Author: Nadiya Nychay
Date: December, 2015
After years of high-level political negotiations, 2015 seems to be the year when Iran makes a full comeback on the international scene. Despite the implementation of the Iran nuclear deal only taking place in 2016, international investors around the world are keen to find out anything they can about business opportunities in the Islamic Republic. While attractive investment opportunities can be found in many sectors of the Iranian economy, some of the most lucrative ones are related to Iran’s wealth of natural resources. Iran was the seventh largest global oil exporter in 2014. It reportedly has the world’s fourth largest crude oil reserves as well as the world’s second largest natural gas reserves. Nevertheless, Iran’s current oil output of slightly over 3 million barrels per day stands at only half of the oil output during the mid-1970s. The crucial question for many investors concerns the precise forms in which they would be able to enter Iranian petroleum markets.
Main features unveiled
In order to provide more clarity on this question, a conference was held in Tehran in late November 2015, where some, though not all, details of the new model contracts (Iran Petroleum Contract or IPC) were unveiled. This conference was attended by 137 companies from 45 countries, although not a single US company was present. In spite of many participants’ expectations, a template of the new IPC was not unveiled; only an overview of its main features was given. More details are expected to be provided during a London summit, scheduled for February 2016.
Buyback system
Nevertheless, the information available to date already allows us to make some observations about the main aspects and features of these new contract models, as well as some useful comparisons with the system previously in place in these sectors – the so-called Buyback Programs.
Under the buyback system, not only was it impossible for a foreign company to book petroleum reserves, it was also not possible to own stakes in an Iranian company. The new contract model does allow foreign companies to book reserves in some cases, however, it will still not be possible to own Iranian oil fields. Given the fact that Iran will maintain sovereignty over its hydrocarbon reserves, foreign contractors will have to choose an Iranian partner in order to establish a joint venture and develop a project. The National Iranian Oil Company will retain ownership over oil and gas fields. In each contract, foreign companies will be required to present a plan for transferring technology as a part of its annual financial and operational program. As for financial incentives, foreign investors will be compensated per barrel produced in excess of the minimum agreed production amount, without a fixed price per barrel and aggregate amount payable. Regarding costs, a maximum 50% of revenues based on current day sale prices may be allocated to the repayment of expenses, as well as financing and operating costs. This means that both the contractor’s fee as well as the repayment of his expenses will be based on the actual price of the oil or gas at the time of production.
Duration
Another important feature of the new Iran Petroleum Contract is its duration. With a potential span of up to 15-20 years, the new pacts could run for twice as long as the previous buyback programs. Foreign investors will even have the option to extend contracts for an additional 5 years. In the event that the Iranian Ministry of Petroleum decides to reduce or stop production at any oil field, the IPC states that it will look first to oil fields not committed to repayment. This clause would, however, not apply in case of reduction or termination of production for technical reasons. Furthermore, these decisions should not affect repayment costs and fees owed by the contractor.
Disputes
A possible further worry for international investors is that disputes will most likely not be referable to international arbitration. Despite allegations that the IPC would “change dispute resolution regulations,” the overwhelming impression is that contracts will still be governed by Iranian laws and that disputes will be handled by the courts of Iran.
Snap-back provisions
Last but not least, it should be noted that one of the major risks foreign investors will continue to face is the potential breach of the nuclear agreement by Iran. This will trigger the so called “snap-back” provisions that were included in the agreement and will cause the re-imposition of sanctions on the Islamic Republic. It is equally important to note that this risk will not disappear or even be mitigated in the near future. As the snap-back provisions form an integral part of the nuclear agreement, the risk of non-compliance by Iran with its terms has to be regarded as part of the investment-related risks that all international investors are faced with in their everyday decisions.
Nadiya Nychay is Counsel at Dentons, Brussels. She can be reached at: nadiya.nychay@dentons.com