A recent Chinese buyback contract for development of Iran’s Yadavaran oil field indicates possibly better terms for international oil companies, said a senior consultant with FACTS Global Energy.
“This deal is considered as one of the most important deals with a foreign oil company in Iranian petroleum industry since the last 3 years,” said Alexis Aik of FACTS Singapore office.
But she noted that lack of confidence in Iran’s political environment and concerns about its economy remain a deterrent to international oil investors.
In October 2004, Iran signed a memorandum of understanding with China Petroleum & Chemical Corp. (Sinopec) to develop Yadavaran field (OGJ, Apr. 23, 2007, p. 20; OGJ Online, Nov. 27, 2006).
Under that deal, China agreed to buy 10 million tonnes/year of LNG from Iran for 25 years.
After 3 years of negotiations, Iran and Sinopec on Dec. 9 signed a buyback contract outlining Yadavaran development in two phases. Production is expected in 2009 (OGJ Online, Dec. 18, 2007).
Other stakeholders in the field are Iran’s National Iranian Oil Co. and Indian firm ONGC Videsh Ltd.
Contract terms
Currently, the buyback contracts are the only available option for foreign investments in Iranian upstream projects.
In the buyback contract, the contractor funds all project investments with pay back of the capital cost to be deducted from sales revenue of oil and gas for 7-8 years.
Iranian buyback contracts might not seem attractive to some companies because the rate of return (ROR) appears to be low compared with other international projects.
This is compounded by the fact that previously negotiated buyback contracts had little or no flexibility regarding cost escalations.
“Currently, a combination of unattractive commercial terms for buyback contracts, political problems created by the Iranian government, and the general lack of confidence in the stability and sustainability of the Iranian economy have kept many serious foreign players away from petroleum projects within the country,” Aik said.
Flexible contract
But the recent buyback contract with Sinopec sent a different signal to foreign oil companies:
- The 4-year payback period is about half that of earlier buyback contracts.
- The ROR was set at 14.98% with no risk, representing a premium of 3% compared with older contracts. One example is NorskHydro’s buyback contract for the KhoramAbad block.
- For the fist time in Iranian buyback contract history, the Sinopec provided flexibility in terms of probable cost escalation, reducing risk.
“All these point towards more attractive terms for Iranian buyback contracts that may be applicable for future buyback contracts,” Aik said.
Politics behind deal
With the exception of China and Russia, the United Nations Security Council and Germany wants more political and commercial sanctions on Iran.
Among the five permanent members of the council with the power to veto, China and Russia disagreed with a third UN resolution to extend sanctions.
China unexpectedly agreed with the US on Dec. 3, 2007, on the basis for more UN sanctions on Iran’s nuclear program. The US announced the UN Security Council, with the Chinese government, will be able to focus on a number of areas where sanctions are to be implemented.
A week later, Sinopec signed a buyback contract with Iran.
“It seems the deal was in response to the agreement that China had with the US for more Iranian sanctions. This was probably to garner more support from the Chinese government,” Aik said.