2 July 2023 - 21:02
  • News ID: 475030
Iran seeks to sweeten oil/gas deal terms

The Iranian Ministry of Petroleum has adopted a new plan to sweeten terms of oil and gas contracts. Potential contractors can now file demand for exploration and production (E&P) license to develop oil and gas fields. Until recently, such licenses were granted exclusively to National Iranian Oil Company (NIOC), but now qualified E&P companies would be granted license. The advantage with this new policy is that the procedure is reduced and companies receiving such licenses might no longer need to sign any contract. Iran’s deputy minister of petroleum for supervision on hydrocarbon resources, Sajjad Khalili, tells Iran Petroleum E&P license would make the upstream oil sector attractive to potential investors.

Here is the full text of the interview Khalili gave to Iran Petroleum:

The Ministry of Petroleum has decided to grant E&P license, so far exclusively granted to NIOC, to E&P companies too. What’s the logic of this policy?

We intend to increase the production rate and recovery factor of oil and gas fields and benefit from hydrocarbon potential through improving business in the upstream petroleum industry So far, negotiations, signing of contract and decision-making about the development of oil and gas fields has been in the hands of NIOC. Due to the complications in the awarding of contracts for oil and gas field development and the time-consuming process currently in effect, the Ministry of Petroleum has been authorized by law to decide about exploration, development and production of hydrocarbon resources and outsource its activities outside of the contractual framework by granting license. NIOC’s awarding of fields to other companies is a time-consuming and complicated procedure. For each oil and gas field to be awarded, 14 steps have to be exhausted since the beginning of negotiation sup to effecting the contract, which would take three to five years. The point is that many factors may change in the field in the process, leading some companies to give up development of fields or fail to work under previous terms and conditions. That is while normally a field may be developed during the five-year period to let production start.

In Iran’s petroleum industry, there are other methods for awarding fields to companies, the most common of which are, buyback, IPC and EPC among others. Why have you decided to opt for E&P license?

We intend to facilitate the process of awarding oil and gas fields for development in Iran. For this purpose, over the past two years, we have studied models of development of oil and gas fields across the globe, which bear the most resemblance to the model of development of oil and gas fields in Iran. We concluded that we can follow the model of countries where recovery from oil and gas is considered as national wealth, like in Iran, and we decided to apply their model for outsourcing oil and gas projects. We intend to apply the E&P license method in parallel with buyback, IPC and other types of contracts for developing oil and gas fields.

What’s the advantage of E&P licensing over other methods of awarding fields to oil and gas contractors?

License is a sovereign instrument for authorizing corporate activity in the upstream sector. Companies granted such license would be authorized to operate in the upstream oil and gas sector. The advantage over signing contracts is that after license is issued, the number of steps for obtaining permit and winning ratification would be slashed from 14 to 5, which would subsequently reduce the length of the 3 to 5-year process to one-third. We’ve in fact diversified models of awarding fields. When IPC was developed, buyback was not sidelined. Now, E&P license does not mean other contract methods would be set aside.

Which body endorses the competence of companies bidding for E&P license?

According to law, the Ministry of Petroleum is tasked with examining and endorsing companies qualified to operate in the upstream and downstream oil sectors. The ministry has already cleared 19 Iranian E&P firms for upstream oil contracts. The Office of Deputy Minister of Petroleum for Supervision on Hydrocarbon Resources would be responsible for evaluating and endorsing companies applying for license.

Can foreign E&P companies also demand such licenses?

Due to sanctions and restrictions for foreign companies the Ministry of Petroleum will initially grant license to local companies. If foreign firms apply they may also receive E&P license.

How can this method be helpful in attracting investment, transferring technology and project management, which constitute the main challenges to oil projects?

Oil and gas production is an economic activity. If an economic activity is attractive, investment will definitely happen. The Ministry of Petroleum and the Office of Deputy Minister of Petroleum for Supervision on Hydrocarbon Resources are required to sweeten terms of contracts to investors. We enjoy a special status in the world in terms of hydrocarbon reserves (158 billion barrels of crude oil and 34 tcm of natural gas in place); nonetheless, we have not been successful enough in attracting investment and technology and project management. To overcome this challenge, we decided to add E&P license issuance to other methods of awarding contracts. We believe that investors would step in if modalities of contracts are simple and attractive enough. I should note that by issuing E&P license, we are transparent enough to regulatory bodies to be assured that all activities comply with law and negotiations and text of licenses are not confidential. One fault with current deals is that except for the framework of the deal, the entire provisions are negotiable, which means that the text of the agreement and all appendices are decided after negotiations, which would automatically lengthen the process of awarding of fields. But that is not so with E&P licensing. The text has been prepared and only some segments proposed by the applicant and confirmed by the Office are rewritten.

Aren’t any talks held about the provisions of the license?

The provisions are not negotiable and they have already been decided based on peremptory norms. But for various oil and gas fields, some clauses may change and the contractor’s share varies depending on the specifications of the field.

What would be NIOC’s role then?

Currently NIOC represents the Ministry of Petroleum in contracts, but based on its new Articles of Association, NIOC is a commercial and E&P company like others. It has now carried out E&P activities like others. The regulatory agency in the issuance of permits is again the Office of Deputy Minister of Petroleum for Supervision on Hydrocarbon Resources. NIOC can obtain permit from us for developing oil and gas fields. In fact, we intend to prepare the ground for the more active presence of other companies in Iran’s petroleum industry. Therefore, when we sign a contract with contractors, we will no longer need to issue a license and when we grant a license to a contractor, no agreement would be needed to be signed. In order to succeed in implementing oil and gas projects, we believe we should make the business environment competitive. Only within the framework of competitiveness, can we witness reduced costs, upgraded quality, improved services, customer satisfaction and innovation. 

When will the Ministry of Petroleum start issuing license?

Issuing a license is in the hands of the Ministry of Petroleum. But we need green light from the Council of Ministers, after which we would be able to issue licenses. We hope to issue the first E&P license this year.

How optimistic are you about this method to win over contractors?

We are at the beginning of the road and we received opinions of some E&P companies in this regard. I should say that the Ministry of Petroleum, holding sovereignty over oil resources, should shun monopoly and instead promote competition. We have 70 oil and gas fields to be developed. We have abundant unconventional resources which have been explored, but we lack technology to develop them. They all need technology behind NIOC’s for development and production. The government lacks sufficient investment for this purpose. Our estimates show that we would need $140 billion in investment to reach 6.5 mb/d production. At current condition this sum may not be provided by the government and NIOC. Issuing a license would centralize affairs within the ministry and will help improve the business environment and competition, and make the upstream sector attractive to Iranian and foreign investors because the length of the issuance of license will be much shorter. Then, the license holder can carry out its E&P activities with peace of mind and without facing any government barriers. We believe that issuance of a license would improve decision making processes and bring good governance in the upstream oil industry.

Do you think that Iranian oil and gas fields are still attractive to investors?

Despite the high rate of return on investment in E&P projects in Iran, due to sanctions and bureaucracy, the number of foreign companies willing to develop oil or gas fields in Iran is not high. However, owing to some initiatives with regard to energy diplomacy and removal of barriers, companies will have tighter competition and more companies will volunteer to develop oil and gas fields in Iran.

Iran Petroleum

News ID 475030


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