collectively. The National Iranian Oil Company retains ownership of oil and gas fields. Commitment to obligations in the contract will be guaranteed by the Iranian government, the central bank, and state-run banks.

Repayment of all direct and indirect expenses, as well as finance and operation costs, will be dependent on allocating a portion (maximum 50%) of products or revenues based on current day sale prices.

The contract also stipulates that all the risks and costs should be borne by the second side if targets of exploration and production for specified fields do not materialise.

In the exploration section, the "Minimum Exploration Obligation" includes geology, gravimetry, seismology, drilling, and assessment of fields with the aim of discovering new fields and making the minimum required investment within the specified period of time, which is undertaken by the second side.

The second side is also obliged to protective production utilizing modern technologies and investing in development and recovery rates, increasing plans in a proportional manner to the complexities of the fields. Meanwhile, foreign companies will be awarded with incentives for protective production.

In addition, all operations by contractors from the start of the contract will be carried out on behalf of the employer. All the properties, including buildings, goods, equipment, wells, ground and underground facilities, will belong to the employer from the same date.

One of the major risks facing foreign companies is the breaching of the nuclear agreement by Iran and the world powers and the possibility of a re-imposition of sanctions on Iran. Those sanctions previously forced the country to decrease it oil production by one million barrels per day. The IPC says if the Oil Ministry decides to reduce or stop production at any oilfield for of any reason, except for technical reasons, priority should be given to oilfields that are not committed to repayment. If such a decision is taken about an oilfield, subject to the contract, it should not affect repayment costs and fees owed by the contractor.

In each contract, domestic companies will be presented as partners for the foreign investor under the employer’s approval and will acquire technical knowledge, engineering, and managerial methods. The second side is obliged to present a plan for transferring technology, as part of its annual financial and operational program. Operation and implementation of projects will be changed alternatively by the domestic and the foreign companies.

One of the advantages of Iranian fields is their low production costs. Each barrel of oil is produced at $5-8 on average.

On the other hand, it is not known to what extent the Iranian contract will be able to compete with Iraq’s new model of contracts, known as fee per barrel. Production costs in Iran and Iraq are nearly the same. The new models of Iranian and Iraqi oil contracts are also very similar, in the sense that a percentage of oil will be paid to the producer instead of money. Meanwhile, incentives have been taken into account for higher production and protective production. The type and specifications of Iranian and Iraqi crude oils are nearly the same.

In Iraq, the contractor can permanently be the project’s operator. But, in Iran a domestic company will sign a partnership contract; operation will be changed alternatively between the two companies.

Of course, Iran has some advantages over Iraq, mainly higher security and more oil and gas reserves. Iran holds 158 billion barrels of crude oil and 34 trillion cubic meters of natural gas.

The domestic workforce in both countries receives the same amount of salary. But, Iran has numerous industrial advantages, especially the ability to manufacture a portion of the required equipment domestically at low prices to sell to the foreign contractor.