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Iran's new oil and gas fiscal terms: what to watch for

Oil&Gas Materials 27 November 2015 08:00 (UTC +04:00)
The expected lifting of most international sanctions against Iran in H1 2016 marks the start of a new era and Iran's possible re-entry onto the global stage
Iran's new oil and gas fiscal terms: what to watch for

By Wood Mackenzie

The expected lifting of most international sanctions against Iran in H1 2016 marks the start of a new era and Iran's possible re-entry onto the global stage. The country crucially needs to attract foreign investment and new technologies to develop and maintain production from its vast resource base. Tehran has recognized the need to replace the unpopular buy-back contract system with fiscal terms that will attract the investment they need.

A new fiscal regime, the Iran Petroleum Contract (IPC), will be unveiled on 28-29 November in Tehran and 70+ oil and gas projects, including around 20 exploration blocks, are expected to be offered for international investment in a mix of bid rounds and direct negotiations from March 2016. The release of the IPC and project opportunities is the most eagerly awaited licensing event in the Middle East since the Iraq licensing rounds in 2009.

The IPC is expected to be up to 25 years in duration, include a floating remuneration fee which will provide exposure to oil and gas prices and the capex(capital expenditure) ceiling is expected to be removed - all improvements on the buy-back contracts and which should be more attractive to potential investors. Ultimately, however, key to the success of the contracts will be the clarity, predictability and transparency of how the IPC behave in different scenarios. At the same time, these improvements need to be balanced against the requirement to appease the Iranian hardliners who are against opening up the country's national resources for foreign investment.

Like the Iraq rounds, the Iran terms and opportunities will be offered against the backdrop of low oil prices. We do not expect foreign investors to accept terms as harsh as the Iraq Technical Service Contracts (TSC) this time round for several reasons. Among them, Iran has to compete with other investment opportunities globally for constrained company capital budgets. Companies will have learned lessons from the Iraq experience, including the risks associated with greenfield developments and committing to overly ambitious production targets. These issues, combined with the low oil price, have led to contract renegotiations in Iraq which is in neither the contractors' nor the Government's interest. In Iran, there is also the risk that sanctions are snapped back.

However, with 260 billion barrels of oil equivalent (boe) remaining reserves, the size of the prize in Iran is huge and it may be that to gain access to some of the very large reserves, we see some IOCs willing to leave some value on the table.

The unveiling of the IPC marks the beginning of clarification of the new Iranian fiscal terms which will be key to attracting inward investment by IOCs and internationalizing NOCs. Whether the new terms will be regarded as attractive or not will depend on the devil of the detail and that may not be forthcoming at the weekend. Wood Mackenzie will analyze the fiscal prospects including benchmarking with other regimes as the details emerge in the coming months.

Key considerations:

Key considerations for the government:

• Harsh terms may encourage renegotiation in the future if low oil prices continue;

• Even on favorable terms for the government, low oil prices may restrict revenues and hence their ability to invest in necessary infrastructure to maximize field value;

• Tight IOC capex budgets may encourage search for better terms elsewhere; and

• Not all foreign players will have the same strategic imperative to invest in Iran with some not prepared to pay excessive signature bonuses.

Key considerations for IOCs:

• Access to existing infrastructure is key;

• Brownfield sites provide best returns in a low margin contract;

• In a low fee per barrel world, only the largest fields make economic sense;

• Cost recovery structure could lead to detailed scrutiny of project plans by the Ministry of Oil and potential delays; and

• Continued low oil prices and/or delays in construction could lead to postponed payments from the government, which may need to be factored in to project economics.

None of the information contained in this note has come from any contact with the National Iranian Oil Company (NIOC) or the Iranian Government while sanctions preventing this have been in place.

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