Iran to consider letting foreigners share oil profits

In a bid to lure more offshore investment, Iran may break a longstanding resistance to foreigners sharing the spoils of its energy wealth.

In a bid to attract more foreign investment to its oil sector, Iran is considering offering foreign companies a share of production profits for the first time since the Islamic revolution in 1979. A government television station broadcast comments by a senior official saying the government was considering utilising what are known as production-sharing agreements on a limited basis. Any move to offer foreign companies a share of production profits - as opposed to fees for services - would mark a radical change to Tehran's energy policy. Offering the contracts across the board - unlikely at present - would be "a huge development" for the country, said Mehdi Varzi, president of the London-based consulting firm Varzi Energy. According to press reports, Hojatollah Ghanimifard, the deputy director for investment affairs of the National Iranian Oil Company (Nioc), said Iran is in talks with the Indian state-owned Oil and Natural Gas Corporation and the Chinese government-owned China National Offshore Oil Corporation over the development of deepwater oil prospects in the south Caspian Sea. Nioc is reportedly considering proposals to offer production sharing contracts for Caspian offshore development as a special case. Government-owned Press TV said Iran recognises high exploration costs could make "special treatment" necessary. "We think this region might be the exception to the rule," it quoted Mr Ghanimifard as saying. For the past two decades, Iran has allowed foreign participation in oil and gas development solely on the basis of buyback contracts, under which international oil companies make upfront investments in exploration and development, then hand fields over to Nioc once production starts, recouping their costs at a pre-agreed rate. Tehran has consistently argued that the buyback model offers adequate investment incentives, but analysts disagree. "The buy backs have essentially failed. They are extremely complicated, take a long time to negotiate and offer poor terms to foreign investors," Mr Varzi said. Iran's efforts to exploit its Caspian region could represent an important first step toward replacing them. The "special case" argument could buy political leeway for the proponents of such a change. The new proposals come as US-led sanctions over the country's controversial nuclear programme are hampering Iran's energy development in other areas, including the giant South Pars gas field in the Gulf. Mr Ghanimifard indicated production-sharing contracts would not be considered for South Pars, as costs would be lower than in the south Caspian Sea. He said a "huge increase in the cost of materials" has been partly to blame for development delays. Several European oil companies, including Royal Dutch Shell, Total, Repsol and Statoil Hydro, have recently quit South Pars, citing political risk. Nonetheless, Seifollah Jashnaz, the managing director of Nioc, said yesterday that several South Pars development phases would be brought on stream by the end of the Iranian year next March 20. He also said Iran was producing a post-revolution record 4.23 million barrels per day (bp) of oil and would increase output to 4.3 mbd by March. Mr Varzi said that for production-sharing agreements to make a difference, Iran's government would need to develop a new consensus on oil development. The agreements would need to be created on the basis of internationally developed standards, and properly understood by Iranian officials, Mr Varzi added. "If the Iranians cannot see the wood for the trees, then you get into a tedious negotiation process lasting two to three years, and people would just get sick and tired of it," he said. [e-mail]