Iran to Pay Oil Companies Larger Fees in 20-Year Contracts

  • Country needs $100 billion to rebuild oil and gas industry
  • International companies to get higher fees to raise output

Iran will pay foreign oil companies larger fees than it did under previous buy-back contracts to attract $100 billion of investments needed to rebuild its energy industry.

The Persian Gulf state, once OPEC’s second-largest crude producer, will also offer 20-year contracts on oil and natural gas projects, Roknoddin Javadi, managing director of state-run National Iranian Oil Co., said in an interview in Tehran.

“What’s been announced so far looks like an attractive contract -- no doubt it’s a vast improvement on the buy-back contracts,’’ said Robin Mills, a Dubai-based consultant who worked formerly for Royal Dutch Shell Plc on projects in Iran from 1998 to 2003.

Iran, holder of the fourth-largest reserves of oil, is preparing to boost its output once world powers remove economic sanctions that choked off investment in its oil and gas industry. Oil exports fell to an average 1.4 million barrels a day last year from 2.6 million in 2011, U.S. Energy Information Administration data show.

New Contract

New contract terms will be introduced next month, as part of plans to boost oil production to 5.7 million barrels a day and gas output to 1.4 billion cubic meters a day by 2021, Javadi said.

“The new contract that we’re going to present has raised the opportunity for those who invest to be able to participate in operation and production for a long term, let’s say 20 years,” he said. “This is the major incentive.”

Russian Energy Minister Alexander Novak was leading a trade delegation to Tehran on Wednesday, the Tehran Times reported, without citing anyone. Delegates were to meet with Oil Minister Bijan Namdar Zanganeh and other Iranian officials to discuss cooperation in the oil industry and power projects.

Iran’s previous buy-back contracts merely paid oil companies a fixed fee over five to seven years, without giving investors a share of a field’s production in the longer term. The new contract will link payments to oil companies to the quantity they produce, Javadi said.

’Most Attractive’

Under a typical buy-back deal, a foreign investor paid to develop and operate an oil field before turning it over to Iranian authorities, and an investor who produced more than the planned amount received no compensation for the additional barrels, Mills, an analyst at Manaar Energy Consulting, said Tuesday by phone. Iran reimbursed only the budgeted production costs and paid a pre-arranged fee of 12 percent to 15 percent, he said.

The new contract looks more appealing to investors than the service fees offered by neighboring Iraq, and it shares some features with the production-sharing agreements in common use elsewhere in the oil industry, Mills said. Investors will apparently have an incentive to produce more oil and develop a field for much longer than permitted under a buy-back, he said.

“It’ll be one of the most attractive contracts in the Middle East for the size and quality of the fields that are being offered,” Mills said.

OMV’s Interest

OMV AG will invest in Iran if terms are flexible, Chief Executive Officer Rainer Seele said Monday. Javadi, Seele and executives from producers Eni SpA, Korea Gas Corp. and contractors JGC Corp. all spoke at the first Iranian Petroleum and Energy Club conference in Tehran.

Iran will present its new oil and gas contracts on Nov. 27-28 in Tehran, Javadi said.

The country pumped 2.8 million barrels a day of oil in September, making it the fifth-biggest producer in the Organization of Petroleum Exporting Countries, according to data compiled by Bloomberg. Iran’s exports of crude and condensate, a light oil liquid, fell to 1.4 million barrels a day on average last year due to sanctions, from about 2.6 million barrels daily in 2011, the U.S. Energy Information Administration said June 25.

The country has already lined up buyers in Europe and Asia for increased oil production it plans as soon as sanctions are lifted, Javadi said. The country will pump and sell 500,000 barrels a day in additional oil within a week of sanctions being lifted and will raise that by at least another 500,000 barrels a day within six months, he said.

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