Tehran considers fresh oil deal terms

22 August 2008
National Iranian Oil Company reviews contract proposals for the exploration of the Caspian Sea.

Tehran is reviewing proposals to make its investment terms more attractive to international oil companies (IOCs) by offering production sharing contracts for the first time.

The state-run National Iranian Oil Company (NIOC) is considering the move as part of a drive to encourage the costly exploration of the hydrocarbons-rich Caspian Sea region.

Under the typical production sharing model, oil majors receive a share of the oil production, allowing them to recoup their investment costs quickly and make higher profits.

If the proposals win approval, it will mark a radical change for Tehran, which has been using buy-back contracts for more than 20 years.

Currently, IOCs invest money upfront and hand the field over to the state-run NIOC once production starts. The oil major then recoups its costs at a pre-agreed rate of profit, based on global oil prices and the field hitting production targets.

Hojatollah Ghanimi Fard, deputy director for investment affairs of NIOC, tells MEED that it is in talks with two Asian oil majors over development in the Caspian Sea, on the understanding that Tehran offers one-off production-sharing deals.

Ghanimi Fard says Iran’s oil and gas sector recognises that the costly, deep-water exploration that the Caspian region requires warrants special treatment. “We think this region might be the exception to the rule,” says Ghanimi Fard. “Since it is deep water, it looks like the production cost a barrel would be much more than in other regions, say compared with the south, or the Gulf.”

While Tehran has always argued that its buy-back model offers reasonable incentives to IOCs that invest in the country’s oil and gas blocks, oil majors have been reluctant to enter agreements to explore the Caspian Sea region due to the degree of risk.

There are 21 billion barrels of oil equivalent in the south Caspian region, according to a study in 2001 by NIOC subsidiary Khazar Exploration & Production Company (Kepco), and oil consortium Caspian International Petroleum Company (Cipco).

But while the study identifies nearly 50 oil and gas structures containing promising exploration prospects, Cipco eventually cancelled its potential investment of $3bn due to disappointing drilling tests. Another consortium, North Apsheron Operating Company (NAOC), also recorded poor results.

Ghanimi Fard says the Supreme Oil and Gas Council will need to approve the introduction of production-sharing contracts, before the government could present a bill to the Majlis (parliament).

Tehran has been considering how it can attract greater interest in the region from IOCs for some time. “There was some notion years ago that for the upper part of Iran, the Caspian Sea, the contract could be done in a production-sharing manner, but the final say will depend on other authorities,” says Ghanimi Fard.

The Caspian was heralded as a potential rival to the Gulf as a source of hydrocarbons energy in the early 1990s. However, a drop in oil prices in the late 1990s meant that key decisions on its development were indefinitely postponed.

Ghanimi Fard says discussions have been held with India’s ONGC Videsh and Beijing’s state-run China National Offshore Oil Corporation (CNOOC), but declines to say whether they will proceed if the contracts remain on a buy-back basis.

Brazil’s state-run Petrobras is understood to be drilling three wells in blocks 6 and 29 of the Caspian Sea, but it is thought to have signed its contract on a service contract basis.

Tehran’s efforts to exploit its Caspian Sea territory come as the development of its other oil and gas fields face difficulties. US-led sanctions pressure are undermining its gas ambitions in the South Pars field.

The UK/Dutch Shell Group formally announced it was quitting phase 13 of the South Pars project in May. Since then, France’s Total has halted a $10bn liquefied natural gas (LNG) project using feedstock from phase 11 of the field, and Norway’s StatoilHydro has cut its involvement as an offshore operator in developing phases 6-8 (MEED 4:8:08).

Ghanimi Fard says strong interest remains in all phases of the South Pars project but argues that the hike in construction costs and delays to the development time-table had put off oil majors.

“The huge increase in the cost of materials has been a big part of these delays, so it is not correct just to refer to the financial pressure which some countries are putting on us [as the reason],” says Ghanimi Fard. The NIOC executive concedes, however, that not every element of the giant gas field can be developed at the same time.

“When you have a giant field like South Pars, you need to be clear on what you are doing on some of these blocks,” he says. “Each block should be considered carefully, so there is no harm done to the overall field.”

Qatar, which owns the southern part of the reservoir, announced a moratorium on development in 2005, saying it wanted more time to discover how the field behaved.

A MEED Subscription...

Subscribe or upgrade your current MEED.com package to support your strategic planning with the MENA region’s best source of business information. Proceed to our online shop below to find out more about the features in each package.

Get Notifications