Start the conversation
Iran yesterday announced a list of 29 international oil companies that have been approved to bid for oil and gas projects under a newly redesigned version of the Iran Petroleum Contract (IPC).
But despite what today's drop in the price of oil may make you think, this is not a sign that Iran is about to massively increase its oil production and scuttle the Vienna Accord that's pushing oil prices up.
Companies Are Still Concerned About Sanctions
The list of 29 companies does not include any U.S. companies, and UK major BP plc (BP) has decided not to participate. In both cases, the status of U.S.-UK sanctions on Iran and threats by U.S. President-elect Donald Trump to scrap the Iranian nuclear accord are preventing involvement by American and British companies.
In the U.S., additional Congressional prohibitions against companies working in the Iranian hydrocarbon space are also still on the books.
Meanwhile, the primary problem facing Tehran is the way in which international companies can work in the country. This issue has been exceptionally contentious for some time among Iranian leaders.
Unfortunately, the media continue to confuse the real issue here…
Iran's Old Contract Scheme Was a Failure
Reports still attempt to pit Iran's President, Hassan Rouhani, against the country's religious hardliners. Actually, there is widespread agreement up and down the domestic political spectrum on the limitations imposed on outsiders. On this, virtually all political and religious leaders agree.
And that continues to be the problem when it comes to attracting investment to Iranian oil and gas projects.
Both the 1979 Constitution (the one written after the revolution led by Ayatollah Khomeini) and subsequent legislation prevent foreigners from either owning land or raw materials inside Iran. That prevents the use of joint ventures or similar arrangements, which are typical for foreign investment in other oil- and gas-rich countries.
That also means international companies cannot "book" any reserves found in Iranian fields, preventing them from using the production to enhance their production figures (as well as their equity value).
Instead, Iran came up with a "buy-back" scheme.
Under this contract, the outside company provides all of the development capital and operational responsibility, subsequently transferring the project to the National Iranian Oil Company once production has reached a contracted level. In return, the outside company is paid back in kind (i.e., in oil) for both the project expense and a previously agreed to portion of the "profits."
Now, Iran may have reserves that rank among the largest in the world. But even before the country was hit by sanctions and nuclear concerns, this buy-back approach was universally considered the most difficult approach to negotiate.
It's a drawn out and frustrating process. A "price" for the oil had to be agreed upon at the outset. Even if market situations changed, the project hit unanticipated cost overages, the oil turned out to require additional treatment, weather or other external events impeded the schedule, or anything else, this "excha…
About the Author
Dr. Kent Moors is an internationally recognized expert in oil and natural gas policy, risk assessment, and emerging market economic development. He serves as an advisor to many U.S. governors and foreign governments. Kent details his latest global travels in his free Oil & Energy Investor e-letter. He makes specific investment recommendations in his newsletter, the Energy Advantage. For more active investors, he issues shorter-term trades in his Energy Inner Circle.