What stands behind the Iran Petroleum Contract?

What stands behind the Iran Petroleum Contract?

Baku, Azerbaijan, Aug. 8

By Vagif Sharifov - Trend:

Iran is preparing to enter into new oil contracts with Western investors worth around $100 billion, emphasizing a special new approach to business. In London in late 2015, when the situation with the sanctions becomes clearer, Iran plans to present to investors a new type of oil contract called Iran Petroleum Contract (IPC). IPC is going to be the basis contract the country plans to work with oil companies after the lifting of sanctions.

Why IPC?

Below I will provide the main and most interesting, in my humble opinion, differences of the new type of contract and try to explain why Iran needs this:

1. Iran wants long-term investment and encourages foreign investors to enter into long-term contracts. The main difference of the new type of contract from the usual 'buy-back' contract in Iran is that the IPC will be signed up to 25 years vs seven years of 'buy-back'. Keeping the western investor in the country for a quarter of century but not five-seven years, Iran may plan to avoid possible new sanctions of any kind, since they will have a negative impact on the investor as well, who is more likely to be Western one.

2. An investor will be able to get physical volumes of hydrocarbons, in fact, having become their owner. It is well known the investor doesn't own even a part of the extracted oil within the buy-back type of contract, but only gets as much oil as deserved for the work done. The IPC contract assumes that international oil company will be able to become the owner of a part of the volume of hydrocarbons produced.

Perhaps by handing over the ownership of a part of oil or gas to foreign investors with experience in global trading, Iran at least can rely on the proven marketing and try to sell its own hydrocarbons in the same way. For example, planning to go to the European gas market, Iran can assume that it will be easier and faster for a European company, which has its own volumes of Iranian gas, to negotiate with its European colleagues.

3. Every tenth undeveloped oil barrel in the world is located in Iran. The proven oil reserves in Iran account for nearly 158 billion barrels, while gas reserves account for 34 trillion cubic meters, according to BP. The volumes are high, but not all of these hydrocarbons can be extracted with the same ease and Iran is well aware of this fact. Iran plans to pay foreign investors extra money for the risk for the development of all prospective structures and not only those with low production cost.

In the IPC type contract, Iran plans to increase the R-factor towards the foreign investor, depending on the geological complexity of the field and difficulty of reservoir development. By the way, 70 percent of Iran's oil reserves are concentrated onshore.

"Iranian Western" oil will restrain world oil prices

It is clear that the Iranian government will not distribute all contracts this year. The investments worth $100 billion will not be obtained immediately. The drilling and exploitation of wells require time and efforts. But let's try to look for a couple of years ahead when the "first" Western oil will be supplied from Iran. Let's try to understand the result and the impact on the global oil market. By the way, I intentionally used the word "first" in quotes. The Western oil was supplied from Iran to the world market before the Iranian revolution in 1979. For example, BP, used to call the Anglo-Persian Oil Company, was established geographically in Iran. It was renamed into the Anglo-Iranian Oil Company in 1935. It was named as British Petroleum only in 1954.

On average, oil production reduced by one million barrels per day over the past 10 years to 3.6 million in Iran in 2014. At the same time, domestic oil consumption in Iran increased by about 0.5 million barrels per day to 2 million in 2014.

At least, 10 Iranian oil projects will reach the peak production in the short term:

project

developer

Production volume on plateau (thousand b/d)

Year of reaching plateau

Yadavaran (Phase-1)

Sinopec

85

2016

Yadavaran (Phase -2)

Sinopec

95

2019-2020

Yadavaran (Phase -3)

Sinopec

120

after 2020

Azar (Phase -1)

NIOC branches

30

2016

Northern Yaran

Persian Energy

30

2016

Southern Yaran

NIOC branches

55

2018

Nothern Azadegan (Phase -1)

CNPC

75

2016-2017

Northern Azadegan (Phase-2)

CNPC

75

2019

Southern Azadegan (Phase-1)

No developer

150

-

Southern Azadegan (Phase-2)

No developer

110

-

Forouzan

NIOC branches

100

2017-2018

South Pars (Phase-1)

PEDCO

35

2017-18

source: EIA, as of 2015

After the sanctions are lifted, Iran will be able to increase oil exports to 2-2.5 million barrels per day within 1-1.5 years. By the way, this is as much as the excess supply on the global market now. The additional 2-2.5 million barrels per day will restrain the prices in the maximum of $ 75 per barrel in the medium term. After long-standing sanctions, Iran will unlikely to meticulously take into account the OPEC quotas. It will be just impossible as a result of the economic recovery due to the foreign investments.

Of course, in their oil price forecasts, the international financial institutions take into account the Iranian factor. For example, the World Bank goes beyond $ 70 per barrel only in 2020. Next year the bank predicts $ 61 per barrel. EIA predicts $ 67 per barrel in 2016. Anyway, today, none of the large well-known institutions forecasts $ 100 a barrel again in the medium term.

Vagif Sharifov, is an oil markets expert

Follow him on Twitter: @VagifSharifov

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