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Al-monitor – The signing of a heads of agreement (HOA) between Paris-based Total SA, China National Petroleum Corp. and Iran’s Petropars on the development of phase 11 of the South Pars gas field is an important development in post-sanctions Iran. In fact, the country had been deprived of Western technology in its petroleum sector since the departure of major European companies in 2008-2009 due to an intensification of nuclear-related sanctions. Though an HOA is not considered a full-fledged contract, it is a symbolic step underlining that Western international oil companies (IOCs) are returning to Iran. This specific HOA is symbolic for two more reasons:
It was signed on Nov. 8, Election Day in the United States, indicating that the outcome of the election had no impact on Total’s decision to re-engage the Iranian market. Furthermore, the creation of a consortium consisting of a Western IOC, an Eastern IOC and an Iranian company is a reflection of what the Iranian stakeholders expect: Western technology, potentially some Chinese financing as well as capacity building for an Iranian company.
AUTHOR
Bijan Khajehpour
The question is whether this signing represents the starting point of a process in which European IOCs will return to the Iranian market. Evidently, being located in a low-cost, oil-producing region, oil and gas fields in Iran offer an opportunity for IOCs in the current low oil price era. Furthermore, Iranian projects do not present any major geological risks. However, political and legal risks are certainly the key factors influencing the investment decisions of IOCs with regard to projects with Iran.
To address the legal shortcomings, Iran has introduced the Iran Petroleum Contract (IPC), which has replaced the old buyback model. Compared to the buyback, the IPC is opting to integrate the exploration and production phases to expand overall capacity. Furthermore, contrary to the buyback model, the National Iranian Oil Company (NIOC) is looking to develop long-term relationships and offer more flexibility in investment costs in order to attract foreign investment, know-how and technology. From an IOC’s point of view, the planned 20- to 25-year duration of an IPC agreement provides a greater level of certainty and incentive to invest.
Nonetheless, IOCs know that the IPC won’t go beyond a “service contract.” Under the Iranian Constitution, ownership of natural resources belongs to the “nation” and cannot therefore be transferred. However, the IPC includes provisions allowing transfer of ownership of hydrocarbons to the foreign partner at defined delivery points. The foreign party, however, will not have any ownership rights over the project assets.
The core problem in putting in place the needed legal frameworks for future contracts is the fact that Iran’s petroleum policies have become politicized. In the absence of a proper energy regulatory body, oil policy is subject to ongoing political bargaining processes. The debates surrounding the IPC have been a good example of this reality. The core issues have evolved around four aspects that are driven by political and pragmatic priorities of the diverse factions in Iran. These aspects are:
Dependency on foreign technology: Archconservative power centers in Iran believe in “self-sufficiency” and “domestic capacity building,” trying to avoid dependence on foreign companies. This thinking is strengthened through the experiences of the heavy damage caused by external sanctions. However, moderates argue that Iran needs foreign investment and technology if it wants to achieve its own goal to become the region’s top technological and economic power by 2025. Furthermore, moderates opine that the IPC lays the foundation for domestic capacity building through joint ventures.
Aligning petroleum projects and foreign policy: One of the disagreements between Iran’s political factions is the degree to which foreign policy and involvement of international companies in Iran should be aligned. In fact, some view the awarding of lucrative petroleum projects as an instrument in fostering ties with key foreign powers. Consequently, different factions will push for the politicization of decisions on key project awards, with moderate forces preferring to award projects to Western companies to secure the latest technology, while conservative elements would tend toward Chinese, Russian and Asian companies for different reasons. Such political interference will evidently put pressure on the technocratic decisions in future IPC negotiations.
Factional rivalry prior to the 2017 presidential elections: It is clear that the Hassan Rouhani administration’s success in attracting IOCs will consolidate the power position of moderate forces and increase Rouhani’s chances of re-election in 2017. Therefore, in addition to publicly criticizing the IPC and the ministry’s plans, hard-line forces have also resorted to spoiling activity (such as a clampdown on the country’s civil society) using the power centers they still control, i.e., security forces and the judiciary.
The role of domestic companies: Similar to other internal disagreements, there is clear competition between different networks of power to secure the economic benefits of investments in the petroleum sector. It is not just about the simplistic polarization of interests between the networks around the Islamic Revolutionary Guard Corps and government, but rather a complex set of interests that need to find a compromise formula. On the one side, there are the operating companies, i.e., the subsidiaries of the NIOC that operate the existing fields and believe they can manage their current projects aiming to push IOCs toward greenfield projects. On the other side, there is competition over the question of which Iranian companies the NIOC would “prequalify” to be partners of IOCs in future joint ventures. Although the NIOC has produced an initial list of pre-qualified Iranian companies, it is obvious that the inclusion on that list has been, and will be, subject to further political lobbying.
A shrewd move by the NIOC came about in early October when it signed the first project based on the IPC model with an Iranian company. This decision has paved the way for signing similar contracts with IOCs in due course, but the above sticking points underline that political, ideological and business interests will produce bottlenecks in the decision-making process. Nonetheless, the government will continue to engage IOCs within the IPC framework because the country needs the anticipated capital and technology. Furthermore, with the current composition of the Iranian parliament, the administration is not too concerned about the intervention of the parliament in petroleum contracts. However, initiatives by hard-line forces that are designed to discredit the government will be pursued and will irritate IOCs and other foreign investors. Notwithstanding, as long as the moderates remain dominant in government, the overall trend will be toward greater engagement with IOCs within the confines of the IPC as a workable platform for future investments in Iran.
From an IOC’s perspective, the imposition of an Iranian joint venture partner may be the most challenging element in the IPC. But as long as the process is transparent and also structured along commercially and legally acceptable principals, the model could work.
As mentioned earlier, today’s Iran presents political and legal risks to IOCs. The Iranian authorities have to appreciate that the level of legal risk and ambiguity will play an important role in IOC decisions. This is why the legal framework — not the IPC alone, but the overall legal regime — is so important in Iran’s efforts to attract foreign investment and technology.
