Tehran’s plans to tender 50 oil and gas projects are taking shape with invitations to prequalify recently issued by the National Iranian Oil Company (NIOC). With the new Iranian petroleum contract (IPC), governing the terms of the deals, now approved by ministerial resolution, sponsors have better clarity on contractual requirements.

NIOC invited international oil companies (IOC) to submit prequalification documents by 19 November 2016 for the tender of 29 oil and 21 gas fields. Although it is unclear how many of the 50 fields will be offered in the first round of tenders, there are a couple of priority fields; Azadegan South and the South Pars oil layer.

Those fields could be offered by the end of this year or in the first quarter of 2017. Iran is expected to award its first oil development deal under the new IPC by the second half of 2017.

Although the IPC resolution has been passed by Iran’s government and confirms a number of key terms, the detailed agreement has not been released yet. Information circulated so far suggests it will feature elements of the country’s previous buyback contract but also offers some substantial differences.

Reduced production phase risk

Previous Iranian oil contracts made NIOC responsible for operations during the production phase, Joanna Addison, a partner at international law firm Herbert Smith Freehills told IJGlobal. This created a risk that sponsors wouldn’t receive the revenues they expected through the production and sale of oil.

“With the new international petroleum contract there will be a joint-operating company between an Iranian entity – likely a subsidiary of NIOC – and the IOC,” Addison said. “This is intended to minimise the previous production phase risk to IOCs. However, over time the executive management functions of the joint-operating company must transfer to the Iranian entity so eventually it will be the Iranian firm that will appoint the key positions in the company.”

“That should put quite a lot of pressure on, and incentivise, the IOC to make sure that the Iranians within the joint operating company are properly trained.”

Other terms include sponsors operating projects for 20 years from the date of operations beginning. This can be extended by five years if the project involves enhanced or improved oil recovery. For integrated exploration, development and production projects the exploration period will be added to the contract’s 20-year period of operations.

Sponsors will also be required to meet certain minimum production levels. The framework doesn’t yet clarify however what the consequences of failing to meet them will be.

“One thing that may be considered, if production targets aren’t met, is a reduction in the remuneration fee but this remains to be seen in the full terms of the IPC,” Addison commented.

Revised terms

The terms are comparable to Iraq’s oil tenders in 2009, according to Homayoun Falakshahi, research analyst for Middle East and North African upstream oil and gas at consultancy firm Wood Mackenzie – although Tehran aims to make them more attractive. The latest changes to the IPC contract did see the removal of some guarantees however:

“Some guarantees that existed initially within the IPC framework have been taken out: the Central Bank of Iran will not guarantee payments, and companies’ payments will only come from the field they’re working on, meaning if the field’s output isn’t sufficient to pay companies back, payments will be delayed,” he said.

“Also, if a company fails technically – fails to increase production or reach a certain target – it may never get access to remuneration, putting a strong pressure on operators to technically succeed.”

Although the latest changes may not encourage companies further, the geological risk on the majority of the 50 projects is quite low, so sponsors should still feel comfortable of achieving high targets, Falakshahi said.

The IPC also reinforces the principle that all the oil and gas reserves remain in the ownership of the Islamic Republic of Iran and that the produced oil, gas, and byproducts are the property of NIOC.

Sponsors will be offered a floating remuneration fee per barrel of oil and square cubic foot of gas in order to incentivise efficient production, as well as incentives for higher risk projects. A number of the details will be subject to competition and negotiation with some fields potentially awarded based on direct negotiations or not even tendered, Falakshahi said.

Local Iranian companies will have a minimum stake of 20%. On some mid-size and smaller projects that stake could be higher, Falakshahi said. There will also be a local content requirement of 51% for the value of works under a governmental contract. Small projects may also be operated by a local company without help from foreign investors.

NIOC produces around 3.8 million of barrels of oil per day (mb/d). With first production from the new fields expected to occur in 2020, NIOC is planning to hit a target of 4.8 mb/d by 2021.