Iran plans to offer more generous terms to oil investors

Iran said to make it easier for international oil companies to tap into its lucrative oil and gas reserves if sanctions are lifted.

Iran, seeking billions of dollars to revitalise its ailing oil industry, plans to offer significantly better commercial terms to companies prepared to invest than offered during the last market opening nearly two decades ago.

Foreign oil executives who have reviewed partial drafts of the new terms, called the Iranian Petroleum Contract, said they’re more generous than the types of deals used in the 1990s and 2000s. Unlike those contracts, which merely paid a set fee for the delivery of a project, the new agreements could give investors some share of a field’s production and allow companies to book more reserves on their balance sheet.

Such arrangements would probably make Iran commercially more attractive than regional competitors for international investment including Iraq and Algeria. The executives asked not to be named because Iran has yet to announce the new contract and terms could still change.

“In simple terms, the message from Iran is that if the sanctions are lifted, in return Iran will offer improved contractual terms to make it easier for international oil companies to tap into its lucrative oil and gas reserves,” said Amir Kordvani, a Dubai-based lawyer at Clyde & Co, a firm specialising in the natural resources industry.

Iran sees the return of foreign firms as a key goal from a potential nuclear deal with the US and the fact the government has started circulating drafts of the terms suggests Iran is expecting to seal an atomic deal. Iran needs $200 billion of investment in its oil industry, oil minister Bijan Namdar Zanganeh said last month.

Iran is likely to test the appetite of foreign oil groups this week during a conference before the Opec meeting in Vienna attended by the bosses of the world’s largest publicly-listed oil companies, including Exxon Mobil, Royal Dutch Shell, Chevron, BP and Total.

Iranian officials working on the contracts at government ministries weren’t available when contacted by phone or email.

Tehran has yet to complete the new contract but oil executives said that Iranian officials have shared several draft versions of the terms, probably to test both the reaction of the foreign oil companies as well as domestic political factions. The executives said some of the drafts contain contradictory language but they share a common theme: the conditions are much better than in the late 1990s.

The biggest novelty is that Iran is offering agreements that resemble production-sharing contracts, or PSCs, the terms favored by international oil companies. Iran’s constitution bans foreign ownership of oil, making traditional PSCs impossible.

The production-sharing model gives international companies a share in the output of an oilfield as payment for their investment. They also allow foreign groups to book the reserves in their books, boosting their balance sheets. When Iraq opened to foreign investors six years ago, it offered service contracts rather than production-sharing agreements.

Fereidun Fesharaki, chairman of consultants Facts Global Energy, said Iran will likely offer better terms than neighbors like Iraq in order to entice companies back after a decade of sanctions that effectively froze investment in the country.

“This is a look-alike,” Mr Fesharaki said, comparing Iran’s draft contract models with a production-sharing contract. “You give it all the characteristics but PSCs aren’t allowed under the Iranian constitution so what you do is you look at all the benefits of it and you make it possible.”

International oil companies are already taking positions. Eni SpA, the Italian group that invested in Iran in the early 2000s, has declared its interest in returning to the Middle Eastern country if the nuclear sanctions are lifted.

"I think by year-end Tehran could propose a new type of contract, more similar to international standards and less penalising for operators," Eni chief executive Claudio Descalzi told Italian newspaper La Repubblica in May.

In private, the message from other companies is similar, with executives saying they are interested in playing a role in developing Iran’s energy potential. The message is far less guarded than in the past, when oil majors largely said they were going to stay away from Iran.

The interest is understandable: Iran is home to the world’s fourth-largest oil reserves, only behind Saudi Arabia, Venezuela and Canada, and the second-biggest cache of natural gas.

The potential return of international oil companies to Iran if the nuclear sanctions are lifted would be the second time the country’s hydrocarbon sector opened in 20 years.

After an almost two-decade hiatus following the Islamic revolution, Tehran tried to lure back foreign oil companies in the early 1990s. It first turned to the US, reaching a $1 billion deal with Conoco in 1995 that was almost immediately scrapped under pressure from the White House. After a false start with the American group, Tehran signed several deals with European majors including Total and Shell. The European companies withdrew later due to the nuclear sanctions.

Today, Iran’s need for foreign capital and technology is more urgent. The country pumps 2.8 million barrels a day, down from more than 4 million a decade ago and a peak of 6 million in 1974.

The International Energy Agency has said Iran’s largest fields, including Gachsaran and Marun, which have been in production for more than 50 years, are in “sore need” of rehabilitation.

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