Iran: Buy-back formula is refusing to add up
Upstream, June 18
By Vahe Petrossian
The oft-criticised buy-back formula introduced more than a decade ago to attract foreign investment to Iran's oil and gas sector has been modified again but only enough to put a gloss on a limited number of projects.
Buy-backs still seem an obstacle to all but the most risk-free investments.
The award of the southern part of the giant Azadegan oilfield to the Japanese earlier this year is in many ways the exception that proves the rule. Because of the involvement of the Japanese government and its long-term strategic and political interests, Azadegan represents a special case.
One key buy-back modification this year, allowing a linkage between the exploration and production phases for new reservoirs and opening the way for a long-term relationship, has of course encouraged further interest in the latest onshore licensing round.
But other more crucial developments have, if anything, raised a question mark over the formula's status and future.
In late 2003, after more than three years of effort and five abortive tender rounds, the National Iranian Oil Company (NIOC) told its subsidiary in charge of the South Pars offshore oilfield project to forget about a buy-back and start from scratch.
Pars Oil & Gas Company (POGC) has since issued a tender for the job of project manager, expecting to decide soon between a partnership of the local Naftkav with UK independent Team Oil, and Well Services of Iran affiliated with Schlumberger.
The two bidders submitted master development plans last month for a first phase output of 35,000 barrels per day, rising eventually to 95,000 bpd, and are awaiting the outcome of POGC's evaluation.
The reasons for the redefinition of the South Pars oilfield project to drop the usual buy-back requirement for foreign investors have not been spelled out by the Iranians but the problem is clearly with the risk factor.
The reservoir, an oil layer associated with the giant gas field of the same name, is seen as very complex and therefore high-risk. POGC last year first agreed practically to eliminate all risk by undertaking to compensate the investor if an initial appraisal-development phase for 35,000 bpd showed the field to be uneconomic.
The traditional buy-back would have applied in case of full development.
This arrangement effectively bent the buy-back formula out of all recognition. And, it is probably safely assumed, NIOC decided that if it is undertaking to carry all risk it and its subsidiary POGC might as well take full charge of the project and appoint contractors to do the job.
Of course, if the fixed rate of return offered within the usual buy-back formula had been high enough, potential investors might have been more interested. But after the high rates of 18% to 20% initially offered to buy-back investors in the early days such as with Total at the Sirri and South Pars phases 2 and 3 projects when the country was politically and financially more isolated in the world officials have for some two years been using a guideline closer to 12%.
Another perhaps more significant blow to the buy-back formula was the reconfiguration late last year of the landmark Cheshmeh Khosh oilfield upgrade, a relatively low-risk project, involving a doubling of output to 80,000 bpd.
After years of difficult negotiations, NIOC late last year pulled the rug out from underneath negotiators from Spain's Cepsa and Austria's OMV, announcing that the project was after all being awarded to its subsidiary, Central Iranian Oil Fields Company.
Aside from an unattractive rate of return, obstacles were also posed by reward-penalty clauses introduced in an earlier modification of the buy-back formula to mollify local critics, who had been arguing that foreign investors were being given too many advantages and were being encouraged to think short-term.
Central to the performance guarantees was Iran's insistence on making an assessment after the official handover of operatorship without giving the developer a substantive role in operations.
The best Iran was prepared to offer was membership of a monitoring committee that would look at performance and make "recommendations".
A buy-back agreement on Cheshmeh Khosh had been expected to set the pace for yet another low-risk and highly prized project, Ahwaz-Bangestan. This costly upgrade and expansion of one of the country's oldest and biggest oilfields has pitted Total against BP since their shortlisting a year ago. The fact that BP, once favoured for the contract, might face political problems because of its vulnerability to US sanctions may be an important factor in delaying a decision by NIOC.
However, experts say that the considerations affecting Cheshmeh Khosh would also apply to Bangestan.
Indeed, the question is whether recent setbacks for the buy-back system and the absence of new deals mean that the formula is dead. Iranian officials insist that there is nothing wrong with the set-up and it will continue to be applied.
However, as a Tehran source says, one day it will be "so modified that it will effectively be dead".
A newly-approved clause to the oil law, incorporating the E&P linkage and a longer-term contractual association, would suggest the authorities are not yet ready to abandon a formula that allows a way around ideological obstacles but which, experts in the country allege, encourages short-termism and is against the country's interests.
In opening up the politically sensitive oil sector to investors a decade after the 1979 revolution, the Iranians were obsessed with not seeming to give foreigners undue advantage and control over national resources.
However, as ideological considerations become ever less important, officials are likely to discover an unprecedented degree of flexibility in their options even within the next five or so years. |
