The recent price slump has radically changed the investment landscape for oil companies. OPEC has signalled that it will not be cutting production and the prospects for global economic growth are weak. While it is not the most auspicious time to seek billions of dollars of investment into oil and gas projects, Iran has no choice but to do just that. Iran's oil and gas sector has been starved of capital for years and the country is in desperate need of revenues in hard currencies.
The search for foreign investment
The closest analogue to Iran's search for foreign investment can be found in Iraq. The most notable similarity between the two countries' upstream sectors being the use of a risk-service type model to govern investments and operations.
Iraq's decision to use risk-service contracts was initially subject to heavy criticism. International Oil Companies (IOCs) much prefer a production sharing contract model that gives them direct access to hydrocarbons. IOCs did not want to set an unwelcome precedent in Iraq by agreeing to the risk-service contract model. Nonetheless a number of the world's leading oil companies (such as BP, ENI, ExxonMobil, Oxy, PetroChina, Shell, and Total) ultimately accepted such terms and invested billions of dollars into Iraq as a result. Iran would no doubt be happy with such an outcome.
The New Iranian Petroleum Contract
In November 2015, Tehran hosted companies from over 40 countries to hear about its plans for the oil and gas sector. Iran appeared to acknowledge that some of the criticism of the risk-service contract model by IOCs was justified and announced that the more favourable terms of a new Iranian Petroleum Contract (IPC) will govern future foreign investment in the upstream sector.
Concerns about the IPC
In light of Iraq's experience and the current market dynamic, the allocation of oil price risk under the new IPCs will come under particular scrutiny. Simply put, IOCs will expect higher rewards for assuming higher risks so Iran will need to approach this issue with appropriate commercial sensitivity.
Other concerns with the IPC include the extent of the influence of the Iranian joint venture partner over operations and whether this might blunt IOCs' effectiveness in deploying its capital and know how. It is also unclear how IOCs can effectively protect themselves against the risk that sanctions snap back, especially if this not treated as a force majeure event under the IPC.
Is the prize big enough?
The National Iranian Oil Company (NIOC) announced that IOCs can expect the IPC to be finalised during June or July 2016. IOCs will be invited to bid for contracts shortly thereafter. Nearly 50 projects available for licensing have been identified and the Ministry has said hundreds of billions of dollars are required to reinvigorate Iran's oil industry. Although this may seem ambitious, history has proven that IOCs are willing to invest huge sums of money regardless of legal and regulatory uncertainty, market risk and challenging security conditions. That is, if the prize is big enough.
With the second largest reserves of gas and the fourth largest reserves of oil worldwide, it is likely that Iran's prize certainly is big enough.
Major features of the IPC
Features of the IPC, as compared to the position under the risk-service contract, is set out in the table below:
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