Iran: towards a new model contract

Iran is one of the most hydrocarbon rich countries in the world. However, the waves of international sanctions over the past decades, many of which targeted the oil and gas industry, have resulted in a significantly reduced technological advancement and investment in Iran’s oil and gas sector.
The Iran nuclear deal framework as agreed between Iran and the P5 + 1 (the permanent members of the United Nations Security Council – the United States, the United Kingdom, Russia, France, and China plus Germany), plus the European Union, together with the Joint Comprehensive Plan of Action as signed in Vienna on 14 July 2015 has resulted in an accord whereby, in return for the lifting of economic

sanctions, Iran has agreed to limit its nuclear activities.
This change in political landscape has meant that international companies, particularly those involved in the oil and gas industry are increasingly looking to Iran for new opportunities. It is within this context that the contractual framework available as between the National Iranian Oil Company (“NIOC”) and International Oil Companies (“IOC”) is most relevant.

Iran’s Buy-Back contracts

Under the 1979 Iranian Constitution, a foreign party cannot privately own, nor be granted a concession to, Iran’s natural resources. In order not to infringe the Iranian Constitution or Iran’s legislation, Buy-Back contracts were introduced to attract foreign investment in Iran’s oil and gas sector, whilst simultaneously maintaining the NIOC control over production.
The Iranian Buy-Back contracts were broadly short term risk service contracts entered into between the NIOC, or one of its subsidiaries, and an IOC, under which the IOC agrees to develop an oil or gas field in return for a remuneration fee, usually based on a pre-agreed percentage of the production of the field and a pre-agreed rate of return.
Iranian Buy-Back contracts were generally unpopular with IOCs, although there was some limited success in the development of various Iranian oil and gas fields. IOCs would usually bear a higher degree of risk associated with development costs and project completion date and had insufficient control over operational issues. Crucially, they did not enable IOCs to “book reserves” because of the way in which they were remunerated: cash, not production.

New Iranian Integrated Petroleum Contract (IPC)

In order to bolster the oil and gas sector and attract foreign investment and technology, Iran announced in 2013 that it was drafting a new model contract to govern upstream hydrocarbon activity. The new model contract provides a new contractual framework under which an IOC can operate in the oil and gas sector. Whilst the new Iranian Integrated Petroleum Contract (“IPC”) has not as yet been finalised, there have been indications that the new model will be something of a hybrid between the old Buy-Back contract and typical Production Sharing Contracts.
Under the new IPC, it is anticipated that while the hydrocarbon ownership requirements will remain with the state, an IOC will be able to partner with the NIOC under a Joint Venture Partnership to carry out exploration, development and production activities. One of the aims under the new IPC joint venture structure is to enable Iranian experts to become familiar with the new technologies, whilst the IOC is likely to have increased management and control over the project.
In contrast to the Buy-Back contracts, the IPC could integrate all three stages of exploration, development and production under one contract, offering a smoother transition from exploration to production, should a commercial discovery be made.
The duration of the IPC is also said to be longer, and is projected to last from around 20-25 years, which is significantly longer than the old Buy-Back model.
There is also speculation that under the IPC, there will be some flexibility for the rate of return that IOC can gain. It may be that should an IOC fail to make a discovery, then it may have the opportunity to explore an alternative field. It is also hoped that the IPC will be structured in such a way that listed IOCs will be able to book the reserves for the purposes of its annual accounts.

Announcement of the IPC

The new finalised draft of the IPC has yet to be made public and the delays in its presentation may have been attributed to the delays in finalising the Iran nuclear deal framework. The Iran oil and gas summit is due to take place in London on 22-24 February 2016, where it is anticipated that further details of the new IPC will be provided.

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