Speculations on the Contents of the New Iranian Petroleum Contracts: Buy-Back in Disguise?
Published 6 February 2015
Abstract
February 2015 - The sudden decrease in oil prices which has come to Rouhani's administration as an unpleasant surprise coupled with Iran's momentary failure to come to a nuclear settlement with the West has put a lot of strain on Rouhani's government, an administration that came to power mainly with the promise of better economic prosperity for Iranians. To this we must add the prospect of over-supply in the market in mid-term due to the discovery of shale gas in North America. All this has translated into more concerted effort on the part of the Iranian government to provide incentives for foreign investors. In an attempt to attract more foreign investment and to incentivize oil giants to develop its ageing petroleum reserves, Iranian Petroleum Ministry has been working on a new type of Oil Contract since the new administration has taken office. While initial plans to formulate a new contract model date back to the beginning of 2014, current circumstances give the country all the more reason to pursue the plan more vigorously. Despite this, introduction of this Contract Model has been delayed in the hope of reaching a nuclear settlement.
Iranian Petroleum Contract Model responds to a very common criticism of Buy-Back that there are too many risks to bear by the foreign investor and little reward offered in return. In the newly-drafted Contract model, costs are to be shared through a joint venture mechanism. While Buy-Back is a short term service contract, IPC aims to establish a longer term relationship, lasting up to 25 years, with investors through integrating exploration and development phase. In essence, IPC is more similar to a classic production sharing agreement than a pure service contract. According to the Iranian Petroleum Minister, once concluded, the contract model will be given in to the government for approval, while there will be no need for parliamentary approval.
Footnotes omitted from this introduction.