Iran Petroleum Contract (IPC)
Iran has a long history of oil contracts (see below figure). First oil started in 1901 under a concession which then turned into a production sharing contract (PSC) in 1951. The later went through revisions until Iranian revolution in 1978 when the right of producing and owning natural resources including oil and gas was only given to Iranian government on behalf of Iranians. Booking reserves by International Oil Companies (IOC) is still one of the red-lines set by the Iranian constitution.
Lately the generation three of her technical contracts famous in Iran as buy-back contracts attracted about $50 bn between 1995 and 2005 until nearly all investors flew away when the sanction pressures increased between 2010 and 2014.
Under the buy-back contracts a joint master development plan (MDP) was prepared, parties agreed on a ceiling of Capex investment, a cost-recovery period was negotiated and a fixed ROR was agreed upon. IOC provided all the Capex and developed the field. The spent Capex was treated as a loan to the state which then produced annuity payments from the onset of production (or the achievement of the production target) until the end of the contract term. Through payments, IOC recovered capital expenditures, operating expenditures and bank charges accrued during the development phase. IOC could be paid in kind. The development phase usually was 2 to 4 years and the production phase was about 5 to 10 years.
Although NIOC’s buy-back format was not the best of technical-service contracts, but the 15 to 18 per cent rate of return on investment was attractive enough to engage several IOCs in the 1990s and the first few years of the new century.
Iran Petroleum Contract (IPC)
Iran Petroleum Contract (IPC) is the latest of NIOC’s oil contracts which is being described as a hybrid oil contract, as it is not a PSC, but tries to include some of its advantages. Booking reserves is still a red-line but several shortfalls of the buy-backs seem to have been addressed (see following table).
|Term||25+ years (versus 5-10 Y in case of buy-backs).|
|Reserves||Includes provisions allowing transfer of ownership of hydrocarbons to the foreign partner at a defined delivery point. But no reserves booking.|
|Ownership||Has a provision for shared ownership of the project assets.|
|JV||In IPC the IOC and Local Partner form a JV and jointly develop the field. NIOC will act as the owner and supervise the planning and operations.|
|Capex||Capex is not preset anymore. JV will create the master development plan and has provisions to allow changes in Capex if needed. A yearly budget and work-plan will be developed and approved by the JV.|
|Complexity Factor||Risk-reward factors linked to the complexity of each field. These factors allow higher fees paid to IOC for ‘high risk’ fields compared to ‘low risk’ ones.|
|Remuneration||Cost recovery (up to 50%), plus fee per barrel; in cash or in-kind.|
|Asset Life-Cycle||Allows smooth transition over various stages of the reservoir i.e. exploration, development, production and EOR/IOR without retendering.|
|Marketing||Allows IOC to market products if they choose to.|
|SCR||Encourages IOC to undertake civil and other social projects (e.g. hospitals) in oil-producing regions.|
|Transparency||Higher financial transparency to reduce risk of corruption.|
|Local content||Min 10% and max 20% local partnership, first priority with Iranian companies, 2nd with Iranian-foreign JVs.|
At the IPC licensing round, IOCs will bid coefficients for different aspect of the development plan including but not limited to minimum contractual work commitment, production plateau, unit Opex, fee per barrel, and the speed of cost recovery. A matrix will calculate each bidder’s score. Other factors that come into the play are complexity factor (e.g. development vs. EOR), and geological possibility of success (POS) in the case of exploration blocks. Sounds complicated, but with the transparency that NIOC has promised not a mission impossible.
Technology transfer and building local capacities are among the strategic objectives of the IPC. To serve this purpose IPC has a tiered base remuneration system that allows increase of the fees to IOC on each produced barrel if the target is overachieved. The model is designed to encourage IOC to deploy the latest technological advancement in the domain of reservoir management, optimization and production.
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