Iran sweetens oil, gas contracts to lure investors http://today.reuters.com/news/articlebusiness.aspx?type=ousiv&storyid=2007-02-02T130401Z_01_L0254113_RTRUKOC_0_US-IRAN-OIL-CONTRACTS.xml&WTmodLoc=BizArt-R3-Insights-2&from=business
Fri Feb 2, 2007
By Simon Webb - Analysis
VIENNA (Reuters) - Iran has sweetened the terms of oil and gas contracts as it seeks to lure international companies to invest in the country despite political risks, but energy executives say they want more incentives. Iran is under increasing U.S. pressure over its atomic work. The U.S. has frowned on deals that international companies have signed with Iran as they look to tap the second largest oil and gas reserves in the world.
Under new contract terms, Iran is offering international companies the chance to stay on as service providers for the full life cycle of oilfields, said Seyed Mostafa Zeinoddin, head of legal affair at National Iranian Oil Company.
He spoke at a two-day conference in Vienna at which Iran is promoting 17 onshore and offshore oil and gas blocks it is offering international companies for exploration.
Under existing contracts, companies hand over operations of fields to NIOC after development and then receive payment from oil or gas production for a few years to cover their investment plus a fixed return. The contracts are known as buy-backs.
Foreign oil companies have complained that there is no upside to these contracts as they get nothing if the field outperforms expectations. There is no incentive for them to cut costs or install the latest technology. The changes would give international companies those incentives as they will get a share of the fields output as long as the field produces.
"Previously the buy backs would be for say six or seven years," said Klaus Angerer, general manager for Iran at Austria's OMV (OMVV.VI: Quote, Profile , Research), which is currently negotiating the terms of a development contract for its Mehr field in Iran.
"Now we could be involved for 15 years or more."
Iran will include a get-out clause in contracts it awards for oil and gas exploration, releasing companies from their obligations if required under international sanctions, Seyed Mostafa Zeinoddin, head of legal affairs at the National Iranian Oil Company (NIOC), told the Vienna conference on Friday.
RESERVES BOOKING
The changes will not let foreign companies book the future share of output as reserves, which remains an issue for those facing shareholder pressure to replenish their reserves. Iran forbids foreign ownership of its oil or gas resources.
"The reserve problem remains," said one executive at an international company. "The potential resources are great but it is a problem that we can't book them."
A second change NIOC is making is to fix capital expenditure on projects after international companies have awarded development deals to subcontractors.
That should lower the risk of estimating costs before the projects are contracted out only to find costs spiralling due to inflation, which is particularly high in Iran and the industry.
"The new contracts reduce the risks to contractors," said Gholamhossein Nozari, Managing Director of the National Iranian Oil Company. "It is not easy to forecast the cost of projects, so we have decided to fix the capital expenditure after the field is tendered. This will help give a larger rate of return."
Nozari told Reuters that he hoped that the new terms would help in negotiations with China's Sinopec (0386.HK: Quote, Profile , Research) to develop Iran's huge Yadavaran oilfield.
BIG RISK
But a Sinopec executive said even with the changes, investing in Iran was still a big risk.
"We recognize that there has been some modification but it is not enough to significantly reduce the risks," said Zhou Yuqi, executive vice president of Sinopec's international exploration and production arm. "It's not substantial."
NIOC has also lowered its target for overall return on investments from new fields that will make it easier to get development plans approved. But the buy-backs would likely remain unpopular with international companies, analysts said.
Returns on the contracts have invariably been eroded by project delays and inflation.
"It's a small step in the right direction, but companies will always want more," said independent oil analyst Ali Ghezelbash. "We weren't expecting a revolution. But at least they are modifying the contracts."
U.S.'s Iran-Libya Sanctions Act, which took effect in 1995, requires Washington to slap sanctions on foreign companies that invest more than $20 million a year in Iran's energy sector.
But it has proved toothless and Tehran has lured close to $20 billion in foreign cash into its oil and gas fields.
Royal Dutch Shell (RDSa.L: Quote, Profile , Research) and Spain's Repsol (REP.MC: Quote, Profile , Research) this week signed a preliminary deal to develop part of Iran's giant South Pars gas field. Tehran values the deal at $10 billion.
(Additional reporting by Karin Strohecker)
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