Legal aspects of Iran’s new oil contracts

There is no legal obstacle for signing Iran’s newly designed oil and gas contract model, known as Iran Petroleum Contract (IPC), or even production sharing agreements (PSAs) with foreign companies, a petroleum ministry official told Trend.

IPC was approved on July 12 after some amendments by Iran’s Resistance Economy Headquarters to replace the old, less popular buyback agreements to attract foreign companies.

According to the Deputy Oil Minister for International Affairs and Trading Amir Hossein Zamaninia, it is expected that the first agreement with a foreign company over developing an upstream oil and gas project, based on IPC, will be signed in three to four months.

Iran unveiled the generalities of IPC in November 2015, offering 49 oil and gas projects to foreigners. Since then, some hardliners criticized the government “on abusing the national interests by sharing the reserves with foreigners.”

In IPC, Iran has kept its sovereignty over its hydrocarbon reserves, but payment of all direct and indirect expenses, as well as finance and operation costs will be dependent on allocating a portion (maximum 50 percent) of products or proceeds based on current day sale prices.

IPC has some advantages over the contract-based and buyback contracts.

The source in petroleum ministry, who wanted to be unnamed, explained that neither IPC nor PSAs share the oil and gas reserves with a foreign company (FCO), which is banned by the constitutional law.

“Iran’s newly designed contract is categorized mostly in service contracts, though it shares some terms with PSAs,” said the source.

According to her, “in legal and contractual terms, contractors will not hold stake in oil and gas reservoir or even output based on PSA. Of course, contractors will have the right to extract oil and gas [in IPC or PSA], but their ownership is defined at a certain point, for example a port, from which oil and gas is exported.”

Subjects	IPC	Buyback	PSA	Concessionary
Petroleum Operation	Integrated	No Integration	Integrated	Integrated
Operator	Cont/JOC	IOC	IOC	IOC
Supervision	NIOC	NIOC	NIOC	Government
Reservoir Risk	Contractor and NIOC	Contractor before handover/NIOC after handover	Contractor	Contractor
Market Risks	NIOC and Contractor	NIOC	Cont/NOC	Contractor
Cost Recovery Duration	5-7 years	Based on Contract Period	5-10 Years	No cost Recovery

Despite offering the right for oil and gas extraction, IPC is not a PSA, but it is categorized as a service contract.

“I should note that participation in production sharing contracts is not in contradiction to articles 44 and 45 of Iran’s Constitution. Moreover, based on note 3 of paragraph T of article 3 of the Petroleum Ministry’s charter, the ministry has been allowed to attract internal and external capitals with the aim of developing hydrocarbon fields giving the priority to joint fields through defining new models of contract, including participation with domestic and foreign investors without transferring the ownership of oil and gas reservoirs,” she said.

According to the Iranian law, the ownership of oil and reservoirs should not be transferred to contractors.

“This is why concessionary, license, or lease contracts are not concluded in Iran, but participation in production sharing contracts are not in contradiction to the Constitution because the ownership of oil and gas reservoirs and also produced oil and gas will remain in the hands of the government,” added the official.

Subjects	IPC	Buyback	PSA	Concessionary
Exploration Risk	Contractor	Contractor	Contractor	Contractor
Fee	Per barrel of oil produced, or per million cubic feet of gas produced	A percentage of the capital costs	Certain percent of profit oil	No fee
Start of cost recovery	First production	First production solely for costs related to first production	First production	N/A
Fee payment	First production	Final production	First production	N/A
Oil prices impact	Crude oil price formula	No oil price risk to contractor	Direct impact on contractor	Direct impact on contractor

According to the law, transfer of the ownership of a property, i.e. oil, gas and condensate, are conducted based on a purchase deal. So, all the contracts for selling crude oil, which are concluded by the Oil Company and buyers, lead to transfer of the ownership of crude oil (not oil reserves).

“It should be noted that sometimes, based on annexations to buyback contracts the ownership and selling a part of produced crude oil or gas condensate are transferred to contractors. So, the law has not forbidden selling oil, gas or condensate based on a sell and purchase contract,” said the source.

Subjects	IPC	Buyback	PSA	Concessionary
Reserves ownership	Government	Government	Government	Contractor
Contract term	20 years with a 5-year extension	Maximum 5 years for development operations	25 years with a 5-year extension	The entire field life cycle
Title to assets	Government	Government	Government	Contractor

As for the government’s guarantee for repayment of foreign investments put in the Iranian oil and gas projects through buyback contracts between National Iranian Oil Company (NIOC) and foreign investors, the source said there was a legal barrier for government’s guarantee.

“Although there is no such barrier in the new model of contracts, in my opinion the government will not guarantee repayment of investment costs and expenditures related to Iran’s oil contract,” she added.

The contracts related to improving or increasing recovery rates in operational fields and reserves are based on engineering studies until their termination.

Upstream contracts between the NIOC and eligible contractors for investment, exploration, description, development, production, and operation are concluded after meeting legal requirements.

Also, it is possible that under the approval of the NIOC, eligible Iranian companies, as the partners of qualified oil companies, can import technological know-how and managerial skills.

It has been foreseen that all the direct and indirect costs, as well as finance and payment expenditures and operation costs should be paid by contractors and repaid based on the contract through allocation of a portion of revenues of the contract (maximum 50 percent) via selling products based on current prices or in cash.

In the new model of oil contracts, all the risks and expenses in case of not discovering a field or a reservoir commercial, or not meeting the contractual goals or insufficient reserve for settling financial debts, should be borne by the contractor.