Expert: PSA most interesting contracts in Iran for foreign investors

Iran Materials 4 September 2013 15:39 (UTC +04:00)

Azerbaijan, Baku, Sep.4/ Trend R.Zamanov

Production sharing agreements (PSA) can be the most interesting kind of contract for foreign investors.

Iran has announced a plan to revise the oil ministry's foreign contracts in order to persuade international firms to invest in the county's oil and gas sector. Besides ordinary contracts, only buyback contracts are legal in Iran.

In buyback contracts, a company accepts to finance and provide the technology for constructing a project. Once the projects are complete it will be delivered to the government. The company then recovers its investment, operating and maintenance expenses in the project by receiving a portion of the project's product or the equivalent in money.

In other words the contractor will provide the money and technology necessary for constructing the project in exchange for a portion of the product, for example oil and gas. There are a diverse range of repurchasing agreements, but only one buyback is legal in Iran.

Iran says it has experienced buyback contracts with Total, Eni, Royal Dutch Shell and Statoil companies.

Reza Taghizadeh, an Iranian energy expert told Trend Agency that despite Iran's claims, the country has never signed real buyback contracts and the agreements that Tehran calls buyback are just ordinary contracts.

He went on to note that Iran pays the contractor with a portion of the product instead of money and calls the agreement buyback. Taghizadeh said that in the signed contracts Iran still owns the fields' resources in total. However based on the agreement, once the expenses are calculated, Tehran returns the money by allocating up to five per cent of the extracted product to the so-called partners who are not real partners, but mere contractors.

According to him, the duration of the pay-off will depend on the price of oil. If the price is high the duration would be shorter and if the price is low, it would take longer to pay off the debt.

Taghizadeh also said that foreign firms prefer to sign production sharing agreements.

Production sharing agreements (PSA) can be the most interesting kind of contract for the foreign investor. Under the agreement the investing company and government will share the resource extracted from the project. Iran is very careful about the ownership of its oil and gas fields, but has announced it will study this type of contract as well.

Taghizadeh further explained why foreign companies prefer production sharing agreements. He said that oil companies like to register a portion of different oil and gas fields' resources as their permanent ownership. This will increase the company's credibility which enables the firm to benefit from more financial credits.

He went on to note that in PSA contracts, the foreign firm's share is much more than the fixed three to five per cent interest of buyback contracts.

Iran's parliament (Majlis) has not yet resolved the legal obstacles of PSA contracts.

Taghizadeh believes that Iran can grant such options to foreign firms in the Caspian Sea region's projects since the country has limited expertise in the area. In other projects, however, the PSA contracts will remain a challenge for the country.