The Contractual Form of Iran's Buy-back Contracts in Comparison with Production Sharing and Service Contract

Abstract

Abstract Since the Constitution of the Islamic Republic of Iran (1979) does not allow foreign companies to own equity stakes in hydrocarbon projects, Iran has developed a new mechanism in line with the Constitution to facilitate the engagement of foreign oil companies in development of oil/gas fields. Such a mechanism resembles a typical buy-back arrangement, under which a foreign company provides the funding for, and necessary equipment and services for the establishment, development or updating a project and agrees to purchase back a portion of the production such as those goods or services produced in that project. This mechanism, however, is a hybrid of a service contract and a production sharing agreement, although it is much closer to the former. Under this mechanism a foreign oil company provides the fund for, expertise, equipment and machinery for the development of a gas/oil field. In return, the petroleum costs, constituting Capital Costs, Non-Capital Costs, Operating Costs, Bank Charges (interests), and Remuneration Fee, will be recovered through the revenues generated from the filed as the result of the development operations carried out by the foreign oil company as contractor. Alternatively, the oil/gas produced as the result of the development operations may be sold to the oil company under the Crude Oil Sales Agreement at the prevailing market price against the expenses and costs charged to the Project Account by the contractor. The development operations are carried out under the control, supervision, inspection and audit of Iranian National Oil Company (a state oil company). Although this provides a degree of control over operations of the private contractor, development operations are carried out under the management of the risk-taking foreign oil company. Thus, for instance, the risk of any shortage of revenue shall be borne by such company. In this article, we provide a true picture of such a particular formula, distinguishing it from typical buy-back in industrial projects, service contracts and production sharing agreements in oil and gas business. To achieve that goal, a brief explanation of the basic elements of such arrangements is a prerequisite for our discussion.