Revising contracts is the first step in Iraq

22 August 2008
Tehran will turn a corner if it adopts a contract model with massive appeal for oil-hungry energy majors.

After several years of uneven progress in its oil and gas industry, Tehran appears to have turned a corner by considering, for the first time, the adoption of a contract model with massive appeal for oil-hungry energy majors.

Iran has traditionally used buy-back contracts to comply with its constitutional bar on foreign ownership of mineral assets, but these are unappealing to most international oil companies (IOCs).

Effectively, the IOC merely acts as a contractor to the national oil company on a short-term deal. Despite these contract terms, oil majors have until recently remained in Iran in relatively large numbers.

With the second largest reserves of oil and non-associated natural gas in the world, it has remained an attractive market.

But with Washington ratcheting up the pressure, many Western oil companies have left Iran, and Tehran is more desperate than ever to lure the sort of billion-dollar investments which IOCs can provide.

But even if it starts to offer more lucrative contracts, several hurdles remain. Given the central role President Mahmoud Ahmadinejad plays in the country’s affairs, it remains far from certain that the National Iranian Oil Company’s (NIOC) preference for a new type of deal will count for much.

Iran has adopted a ‘take it or leave it’ approach to multinationals and it insists that much of the exploration work on key fields such as South Pars can be completed by domestic firms if need be, although that is likely to happen at a slow pace.

Even more problematic is whether oil majors will risk provoking the ire of the US by returning to what remains prized exploration territory. If they do not, Tehran’s stuttering exploration programme will almost certainly be delayed yet again even if production-sharing deals are on the table.

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