Abstract
Following three generations of buyback contracts, the new model of Iranian petroleum contracts (IPC) was introduced by the Iranian cabinet to incentivize investments in the country. This paper analyzes the fiscal terms of the contract with technical information from one of the candidate fields for licensing. The financial simulation shows that, in general, the IPC resembles more a service contract than a production sharing contract as the contractor’s take is relatively low—below 5% across different scenarios of crude oil price. Second, the IPC is progressive in that as the overall profitability of the project improves the government takes an increasing share of the economic rent. The results are confirmed in a sensitivity analysis of each party’s profitability and takes on oil price, CAPEX, OPEX and the fee.
Highlights
Iran has the one of the largest oil reserves in the world.1 Traditionally, Iran has relied on buyback contracts for awarding upstream petroleum licenses to international oil companies
The results demonstrate that, in general, the Iranian petroleum contracts (IPC) is progressive that as the overall profitability of the project improves the government takes an increasing share of the economic rent
In contrast to the buyback contract under which the investor does not play any role in the production phase, under the IPC the foreign company is allowed to participate in all phases of upstream activities including exploration, development and production
Summary
Iran has the one of the largest oil reserves in the world. Traditionally, Iran has relied on buyback contracts for awarding upstream petroleum licenses to international oil companies. The terms of the buyback contract had been revised three times by the national oil company resulting in three generations of buyback contracts (Maddahinasab 2017) Despite these alterations, Iran was not very successful in raising the required investment for its petroleum industry. The fee was paid as a percentage of total capital costs under the buyback contract, which could lead to the so-called gold plating.5 Elements of progressivity such as an R-factor are included in the IPC remuneration scheme. Since the Iranian government revealed its plans of setting up a new contract in 2015, a number of papers have analyzed the contract terms, mostly from a legal and contractual perspective, focusing on such issues as the similarities and differences between the IPC, the buyback and production sharing contracts; risk sharing mechanisms, and the progressivity of the IPC.
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