Call for Rewriting Iran Oil Contracts

EghtesadOnline: New oil and gas projects cannot be developed under sanctions unless new contracts are designed, a senior energy analyst and former head of Iran's Petroleum Contracts Committee said.

News ID: ۷۴۸۰۱۵

29 July 2019

"Under the current conditions attracting foreign investment for upstream development projects is almost impossible. We need to focus on domestic companies and pave the way for their maximum participation in development contracts," Seyyed Mehdi Hosseini was quoted as saying by ILNA.

New contracts should be designed in a way that minimizes investor risk and maximizes their profit. If this does not happen, no one will invest in risk-prone projects and energy development projects will suffer, Hosseini warned.

So long as sanctions exist, neither the new model of oil contracts -- Iran Petroleum Contract (IPC) -- nor the old buyback agreement would be attractive. “So, there is a need for a special model of contracts to encourage Iranian and foreign firms that have no links to the US financial system,” Financial Tribune quoted him as saying.

Under the present conditions “joint oilfields should be given higher priority because their expansion does not require advanced technology," he said, adding that local companies should concentrate on onshore hydrocarbon reserves as they do not need large investment and the risk factor is lower.

Referring to domestic companies that were endorsed by the Oil Ministry to develop oil and gas fields, the senior energy analyst said "political issues should be set aside and new contracts must be based on risk and reward policy -- the more risk they take, the higher the award."

Hosseini is of the opinion that importing advanced machinery and sharing technical know-how for developing oil and gas projects have become a daunting task, and that the National Iranian Oil Company too concurs that previous contractual agreements have long lost their usefulness.

Iran shares 26 oil and gas fields with its neighbors. However, due to a lack of technological and financial investments over the past several years, it has been unable to draw a substantial amount of oil/gas from the fields.

Studies show that around 20% of Iran’s recognized oil reserves and 30% of its natural gas reserves are in the fields owned jointly by neighbors.

Dysfunctional Economy

Despite Hosseini's insistence on rewriting the oil contracts,  members of the Majlis Integration Commission, including Shahmsollah Shariat Nejad, say even if the agreements are altered, an economy that depends largely on crude oil export is simply not a functioning economy.

Though moving toward manufacturing non-oil goods for export could help and curb the dependence on oil, executive bodies and decision-makers are hardly interested in the oft-spoken and much-needed shift in policy, he noted.

"Iran is not the only country which is trying to develop, and drawing on the experience of other nations can be of great help."

Under the present conditions the government “has little option but to revive the sluggish economy by supporting manufactures," but there are groups and vested interests that apparently benefit from an economy based on oil exports.

Shariat Nejad says all those who have invested in manufacturing non-oil goods are disappointed because “macroeconomic variables (inflation and currency rates) are constantly changing. Add to this the lack of investment security.”

Results of a study by the Majlis Research Center, the research arm of the parliament, shows a decline in the security climate for investment and business last autumn (Sept-Dec 2018) compared to the summer of that year.

"Recent calls for supporting production is akin to an exaggerated slogan and empty promise," the MP complained, noting that there is no will and determination [among policymakers and state bodies] to start the long-delayed journey from crude revenue to manufactures.