Foreign investment reforms in Iran’s oil and gas sector

Iran first announced its reform of foreign investment in the oil and gas sector in November 2015. About 50 oil and gas projects were intended to be developed by foreign investors with local partners under a new scheme. Cabinet approved the general terms of the new scheme on 3 August 2016. Some expect the first post-reform projects to be awarded before the end of 2016.

Iran’s hydrocarbon reserves are significant. Its reserves are in global terms fourth for oil and second for natural gas. To realise its full potential, Iran hopes to attract USD $200 billion of foreign investment over the next 5 years. IP transfer is at the core of this reform.

Traditionally, Iran has used buyback contracts. The reformed scheme utilises a new model – the Iranian Petroleum Contract. However, similar to buyback contracts, the new model is still a risk service contract at its heart, meaning that the contractor is expected to fund exploration and development in return for the right to recover its costs and a fee – if successful.

Although the Cabinet has approved the general terms, the precise terms will be negotiated for each project. We will not know the full implications of the new model until after the bidding and negotiation for a specific project.

Currently, some uncertainties for the IOCs (such as British Petroleum, France’s Total, Noway’s Statoil, China’s Sinopec, Shell, Italy’s Eni and Spain’s Repsol) are as follows:

  • The scope for negotiation of the projects, and more importantly, the possible degree of genuine commercial negotiations is unclear;
  • The Cabinet requires partnerships with local partners. The suitability, financial and technical capacities of the local companies will require careful assessments;
  • The tender process design and the substantive bidding requirements are unclear;
  • The extent of the commitment to IP transfer for any IOCs is unclear;
  • Iran also expects Iranian nationals to have managerial responsibilities, but the scope of their role is again to be seen.

 

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