Local firm is first recipient of Iran’s new oil contract designed to attract foreign majors

Local firm is first recipient of Iran’s new oil contract designed to attract foreign majors
By bne IntelliNews October 5, 2016

Iran’s long-awaited new framework for oil and gas contracts, the main aim of which is to lure back international energy companies to the country’s investment-starved energy industry, had as its first signatory a local company called Persia Oil and Gas Industry Development Company, according to Iran’s energy news agency SHANA.

The so-called Iran Petroleum Contract (IPC) is designed to draw a line in the sand of the former “buyback” system, which limited foreign companies’ equity stakes in Iran’s oil and gas fields, and did little to attract international oil companies’ interest. The new system allows for further negotiation in determining ownership percentages of fields on a case-by-case basis and has been dubbed “Advanced Buyback” by Iran’s oil ministry. Under the IPC, companies will be able to tender for fields, but still bans the sale of them to foreign entities as per the 1979 Islamic Republic constitution. The case for local companies like Persia Oil and Gas remains negotiable over how much share they can take in the state-owned fields.

According to the 20-year agreement worth $2.2bn signed on October 4 between the Iranian Ministry of Petroleum and Persia Oil and Gas, the local company has been commissioned to explore and develop the Yaran, Koupan and Maroun oilfields in Iran’s Khouzestan region, boosting output by 75,000 barrels a day (b/d) to 260,000 b/d. The fields contain a total of 14.5bn barrels of oil in place, of which 2.5bn are exploitable under the current recovery rates.

Persia Oil and Gas is an affiliate of the Tadbir Group, which itself is a subsidiary of the Setad Ejraiye Farmane Emam (The Executive Headquarters’ of the Imam [Khomeini’s] Directives). This was created at the beginning of the 1979 Iranian Revolution and is estimated to be worth over $95bn. It is under the sole ownership of the current supreme leader, Ali Khamenei.

As part of the deal, Persia Oil and Gas can form a consortium and team up with foreign partners if it was deemed necessary in terms of gaining finance and technology, such as enhanced oil recovery techniques. 

Persia Oil and Gas, being an Iranian company, was a shock candidate to be the first to sign the new IPC, with most analysts expecting a headline foreign name to be the first. “I don’t exactly know why this has happened – it just shocked our entire company,” one oil analyst in Tehran who asked not to be named told bne IntelliNews, adding that foreign companies might have “remained hesitant over the supposedly upgraded offer.”

In 2015, Iran’s oil minister Bijan Namdar Zanganeh made out originally that the signing of the first deal under the new IPC would be a watershed moment that would attract foreign companies back to Iran’s under invested fields. Following the signing, Zanganeh told Iran’s sole state broadcaster Islamic Republic of Iran Broadcasting (IRIB) that: “Iran needs more than $100bn investment to develop its oil and gas sectors. We do welcome cooperation with all companies [both local and foreign] that can provide the capital needed to develop the latest technology.”

Ali Kardor, CEO of National Iranian Oil Company (NIOC), the state energy company, said earlier in the week that international companies would be able to send in their sealed bids for another field called South Azadegan.

Other oil fields should also be coming up for tender as the Rouhani administration rushes to sign contracts before the next election to prove it can deliver on the president’s election promises over reforming the economy in a bid to win a second term. 

The Iranian government has been eager to attract foreign capital back into the country in recent months, but has faced obstacles along the way, including hostility from some sections of the Iranian revolutionary establishment over how far and fast to open up sections of the economy. Resistance by hardline elements held up the finalisation of the new IPC for months, fearing that foreign companies would take all the profits from Iran’s vast oil and gas wealth, as the forerunner to BP Anglo Persian Oil Company did in the early half of the 20th century.

Those fears resulted in the IPC being altered as it wended its way through several committees that felt it gave foreign companies too much leeway. However, industry analysts who have studied it said that the only changes made by the committees was related to the definitions of the IPC. The main changes were with regards to local companies and partnerships, which could go some way to explaining the signing on October 4.

Iran increased production from 814,000 barrels a day (b/d) during sanctions to 3.6mn b/d during the summer. The current estimated production is 3.8mn b/d, with the country’s ageing infrastructure working at full capacity. Iran’s Ministry of Petroleum hopes to push that figure over 5mn b/d in the next year, but is struggling to find foreign investment.