Exploration, development and production of Iran's fields and reservoirs through the Iran Petroleum Contract (IPC)

Abstract

After nearly four decades, the National Iranian Oil Company (NIOC) introduced a new upstream contractual framework in 2016. The Iran Petroleum Contract was introduced in response to deficiencies in the previous risk service contract – called the Buyback contract – and in order to attract foreign investment into the country's petroleum industry. The general terms and conditions of this type of upstream contract were approved by the Board of Ministers in 2016, based on which a 20-year contract for the development and production of Phase 11 of the South Pars gas field in the Persian Gulf was concluded in 2017 between NIOC and a consortium consisting of Total, CNPCI and Petropars as contractor. The main objective of this article is to assess the new upstream contract through a detailed examination of its regulatory aspirations and its underlying legislative presumptions.

Keywords:

• IPC
• Buyback
• Bylaw
• cost recovery
• fee

Notes

1 Mustafa Bakar Mahmud and Alex Russell, ‘Evidence that the Terms of Petroleum Contracts Influence the Rate of Development of Oil Fields’ (2002) 26 OPEC Energy Review 21.

2 William E Hughes, Fundamentals of International Oil and Gas Law (PennWell Corporation 2016) 287.

3 Daniel Johnston, International Petroleum Fiscal Systems and Production Sharing Contracts (PennWell Publishing Company 1994) 87.

4 SN Ebrahimi and M Maddahinasab, ‘Controlling Contractor's Rate of Return (ROR) in Risk Service Contracts with R-Factor Mechanism’ OGEL 1 (2018) www.ogel.org/article.asp?key=3731.

5 For the Buyback and its detailed deficiencies refer to Abdolhossein Shiravai and Seyed Nasrollah Ebrahimi, ‘Exploration and Development of Iran's Oilfields through Buyback’ (2006) 30 Natural Resources Forum 199; Willem JH Van Groenendaal and Mohammad Mazraati, ‘A Critical Review of Iran's Buyback Contracts’ (2006) 34 Energy Policy 3709; Abbas Ghandi and C-Y Cynthia Lin, ‘Do Iran's Buy-back Service Contracts Lead to Optimal Production? The Case of Soroosh and Nowrooz’ (2012) 42 Energy Policy 181; Zhuo Feng, Shui-Bo Zhang and Ying Gao On, ‘On Oil Investment and Production: A Comparison of Production Sharing Contracts and Buyback Contracts’ (2014) 42 Energy Economics 395; P Dittrick, ‘Yadavaran Buyback Contract Signals Better Iranian Terms’ (2009) 1 OGEL; M Bunter, ‘The Iranian Buy Back Agreement’ OGEL 1 (2009) www.ogel.org/article.asp?key=2855; P Dittrick, ‘Yadavaran Buyback Contract Signals Better Iranian Terms’ OGEL 1 (2009) www.ogel.org/article.asp?key=2858; A Brexendorff, Christian Ule and Maximilian Kuhn, ‘The Iranian Buy-back Approach’ OGEL 1 (2009) www.ogel.org/article.asp?key=2861.

6 Article 7 of the Act of Duties and Authorities of the Petroleum Ministry ratified by the Parliament on 2012 states that ‘the general conditions of petroleum contracts shall be proposed by the Petroleum Minister and shall be approved by the Council of Ministers’.

7 The Bylaw on the general conditions, structure and model of upstream oil and gas contracts has been unofficially translated by the author and two of her colleagues from Persian to English and published by Oil, Gas and Energy Law (OGEL) and is accessible at www.ogel.org/legal-and-regulatory-detail.asp?key=17114 accessed 18 December 2019.

8 See Hughes (n 2) at 287.

9 Article 2(a) of the Bylaw.

10 The Bylaw defines green fields as ‘oil or gas fields discovered by the National Iranian Oil Company (NIOC) or by other companies for the NIOC which are ready to enter into development phase’ and green reservoirs as ‘A discovered reservoir from which, at the time of the conclusion of the relevant contract, no hydrocarbons have been commercially produced’.

11 The Bylaw defines improved oil/gas recovery as

A series of operations resulting in maintaining production levels, improving the oil/gas recovery rate or accelerating production (increasing the depletion rate), which may be implemented in all production phases during the field or reservoir lifetime, as the case may be (such as complementary geological studies, petroleum and reservoir engineering studies, execution of geophysical and 3D/4D seismic projects as required, design and execution of projects such as infill drilling, use of advanced drilling technology such as multi-lateral and smart drilling, gas lift in fields or reservoirs, reservoir fracturing, use of downhole pumps, improvement of drilling methods, maximizing the use of horizontal drilling and so on).

12 The Bylaw defines enhanced oil recovery as

using different types of advanced and modern technology, including studies, and designing optimized reservoir and production engineering methods, using varying injection techniques [of fluids] as required in the reservoir or field such as gas, water, steam, chemicals, polymers, CO₂ injection, etc., using complementary technology in each phase as required, which results in an increasing recovery factor and conservation of oil, gas or condensate resources during the lifetime of the field or reservoir.

Enhanced gas recovery is defined as ‘using different types of the advanced and modern technology which results in increasing or maintaining reservoir or field pressure and maximum displacement, which leads to increasing the gas recovery factor of the field or reservoir’.

13 The Bylaw defines brown fields as ‘fields which have already reached the production phase’ and brown reservoirs as ‘reservoirs with a history of commercial hydrocarbon production’.

14 Note to Article 2(a) of the Bylaw.

15 For information about this type of contract see Z Goudarzi and E Ghorbani, ‘Engineering, Procurement, Construction and Financing Contract (EPCF) in the Iranian Petroleum Legal System’ OGEL 5 (2013) www.ogel.org/article.asp?key=3393.

16 Article 4(b) of the Tender Act.

17 To see how tenderers are evaluated based on criteria, see: www.mop.ir/Portal/File/ShowFile.aspx?ID=2f67925f-48c0-481b-b003-2e1a16efa70e accessed 19 March 2018.

18 Article 4(b) of the Tender Act.

19 NIOC's subsidiary is a company with more than 50 per cent of its shares belonging to NIOC, while an affiliate is a company with 50 per cent or less of its shares belonging to NIOC.

20 Article 1 of the Bylaw.

21 Article 4(a) of the Bylaw.

22 Note 1 of Article 4(a) of the Bylaw.

23 Article 11 of the Bylaw.

24 Note of Article 11(a) of the Bylaw.

25 Article 7 of the Bylaw.

26 Peter Roberts, Oil and Gas Contracts: Principles and Practice (Sweet & Maxwell and Thomson Reuters 2016) 7.

27 Article 8(d) of the Bylaw.

28 Article 4(b) of the Bylaw.

29 Article 4(c) of the Bylaw.

30 Article 4(d) of the Bylaw.

31 Article 1(q) of the Bylaw.

32 Article 1(r) of the Bylaw.

33 Article 1(t) of the Bylaw.

34 Article 1(s) of the Bylaw.

35 M Bunter, ‘Commentary on the Paper “The Risk in Bank Charges Mechanism of Iranian Petroleum Buyback Contract”’ OGEL 3 (2017) www.ogel.org/article.asp?key=3707; M Bunter, ‘The Iranian Buy Back Agreement’ OGEL 1 (2009) www.ogel.org/article.asp?key=2855; and M Maddahinasab and N Rahimi, ‘The Risk in Bank Charges Mechanism of Iranian Petroleum Buyback Contract: Regarding Islamic Approach Toward Financing’ OGEL 3 (2017) www.ogel.org/article.asp?key=3706.

36 In contrast to some countries like Nigeria, the Bylaw does not prohibit contractors from charging interest on loan facilities obtained for carrying out petroleum operations. In Nigeria, the 1993 PSC expressly enabled the contractor to finance petroleum operations with loans from external sources, provided the approval of the Nigerian National Petroleum Corporation (NNPC) is obtained and any interest on the loan was recoverable as operating costs. However, such terms did not exist in the 2000 PSC and 2005 PSC and contractors can only borrow at their own cost as it is not permitted to add interest to operating expenses. For more information, refer to MB Umar, ‘Legal Issues in the Management of Nigeria's Production Sharing Contracts From a Study of the Nigerian National Petroleum Corporation's (National Petroleum Investment Management Services’) Perspective’ OGEL 1 (2005) www.ogel.org/article.asp?key=1740.

37 Article 8(f) of the Bylaw.

38 The Bylaw defines first production as ‘defined production rate in the Development and Production Plan of field or reservoir achieved in the first phase of the development operations of a green field/reservoir’.

39 The Bylaw defines first incremental production as ‘defined production rate in the Development and Production Plan of field or reservoir achieved in initial incremental production rate as the result of improved oil/gas recovery or enhanced oil/gas recovery of a brown field/reservoir’.

40 The Bylaw defines incremental production as ‘production rate of oil, gas, or condensate from a brown field or reservoir of the relevant contract, in excess of the depletion base line’. By ‘depletion base line’ is meant

the line or curve of the depletion process of the field or reservoir, as agreed between NIOC and a contractor at the time of contract conclusion, taking into account the existing facilities and without considering new improved oil/gas recovery and enhanced oil/gas recovery (EOR, EGR, IOR & IGR) which are to be implemented during the contract term.

41 Article 3(e) of the Bylaw.

42 Article 10(a) of the Bylaw.

43 Article 10(b) of the Bylaw.

44 Article 3(d) of the Bylaw.

45 Article 6(c) of the Bylaw.

46 Article 3(e) of the Bylaw.

47 Article 12 of ‘Act Removing Barriers to Competitive Production and Improving the Country's Financial System’ ratified in 2015.