Iranian contracts - modernising Iran's oil sector

Author: oil and gas lawyer at Pinsent Masons, Niazi Kabalan

Niazi Kabalan
Niazi Kabalan

There was a tangible sense of excitement in Tehran last week as oil and gas developers and investors jetted in to Iran to witness first-hand the unveiling of the new Iranian oil contracts.

With Iran's geological profile and staggering oil reserves it's no wonder developers have been eagerly awaiting the news.

But in the aftermath of the summit, will the new contracts prompt an influx of oil major investment? As always the devil is in the detail. Contracts are yet to be finalised so developers remain cautious and rightly so.

That being said there are some positives to take away from weekend. Overall the outline of the contract is akin to contemporary petroleum contracts in the region, with removal of capital cost caps and extending the contract terms, representing an appetite and drive toward a modern oil and gas industry.

However, ownership in the hydrocarbons themselves is not shared with the oil companies.

The requirement to JV with local Iranian companies will no doubt be welcomed by the conservative, old guard Iranian leaders as they strive to boost the local economy beleaguered by years of onerous trade sanctions.

Indeed such a move will be transformational for domestic businesses with technology and knowledge transfer at the heart of the Government's vision for post-sanctions Iran.

If leaders truly want to realise its ambitious production targets, investment into a skilled domestic work force will be crucial. Hefty financial contributions by international oil giants will be pivotal.

But hopes of a PSC model, with beneficial fiscal terms for developers, have been dashed with Iran opting for a risk service contract.

Typically the national oil company has a dominant position over oil companies under this model with the ability to drill at their discretion and partner with other oil majors often restricted.

Indeed, it is unclear how the local partnering condition will actually work, given the high capital expenditures requirements of the upstream E&P business.

The mood in Tehran is positive but unanswered questions remain. The final contract is yet to be unveiled and oil companies are well advised to keep a watchful eye on developments before rubber stamping any investment plans.

The ability to book reserves, a common factor of modern global contracts, is yet unclear under the new regime and the mechanics of the risk service model far from ideal.

While the new contracts are an essential step on the road to Iranian re-entry into the global oil and gas community, preparation is of course key. It’s understandable that oil and gas companies want to be ready. But there is a need not to jump the gun.

Nothing is set in stone and any business needs to be confident that they are not breaking the law or contravening strict sanctions by engaging in talks and concluding agreements at this point.


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Oil & Gas Middle East - September 2020

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