Cyrus Ashayeri, Los Angeles
Manouchehr Takin, London
The new Iranian Petroleum Contract (IPC) is to be officially announced during the Tehran Summit on November 28th and a second conference in London in February 2016. On October 19-21, 2015, the first Iranian Petroleum and Energy Club (IPEC) – not to be mistaken with IPC - congress took place in Tehran. This event was heavily focused on the current status of the energy industry in Iran. There were panels on the upstream, petrochemicals and refining, natural gas, LNG, power and renewable energies. The three day conference was opened by Gholam Reza Manouchehri, the congress secretary, and the CEO of IOEC (Iranian Offshore Engineering and Construction Company) followed by speeches by Rokneddin Javadi, the deputy oil minister and the managing director of NIOC and Bijan Namdar Zangeneh, the Iranian oil minister. This conference took place in a promising ambiance, immediately after the announcements of the planned lifting of the nuclear related international sanctions imposed on Iran by the United States and the European Union. Despite being held before the official announcement of the new Iranian Petroleum Contracts (IPC), this conference provided invaluable information on what to expect from the opening of the Iranian energy industry in the coming months. The low production cost ($5 to $10 per barrel) of Iranian fields could be attractive in the current market conditions and many international companies are carefully observing the Iranian oil scene.
Why is Iran introducing a new form of oil contract?
To answer this question, one must take a look into more than a century of oil industry history in Iran. After the discovery of the first commercial oil well in Masjid Suleiman in 1908, Iranian oil was produced under concession contracts for more than four decades until the nationalization of the oil industry in 1951. An agreement with an international consortium of American, British, French and Dutch companies was made in 1954 for an Agreement Area covering most of Iran’s southern oil provinces. In the late 1950s, 1960s and 1970s, other agreements were made with many other international companies for exploration and operation outside the Agreement Area and in the Persian Gulf.
After the 1979 Islamic revolution, all international contracts were canceled. The Iranian oil industry suffered during the eight year war with Iraq. Field operations were expanded after the ceasefire in 1988. However, the Iranian government and the Parliament recognized the need for outside capital and technology and adopted the Buy-Back contract model to revitalize the country's oil production. The first such contract was made with the US firm Conono in 1995 and similar contracts with other companies resulted in the implementation of a number of exploration and field development projects in the late 1990s and the early 2000s. The total production contribution from the completed and operational Buy-Back projects has been 8 billion cubic feet per day natural gas, 320 thousand barrels per day gas liquids and 700 thousand barrels per day oil. The expected total production contribution from the completed but non-operational Buy-Back projects is expected to be 3 billion cubic feet per day natural gas, 120 thousand barrels per day gas liquids and more than 500 thousand barrels per day oil.
Today, after more than two decades of Buy-Back contracts, the Iranian government has decided to revisit this contract model, attract investment and modern technology, conduct exploration and development operations and rapidly increase the country's oil and gas production. Iran expects that its new contract model – Iran Petroleum Contact (IPC) - will attract significant foreign investment by removing the limitations and restrictions of the former Buy-Back contracts.
What are the top priorities in the new contracts?
Almost all key authorities of the Iranian oil and gas industry have announced four main objectives as the goal of the IPC:
- Attract foreign investment
- Rapid development of shared oil and gas fields
- Increase production levels by implementing improved oil recovery (IOR) and enhanced oil recovery (EOR) methods
- Technology transfer through partnerships and training programs
Seyyed Mehdi Hosseini, Head of the Oil Contracts Revision Committee, photographed at the IPEC Congress.
The general outline of the IPC
So far, according to published and unpublished information, the goal of Iran's opening is to establish 'win-win' deals between Iran and the international oil companies. Some of the salient features of the new contract model could be summarized as follows:
- The IPC includes all stages of exploration, development and production. IOCs must provide investment and manage all operations.
- Improving the extraction of hydrocarbons from the currently producing fields: The average recovery factor for major Iranian oil fields is believed to be about 25%. Based on the reserves studies, there is an estimated 600 billion barrels of oil in place in Iran which means increasing the recovery factor by only 1% could result in producing an additional 6 billion barrels.
- Development of Green fields followed by a production period based on the contracts: IOCs must enter partnerships with Iranian companies to ensure considerations such as technology transfer and local workforce. The foreign partner should prepare a development plan and should form a joint venture with a domestic partner. These should be approved by NIOC. The IOC will be responsible for field development operations and for producing the field during the term of the contract and NIOC will take over after the end of the contract. Joint venture development plan and cost estimations must be on an annual basis.
- The exploration blocks are identified and announced by NIOC and minimum exploration obligations are integrated into the initial contract: The exploration phase can extend to 7-9 years. In case of commercial discovery, IOCs can enter a new development and production phase by signing a new contract. NIOC will decide if a new discovery is commercial or not. To attract more companies, it is anticipated that the new form of contract allows up to 25 years for the joint ventures. If a company fails to discover commercial quantities of hydrocarbons before the end of the contract period, it may be granted exploration license in some of the neighboring blocks. Otherwise, the initial block is divided into smaller blocks and the unsuccessful blocks will be relinquished to the government.
- Remuneration fees are calculated based on production: Unlike the Buy-Back model, fees will be determined as a percentage of production, in terms of dollar per barrel of crude oil or condensate per day or thousand cubic feet per day for natural gas. The fees are also structured in a flexible manner to be able to respond to dramatic changes in technical or financial conditions.
- Correlation between risks and profits: higher fees are considered for projects categorized as high risk. Risks are evaluated and announced by NIOC. From an operational point of view, the exploration blocks are divided into five different categories such as onshore/low risk or offshore/high risk.
IPC is more flexible
According to Seyyed Mehdi Hosseini, the head the oil contracts revision committee, the new contracts provide a win-win situation for both sides based on the revised fiscal regime, governance, and dispute settlement considerations.
A fair fiscal regime with the acceptance of actual costs and a sensible cost recovery period alongside a balanced risk and reward approach are supposed to provide incentives for international companies to engage in long term contracts with Iran. IPC will offer a smooth operational environment by decreasing the involvement of NIOC and using third party experts in case of financial or technical disputes with NIOC or affiliate companies.
IPC has a new approach towards taking into account dramatic changes during the period of the contract. Changes such as global oil prices or reservoir behavior can result in recalculating the terms of the initial contract in order to balance the risk and reward between NIOC and the international operators.
Along with the above-mentioned flexibilities, there are some restrictions and obligations associated with the IPC. Some of the announced obligations are: Utilizing maximum Iranian workforce, purchasing at least 51% of the products and services from the Iranian domestic market, and conducting necessary training and educational programmes for the Iranian workforce.
About the authors
Cyrus Ashayeri is a graduate researcher at the University of Southern California, with BS in Chemical Engineering, and MSc degrees in Petroleum Engineering and Geoscience Technologies. His research has been focused on the global energy economics and unconventional resources in OPEC countries.
Manouchehr Takin is a London-based independent global oil and energy consultant with over 40 years' oil and gas industry experience spanning: Centre for Global Energy Studies, Organization of the Petroleum Exporting Countries (OPEC), International Oil Consortium in Iran, Amoco, Ultramar, National Iranian Oil Co. and Shell, as well as the Geological Survey of Iran and Anglo-American/Charter Consolidated. Dr. Takin holds a BSc in Geology from Manchester University, a PhD in Geophysics from Cambridge University and an MBA from the Industrial Management Institute, Tehran.