The Iran Petroleum Contract: Latest Developments

On 28 November 2015, Iran announced it would use the IPC as its new model contract - a distinct departure from the buyback system it had been using for almost two decades.

Under the previous buyback system, an International Oil Company (IOC) would fund oil exploration and production on behalf of the National Iranian Oil Company (NIOC), bearing all the relevant risks. At the production stage, the NIOC would gain complete ownership of the project, using revenue from selling the product to reimburse the IOC for cost plus an agreed rate of return. The IOC also agrees to buy a portion of total production.

The announcement of the forthcoming IPC claims to allow for the creation of a joint venture between an IOC and a NIOC (or NIOC subsidiary) for all stages of oil and gas development, including production and recovery.

The IPC allegedly addresses issues with the earlier buy back contracts, and gives foreign investors more of an incentive to invest in Iran as project risk is now shared by both the NIOC and IOC. Another purported benefit for IOCs is compensation. Compensation per barrel is now dependent on the risk factor of the project and volatility in oil prices, unlike the fixed profit-per-barrel offered in buyback contracts. Furthermore, the IPC is purported to offer longer contract terms (20 - 25 years), giving IOCs more of a chance when it comes to cost recovery. Lastly, as a more integrated model, the IPC will reportedly place greater emphasis on the sharing of technology and technical knowledge, an area where the local industry can greatly benefit.

Whilst there have been many official announcements on the IPC from Iran, the IPC has yet to be officially approved and released by the Iranian Parliament.

The latest update on IPC came in July 2016, where the Iranian Ministry of Petroleum announced a list of eight local companies (out of 37) that will be authorised for joint venture partnerships with IOCs under the IPC. The list includes Petro Pars, Dana Energy Company, PetroIran Development Company (PEDCO), and Oil Industries' Engineering and Construction (OIEC), MAPNA Group, Industrial Projects Management of Iran (IPMI), and Persia Oil and Gas Industry Development Company (POGIDC).

When the full text of the IPC is released, it should not come as a surprise to some IOCs and NIOCs. We expect some would have already been consulted on certain elements of the IPC.