Advisor to Oil Engineering and Development Co. managing director attended a conference entitled “Irans Oil Contracts” in the office of Petroleum Ministers Young Advisors last week, putting great emphasis on paving the way for oil deals. Eng. Ali-Akbar Vahidi Al-Aqa said that the economic macroeconomic plan is the first ring of the chain and the government outlines comprehensive plans for the development of industrial, economic, and agricultural sectors at all levels. Energy is the second ring that includes production, consumption, and exports, stated the advisor. “Development, production, and exports of oil and gas constitute the other ring that deals with conditions and requirements for the oil sectors development. Oil and gas production and policy, priorities of production in joint fields, and increase of recycling and production coefficients in the fields are studied in this section. “The outcome of the aforesaid plans helps the next ring draw up plans on oil and gas development and gas injection. Firstly, the needs and goals in the operational stage should be identified and then oil contracts signed, if necessary. Given the countrys conditions and policies, the oil contract could be unnecessary and the job could be done through domestic investment or finance for service deals.” Concession Agreement Elaborating on three types of oil contracts in the world, the expert said, “The first type is concession agreement, under which the agent pays some part of gross income and profit to the host country as tax and gets full possession of the underground resources. “The contract observes two issues. Firstly, it helps the agent obtain possession of oil reserve. Secondly, it makes the contract a legally binding agreement.” The second type is joint contract that includes three kinds of partnership in structure, capital, and profit. The stocks of the agent and the host country are in a ratio of 10 to 90 percent. This type of agreement, however, causes some damages to the host as it fails to monitor production. Service Contract The third type of deal in the oil industry is service contract, which is divided into two simple and buyback types. Buyback, in fact, is a method of repayment initiated in Eastern Europe in early 1920s. According to its terms and conditions, the investor earned some part of production profit at a certain period and thereafter the whole capital went to the employer. The Iranian government is also paying the cost of service projects within the rules and regulations of buyback contracts. Three kinds of buyback contracts are signed in Iran: Buyback (development of oil and gas fields), modified buyback (exploration and integrated development of oil and gas fields), and newly transformed buyback (development of complicated fields and increase of output). Al-Aqa pointed to some reasons behind Irans willingness to ink buyback contracts and added, “It is necessary to develop the identified fields and renovate the devastated ones.” Reasons behind Buyback Tendency As the Iranian government felt the need for management of oil fields development according to the executive standards; and shortage of foreign currency and the need for foreign experts involvement were palpable, the country decided to ink buyback contracts. There were other legal justifications that caused Iran tilt toward buyback contracts as this type of deal - unlike other kinds - urges the contracting parties to be law-abiding and helps the country possess the produced oil and supervise production, noted the official. Based on the contract, the whole expense of the project is met by some part of oil revenue and paid to the contractor. The law sets the ceiling for the abovementioned amount. In addition, the contractor buys oil at the latest price and is duty-bound to take optimal advantage of domestic potentials. Still, the contract is outlined within the Iranian law and the contractor is obligated to transfer the technology to Iranian experts and would get no possession of the oilfield. Moreover, the National Iranian Oil Company (NIOC) reserves the right to monitor the production processes. Advantages and Disadvantages Touching upon the benefits and shortcomings of a buyback contract, Al-Aqa said, “The contractor obtains on possession of the field, the host country makes no investment and only supervises the production, and the long-term interests are defined. These are the advantages. “The contractor is not motivated to develop the field in the best way and is not even well encouraged to transfer the know-how in the upstream oil and gas sector. The contractor also uses few experts to implement the project. This type of contract is appropriate for a short period. Under the current circumstances of the oil market, the foreign enterprises are not keen to sign buyback contracts. These are the problems facing such deals.” Amendment The main changes the country is to make in buyback contracts is thorough study on the reserves to provide a draft and later get the nod as a comprehensive development plan, to set the ceiling for investment after the initial study and design, and to put the project out to tender under the NIOC supervision. Technical inspection and close supervision on equipment built or purchased by the contractor, setup of a specialized organization to safeguard the reserves and continuously monitor the production operations, invitation of tenders and employment of contractors for different stages of giant fields, establishment of a committee to control the production, and completion and definition of technical and engineering processes of the plans are cases that would most likely undergo some changes.