The Iranian constitution prohibits foreign or private
ownership of natural resources, and all production-sharing agreements are
prohibited under Iranian law," as outlined by the Energy Information
Administration (EIA).
To get around this issue, buyback contracts allowed
international oil companies to enter into exploration and development contracts
through an Iranian affiliate. Through these buyback contracts, investors were
paid in oil and gas from projects they developed with their own money, and then
ownership of the field reverted back to the National Iranian Oil Company once
development completed. With the lax in economic sanctions and Iran's attempt to
lure foreign investment, it is believed that these contracts would be amended.
Salient points of a Buy Back Contract:
- Buy Back contracts, are arrangements in which the contractor funds all investments, then transfers Operatorship of the field to NIOC (Hand Over) after the facilities are in place and production has commenced and then receives remuneration from NIOC ( National Iranian Oil Co.),
- In other words , Buy Back’s are essentially risk-service contracts, according to which the contractor funds all investments, takes all risks such as exploration risk, production risk, etc.
- The contractor then recoups it’s investment after commercialization and subsequent development of the field and receives remuneration from the NIOC. The remuneration fee is based on an agreed contracted Rate of Return (ROR) and can be paid in the form of NIOC’s allocation of a share of it’s production equal in value to the amount due or cash.
- In addition to this, the Contractor is entitled to bank charges at LIBOR plus 0.75% on the costs incurred till it has recovered the same.
- Cost Recovery by Contractor: The Contractor is allowed to recover all costs, bank charges, Iranian tax and Remuneration fee from a maximum of 50% of gross revenue less operating costs of the year. Capital Costs and Non-Capital Costs, incurred and paid by Contractor together with Bank Charges shall be amortized in equal monthly installments over 8-10 Cost Recovery Years from commencement of production.
- Remuneration Fee to Contractor: Remuneration Fee will be calculated immediately after Development Ceiling Costs are determined so as to give a ROR (as bid) to Contractor based on the Production profile as per the Development Plan. The calculation of ROR will be based on the Contractors’ Net Cash flow calculated as the difference between Cash Outflow by Contractor and the Cash Inflow to Contractor. Cash Outflow is defined as the sum of Capital Costs and Non-Capital Costs and Cash Inflow is defined as the sum of Capital Costs recovery, Non-Capital Costs recovery and Remuneration Fee. The ROR will be the nominal discount rate that brings the NPV of the Contractor Net Cash flow to zero.
- If the actual production is lower than MDP production profile, the Remuneration Fee decreases consequently the return decreases, as the difference between the resulting adjusted monthly installment and the initially projected monthly installment is not allowed for carry over and thus is not recoverable by contractor.
- If actual production is higher than the production profile as per Development Plan, the ROR may be increased by up to 1% for the relevant installment.
- No recovery of Capital Costs beyond the agreed amount is allowed.
Proposed new Iran Petroleum Contract (IPC):
Key objectives of the IPC are:
• Integrating both the Exploration and Production phases;
• Helping the Iranians achieve enhanced capacity,
maintenance and reserve recovery;
• Attracting foreign capital, services, know how and
technology;
• Establishing long term relationships with foreign
partners; and reducing the investment risks by offering more flexibility in
investment costs.
Under the new terms, state-run National Iranian Oil Co.
will form joint ventures for crude and gas production with international
companies to manage projects, provide financing and maximize hydrocarbon
recovery. Foreign companies conducting exploration projects will be paid for
their work with a share of the output, according to presentations at a recent
oil and gas conference in Tehran.
International companies seek access to hydrocarbons to
book reserves, a form of reporting by which they can claim a share of oil and
show they can replace barrels they produce. Under the IPC, there will be
provisions allowing transfer of ownership of hydrocarbons to the foreign
parties at defined deliver points. The companies, which would have no rights
over the reserves, would be able to report output they receive as payment once
a field reaches its production targets and after exploration is complete.
International companies will act as the sole operator at
oil and gas exploration blocks and will be responsible for the risks of those
projects. NIOC may be a technical partner in the developments. The ventures
will have 15 to 20 years to pump oil after seven to nine years of exploration
under the new contracts.
Fees paid to international companies will be linked to
the oil price and determined on a sliding scale, with riskier developments
paying more. Iran is giving priority to investment in common fields shared with
neighboring countries such as Iraq and Qatar, and work on those deposits will
be remunerated at the higher rate.
The IPC is also to be designed to take advantage of the
IOCs marketing expertise and give Iran access to their supply network to find
an export market. However, the IOC will be required to meet the Iranian local
content requirement which will be 51% of the contract value. Additionally
disputes will be settled under Iranian Laws.
It is clear that the IPC is geared for the large IOCs and
for the shared fields ( i.e. fields shared with other countries – Iraq, Qatar,
Saudi Arabia). Iran is seeking to access technology and upgrade it’s technical
capability through joint ventures. Iranian content is to be at 51% as currently
proposed. The new IPC seeks to alleviate concerns associated with buybacks as
under:
1. Avoidance of all existing obstacles in current
Buy-Backs
2. Moving towards international recognized concept
3. Balance the Risk-Rewards of the investors
4. Maximize incentives for investors in low and high risk
Areas
5. Integrated operation (E ,D, P)
6. Maximize alignment of the benefits of the parties
7. Best technical approach to the operations ( E,D,P)
8. Partnership for better operations
9. maximize recovery factor
10. Adoption of model for IOR/EOR operations
11. Premiership of the common fields
12. Flexibility in scope and costs changes
