Iran to offer improved terms for investors

With progress being made towards a nuclear deal and the prospect of lifting sanctions on the horizon, Iran is hoping to reinvigorate its upstream oil and gas industry by offering improved fiscal terms. The country’s oil sector has struggled to receive foreign investment in the last decade and therefore needs to attract new technologies to reverse production declines, says an analyst with research and consulting firm GlobalData.

Will Scargill, GlobalData's Upstream Fiscal Analyst, states that in order to maximize investment if sanctions are lifted, the Iranian Oil Ministry has developed the Iran Petroleum Contract as a replacement for its previous buyback model. This change seems to be an improvement from an investor perspective and has already attracted interest from international oil companies, such as BP, Eni, Total, Gazprom, CNPC and PETRONAS.

Scargill says: “Based on recent reports, this new model will offer a share of output based on oil prices and associated risk, instead of cash repayment. While Iran would retain ownership of reserves, this should allow companies to book production entitlement as reserves in financial reports. This would be similar to the Production Sharing Agreements (PSAs) offered in several countries in the region.”

However, the analyst adds that the contract’s effectiveness in luring investors will ultimately depend on details expected to be released later in the year. If the right model is offered, Iran will prove to be a global center for oil and gas capital, thanks to its proven reserves of 360 billion barrels of oil equivalent.

Scargill continues: “If the structure is similar to that of a conventional PSA, it’s likely that the contractor’s production share would vary according to profitability through an R-factor mechanism. This model would not cap the rate of return as the buyback contract did, making it more attractive to investors.”

The analyst states that the link between the contractor’s share of output and oil prices will prove another important feature of the contract.

“If the mechanism linking payment to prices adjusts the resultant production allocations in exact proportion to the prevailing price, the new model would in many ways be similar to service contracts, which pay cash fees. The payment value would not vary according to price, therefore providing a more stable contract for investors as no upside or downside price risk would be involved,” Scargill says.

The analyst believes that while the new model will improve on the buybacks, it will be these features that determine Iran’s competitiveness against other opportunities. However, he says that talk of renewed investment in Iran’s upstream sector is still dependent on the removal of trade sanctions.

Edited from various sources by David Bizley

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