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Page added on February 9, 2014
Iran to Offer Oil Investors Better Terms Than Iraq
Iran, bound by economic sanctions and seeking investment to help develop its oil and natural gas, plans to offer international energy companies more attractive contracts than neighboring Iraq, an Oil Ministry adviser said.
The Islamic republic is developing a new type of contract that’s “in line” with international practice and law, Mehdi Hosseini, who leads a ministry committee reviewing oil contracts, said at a news conference in Tehran today. The new model will be more flexible and advanced that those investors encounter in fellow OPEC-member Iraq and will differ from what’s available elsewhere, he said.
“Any new model will have to be win-win for all parties involved,” Hosseini said. “The new contract is our own type. We haven’t given it a name.” He reiterated that Iran plans to introduce the new contract at a conference in London in late June or early July. The Persian Gulf state will curtail use of existing buy-back contracts, he said.
Iran’s buy-back arrangements require companies to pay for oil and natural gas exploration and recover their investment from any production at a pre-arranged rate of return. Hosseini said in November that the country, hampered by sanctions over its nuclear program, was working on more investor-friendly contract terms that conform more closely with international practice.
Resuming Talks
Iran, the fifth-largest producer in the Organization of Petroleum Exporting Countries, will resume negotiations with world powers over its nuclear activities on Feb. 18 after reaching a preliminary deal in November. The two sides seek a comprehensive accord to ensure Iran’s nuclear program is non-military, as it says, and end international sanctions against the country. Iran is losing as much as $5 billion a month in oil sales because of sanctions.
The nation needs as much as $150 billion in investment over the next five years to develop its oil and gas, and Iranian officials expect most of the money to come from foreign companies, Hosseini said.
The central government of Iraq, which overtook Iran as OPEC’s second-biggest member in 2012, pays investors a fixed fee for any oil they produce. Iraq’s semi-autonomous Kurdish region offers production-sharing contracts, which many foreign companies prefer as more lucrative. Exxon Mobil Corp. (XOM) and Total SA are among the companies that have signed deals with Iraq’s Kurdish authorities.
Iran will give a preview of its new investor contract to a domestic audience at a two-day conference in Tehran starting Feb. 22, Hosseini said. International representatives are welcome and some European and Asian companies have expressed interest in the event, he said, without identifying any of them.
Iran’s oil reserves of 157 billion barrels are the world’s fourth-largest, and it holds the biggest gas reserves, estimated at 1,187 trillion cubic feet, according to BP Plc’s Statistical Review published in June 2013.
6 Comments on "Iran to Offer Oil Investors Better Terms Than Iraq"
rockman on Sun, 9th Feb 2014 3:48 pm
Just a guess but I suspect the bidding will focus on that guaranteed ROR. A year ago I cut a similar deal with another company that had great new oil play idea but lacked the capex to develop it. We’ve just started the pilot drilling phase. If the first 5 wells work we’ll put $100 million on the table to begin full scale development. The entire negotiations focused on our ROR. We got the deal because we accepted a lower ROR then the other competitors.
And this is the potentially big news about the Iranian plan: who will win the contracts? I would give a huge edge to China. For any other oil company, especially the pubcos, they are strictly looking at the profit margin. ExxonMobil is not going to factor in supplying oil to the US in their negotiations. China, OTOH, is as much (if not more) focused on the access to oil then the profit. As others like westexas have noted China can create a greater return on the oil they import then most if not all countries. XOM et al don’t benefit from US industry gains from consuming oil. But thanks to their fairly monolithic design China can factor in the “big picture”.
Northwest Resident on Sun, 9th Feb 2014 4:43 pm
What we see in this Bloomberg article is just the tip of the iceberg. Beneath the surface, hidden from view, is a massive volume of raw power and fabulous wealth in play. The component parts of that hidden mass are top-level political maneuverings, subtle and outright threats, espionage, murder, death by the thousands, threat of war, bribes and extortion, and a million little stabs in the back. Amazing how this world works.
rockman on Sun, 9th Feb 2014 5:32 pm
NR – Yep…very similar to what I’ve experienced working in S. La. For the last 40 years. LOL. Except, of course, the food was better.
Davy, Hermann, MO on Mon, 10th Feb 2014 12:15 am
FROM ROCK
China, OTOH, is as much (if not more) focused on the access to oil then the profit. As others like westexas have noted China can create a greater return on the oil they import then most if not all countries. XOM et al don’t benefit from US industry gains from consuming oil. But thanks to their fairly monolithic design China can factor in the “big picture
Rock, I have been watching this Chinese oil investment Juggernaut for years. I am interested in this economic geopolitical strategy. I have never seen a foolproof investment strategy. What happens if you fail to create a greater return than other countries from these investments? What happens when the game changes and they have far flung oil investments with huge logistical, capital, and human commitments. You could see a great unwinding. This could be a situation where assets are stuck in place. The Chinese have invested in many questionable areas. The Chinese seem too often to take what others can’t or won’t invest in. I see a big gamble in play. They are going to score big or it could be a monumental dud!
rockman on Mon, 10th Feb 2014 3:06 pm
Davy – Certainly a fair bit of potential instability in China’s energy model. OTOH who has one that isn’t full of risk? The Chinese have a blind spot in some ways. Or at least some have in the past. Years ago I spoke with a guy how traveled to China to teach some businessmen the basics of the free market system. He figured he would just spend one day explaining the general concept of profit margin. He was very wrong. His students couldn’t understand why a factory that made widgets at a total cost of $1/widget would sell them for more than $1/widget. To them, with the communist background, it made no sense that a company would deliver a product to the market place at a price higher than what it cost to create it.
And that may be a hindrance to some Chinese companies with private investors. But it also gives the govt dominated energy businesses a big advantage over other energy companies. Consider the potential new trade deals Iran is proposing. Companies basically compete against each other on the basis of which will accept the lower rate of return. In theory a Chinese govt energy company can bid a 0% ROR. That company could be more concerned with what China can gain by importing and utilizing Iranian oil than a profit the company might realize. That would be rather difficult for ExxonMobil or Total to compete with. Their only concern is their companies’ profits and not if the US or France imports all the oil they need.
Davy, Hermann, MO on Mon, 10th Feb 2014 4:02 pm
Rock, I am curious what is going to happen if this Chinese banking system goes critical. There are many nuances to this story. Their economy is in a different situation then the western counterparts. Yet, there are serious imbalances that will affect their ability to continue to buy up the world. If a financial crisis develops China will need to divert their huge foreign reserves to triage this crisis. This most likely will have feedbacks. Many of these reserves are in US treasuries. That market is very important to the global finance system and it is debatable how liquid it is with the FED interventions. The FED’s ability to buy everything up has a limit. These feedbacks are not yet fully understood because this has not happened since 1994 and their economy then was so much smaller. It should be interesting if they can follow their current oil resource policy through this possible crisis and much will change if credit is destroyed internally in the Chinese economy.