Revising Iranian oil contracts in order to absorb foreign investment

Iran's Oil Miister Bijan Namdar Zanganeh has issued an order to revise types of the ministry's oil contracts. The changes aim at "making oil contracts more attractive for foreign companies".

Probably, Iran will prefer to sign "Build-Operate-Transfer" (BOT), "Production sharing agreements" (PSA), and "Buyback" contracts.

Build-operate-transfer (BOT) is a form of project financing, wherein a private entity receives a concession from the public sector to finance, design, construct, and operate a facility stated in the concession contract. The company then is allowed to operate the project in order to to recover its investment, operating and maintenance expenses in the project. When the contract expires the company will transfer the project competly to the government.

Production sharing agreements (PSA) can be the most interesting kind of contract for foreign investors. Under the agreement, the investor company and the government will share the resources extracted from the project. Iran is very careful about the ownership of its oil and gas fields but it has announced that it will study this kind of contract for joint fields as well.

In Buyback contracts, a company agrees to finance and provide technology for constructing a project. Once the projects is complete, it will be handed over to the government. The company then recovers its investment, operating and maintenance expenses in the project by receiving a portion of the project's production or the equivalent in money. In other words, the contractor will provide the money and technology necessary for constructing the project in exchange for a portion of the product (for example oil and gas). There are a diverse range of repurchasing agreements, but only one kind (buyback) is legal in Iran.

Iran's need for foreign investment and technology

Iranian government is in dire need of money and financial resources and can't afford paying the expenses of giant projects in the energy sector, so it needs the money of domestic and foreign private companies to carryout the projects.

Iran's oil and oil products exports, which account for over 80 per cent of the country's total exports, have faced a significant falling trend in the past two years. The country's oil exports was around 2.2 million barrels per day in 2011 but the figure has fallen to below one million barrels.

Due to sanctions against the country, Tehran is not able to receive its oil revenues in any currency. Therefore it can just import legal goods from the destination country in exchange for the exported oil.

Iran's gas condensates exports also faced a 26-per cent decrease in the mentioned period, while the country's petrochemical products exports fell by 40 per cent.

Iran's gas condensate, and petrochemical products exports stood at $10 billion and $15 billion, respectively, in 2011.

Several oil and gas projects in Iran have been halted (or their progress is very slow) due to financial problems or lack of technology. The projects' expenses have increased sharply, as well.

For example, in the absence of foreign companies, it was estimated that phases 11 to 24 of the giant South Pars gas field will come on stream at the cost of $40 billion. But some $46 billion have been invested in the project so far while none of the phases are complete yet. According to the former Iranian Oil Minister Rostam Qasemi another $30 billion should be invested in the project. Iran's oil projects are suffering same problems, as well.

Obastales and problems

Iran can absorb both foreign investment and technology by signing buyback, PSA and BOT contracts. But besides persuading foreign firms to invest in Iranian projects, the country faces 3 main problems: domestic legal obstacles, international sanctions, and the government's dire need to spend profits of the projects.

Iran also needs to get quality guarantee from foreign firms in order to benefit the projects' full-capacity production in the long term.

Domestic legal obstacles: Only one kind of repurchasing agreements - buyback contracts - is legal in Iran and that consists of providing a portion of product in exchange for technologies and services. The process of signing such contracts is also very long and many organizations including oil ministry, Parliament (Majlis), four other economy-related ministries, the country's Presidential Office, Money and Credit Council, and the Central Bank of Iran should approve the deal.

Internatonal sanctions: Currently investing in Iran's oil industry, as well as selling oil-related technologies have been sanctioned by the United States. Also the European Union and the USA have approved sanctions that ban their companies from purchasing oil from Iran. In other words, foreign companies neither can invest in a project inside Iran, nor can export the products of the projects.

Iran's dire need for export money: BOT contracts obligate the government to give the extraction rights of the oil and gas projects to the investor for a long time. So the government should wait for several years until the company recovers its investment, operating and maintenance expenses in the project. Then the company will transfer the project to the government.

The buyback contracts are usually long-term as well. Besides, Iran's oil, petrochemicals, and gas condensates, output is currently way below the country's capacities due to international sanctions and Tehran's problems with exports.

Also, no western company will accept oil and gas from Iran because of the sanctions, so Tehran has to pay the equivalent money to the investors. But the Iranian government lacks enough forex and is facing severe enough problems to provide enough foreign currency to import necessary goods such as medicines. Also, due to the special situation regarding international sanctions, the investors will ask for higher risk expenses, which will increase project costs for Iran.


Dalga Khatinoglu   /Trend/