Tougher oil investment problems for Iran than 2 decades ago

By Dalga Khatinoglu

A senior expert from Wood Mackenzie says because of increased competition and a tough oil price environment, capturing foreign investment will be more difficult for Iran now than 20 years ago.

Iran has unveiled the general pattern of new designed oil and gas contract with name IPC to introduce 45 oil and gas fields for foreign companies to absorb $185 billion in next five years.

Regarding the 20-percent drop in global investment on upstream oil and gas projects in 2015 (decreased by $200 billion according to IEA) and continuance of decreasing this volume in 2016, how much Iran can be hopeful to attract investments?

Homayoun Falakshani, Middle East upstream analyst for Wood Mackenzie said: "Iran has a competitive advantage over most other regions in the world: it has vast untapped oil and gas reserves that are among the lowest cost to develop globally. Will this make companies rush into its market? The difficult reality under the previous buy-back contracts and the bitter Iraqi experience show companies will be more cautious. This attitude is strengthened in the current low oil price environment where capital budgets are stretched. Foreign companies will primarily be looking for value rather than resources, although some might pick a different strategy."

"Because of increased competition and a tough oil price environment, capturing foreign investment will be more difficult for Iran now than 20 years ago, when it implemented its buy-back contract,' he said.

In IPC, Iran has kept its sovereignty over its hydrocarbon reserves, but the new contract has some advantages over previous models, namely contract-based and buy-back advantages.

According to new designed long term contract, the pepayment of all direct and indirect expenses, as well as finance and operation costs, will be dependent on allocating a portion (maximum 50%) of products or revenues based on current day sale prices.

Falakshani sayd two key factors will determine whether tens of billions of dollars will be poured into Iran's oil and gas sector: "the level of attractiveness of both fiscal terms and assets on offer. Only a perfect mix of these two factors will satisfy both Tehran and foreign companies. If Iran offers quality assets coupled with attractive enough fiscal terms, it could become the next investment magnet in the industry."

"But companies will also be very wary before finalising any deal. The banking sector will be even more prudent given the potential for sanctions to being snapped back. Other business issues specific to Iran might make some companies more cautious as well. For these reasons, we will probably see a lot more interest than we will see firm commitments."

IPC's general pattern

IPC stipulates that all the risks and costs should be borne by the second side if targets of exploration and production for specified fields do not materialise.

In the exploration section, the "Minimum Exploration Obligation" includes geology, gravimetry, seismology, drilling, and assessment of fields with the aim of discovering new fields and making the minimum required investment within the specified period of time, which is undertaken by the second side.

The second side is also obliged to protective production utilizing modern technologies and investing in development and recovery rates, increasing plans in a proportional manner to the complexities of the fields. Meanwhile, foreign companies will be awarded with incentives for protective production.

In addition, all operations by contractors from the start of the contract will be carried out on behalf of the employer. All the properties, including buildings, goods, equipment, wells, ground and underground facilities, will belong to the employer from the same date.

One of the major risks facing foreign companies is the breaching of the nuclear agreement by Iran and the world powers and the possibility of a re-imposition of sanctions on Iran. Those sanctions previously forced the country to decrease it oil production by one million barrels per day. The IPC says if the Oil Ministry decides to reduce or stop production at any oilfield for of any reason, except for technical reasons, priority should be given to oilfields that are not committed to repayment. If such a decision is taken about an oilfield, subject to the contract, it should not affect repayment costs and fees owed by the contractor.

In each contract, domestic companies will be presented as partners for the foreign investor under the employer's approval and will acquire technical knowledge, engineering, and managerial methods. The second side is obliged to present a plan for transferring technology, as part of its annual financial and operational program. Operation and implementation of projects will be changed alternatively by the domestic and the foreign companies.

One of the advantages of Iranian fields is their low production costs. Each barrel of oil is produced at $5-8 on average.

On the other hand, it is not known to what extent the Iranian contract will be able to compete with Iraq's new model of contracts, known as fee per barrel. Production costs in Iran and Iraq are nearly the same. The new models of Iranian and Iraqi oil contracts are also very similar, in the sense that a percentage of oil will be paid to the producer instead of money. Meanwhile, incentives have been taken into account for higher production and protective production. The type and specifications of Iranian and Iraqi crude oils are nearly the same.

In Iraq, the contractor can permanently be the project's operator. But, in Iran a domestic company will sign a partnership contract; operation will be changed alternatively between the two companies.

Of course, Iran has some advantages over Iraq, mainly higher security and more oil and gas reserves. Iran holds 158 billion barrels of crude oil and 34 trillion cubic meters of natural gas.

The domestic workforce in both countries receives the same amount of salary. But, Iran has numerous industrial advantages, especially the ability to manufacture a portion of the required equipment domestically at low prices to sell to the foreign contractor.

Dalga Khatinoglu is an expert on Iran's energy sector, head of Trend Agency's Iran news service.

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