An economic analysis of Iranian petroleum contract
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ORIGINAL PAPER
An economic analysis of Iranian petroleum contract Fazel M. Farimani1 · Xiaoyi Mu2 · Hamed Sahebhonar3 · Ali Taherifard4 Received: 23 March 2020 © The Author(s) 2020
Abstract Following three generations of buyback contracts, the new model of Iranian petroleum contracts (IPC) was introduced by the Iranian cabinet to incentivize investments in the country. This paper analyzes the fiscal terms of the contract with technical information from one of the candidate fields for licensing. The financial simulation shows that, in general, the IPC resembles more a service contract than a production sharing contract as the contractor’s take is relatively low—below 5% across different scenarios of crude oil price. Second, the IPC is progressive in that as the overall profitability of the project improves the government takes an increasing share of the economic rent. The results are confirmed in a sensitivity analysis of each party’s profitability and takes on oil price, CAPEX, OPEX and the fee. Keywords Iranian petroleum contract (IPC) · Fiscal regime · Government take · Progressive · Petroleum rent
1 Introduction Iran has the one of the largest oil reserves in the world.1 Traditionally, Iran has relied on buyback contracts for awarding upstream petroleum licenses to international oil companies. A buyback contract is essentially a service contract under which a foreign company develops an oil or gas deposit and recovers its costs and a pre-negotiated remuneration fee from sales revenues, but has no share in the project’s profit. Once the field starts production, the investment is handed over to National Iranian Oil Company (NIOC) who will take over the operation of the field2 (van Groenendaal and Mazraati 2006). It was first adopted by the Iranian government in 1993. For more than 20 years, the buyback contract was the main apparatus of petroleum licensing in Iran. Handling Editor: Qi Zhang Edited by Xiu-Qiu Peng * Xiaoyi Mu [email protected] 1
Sharif Policy Research Institute, Sharif University of Technology, Tehran, Iran
2
Center for Energy, Petroleum Mineral Law and Policy, University of Dundee, Dundee, UK
3
Sobhan Institute for Energy Studies, Tehran, Iran
4
Sobhan Institute for Energy Studies, Imam Sadiq University, Tehran, Iran
Technically speaking, a buyback contract is a type of risk service contract in that all costs are born by the foreign company who can only recover its costs and the agreed remuneration if the field produces at its agreed level and the price is high enough. In other words, the foreign company’s cost recovery and remuneration depends on the field’s performance. The terms of the buyback contract had been revised three times by the national oil company resulting in three generations of buyback contracts (Maddahinasab 2017). Despite these alterations, Iran was not very successful in raising the required investment for its petroleum industry. An oft-voiced critique from international oil and gas companies is that the period of the contractor’s involvement in the field i
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