Iran Adopts Oil Contract as Glut No Barrier to Boost Output

  • Government wants to lure $50 billion a year of investments
  • Nation has already boosted oil production 27% this year

Iran Approves a New Oil Contract Model

Iran approved a new oil contract model, taking the OPEC nation a step closer to welcoming foreign investment in its energy industry and boosting production even more into an oversupplied market.

The contract model was approved at a cabinet meeting Wednesday, according to the official Islamic Republic News Agency. Priority will be given to boosting output at jointly owned oil and gas fields, state radio reported, citing Oil Minister Bijan Namdar Zanganeh. Iran wants to lure international companies that can make long-term investments worth billions of dollars and bring technology after sanctions were eased in January.

Iran has been working on the oil contract model for the past two years. The country hopes companies will invest as much as $50 billion a year. It’s already succeeding in meeting its pledge to regain market share it lost due to the sanctions over its nuclear program. Production was 3.55 million barrels a day in July, 27 percent higher for this year and the most since December 2011, according to data compiled by Bloomberg.

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“Any process is going to take time and a lot of steps before any investment goes into the ground,” Edward Bell, commodities analyst at Emirates NBD in Dubai, said by phone. “This isn’t going to be a step change in the way markets are going now.”

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Brent crude prices fell 15 percent in July amid a growing recognition the global surplus of crude will take time to clear. Iran seeks to reach an eight-year high for daily output of 4 million barrels by the end of 2016, with foreign investment helping it regain the position as OPEC’s second-largest producer. It was third-largest in July, according to data compiled by Bloomberg.

Big oil companies, mostly from Europe and including Italy’s Eni SpA and France’s Total SA have expressed an interest in developing Iran’s oil and gas fields. Calls to Eni and Total seeking comment about their interest now weren’t immediately returned.

The new contract model was approved in a cabinet session presided by President Hassan Rouhani on Wednesday. The Oil Ministry will review each contract to be signed by potential new investors, including details on price, duration and other terms of the project, according to state radio. The document still needs to be reviewed by parliament for final endorsement, Iran’s Oil Ministry news service Shana reported.

Investors will want to know exactly what conditions they will face in Iran, such as joint venture regulations and dispute resolution, Emirates NBD’s Bell said. “Once we get the full details on that, we will get a much better sense of how attractive the contracts are.”

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