Moment of Truth for Oil Companies
Speculation about Iran's restructured oil contracts has subsided. Now everyone is convinced that the new type of oil contracts is not demanded by a single person or even a group of people within the Islamic Republic, rather it has won consensus in the Islamic establishment and all decision-making bodies in the country are in favor of their implementation.
This consensus relies on a reasonable basis and conforms to the known economic and business principles.
Iran needs $100 billion in investment to develop its oil fields and enhance recovery from its ageing reservoirs. Such an investment is not available in the country and Iran has no option but to attract foreign investment. Therefore, oil contracts that secure the interests of both sides on a win-win basis were needed to be drafted. In such contracts, there must be a direct relationship between acceptance of risk and profits. It means that when an investment company accepts higher risks it would need to gain more profits.
Since Iranian Ministry of Petroleum officials believe that implementation of a contract would directly affect the success or failure of a project they took their time to develop a new model of contracts that would be comprehensive and all-inclusive. The new model of contracts, which were drafted without any hastiness or emotional interference, were designed after years of studies. There is a strong belief that even a good contract could give rise to unfavorable consequences when it is implemented in an undesirable atmosphere.
Therefore, given the significance of the petroleum industry in Iran and the fact that it is a national industry, constructive interaction was needed to take shape between relevant bodies so that the contracts would be implemented appropriately and tensions would be reduced. Some sort of mutual understanding was necessary for the implementation of the new model of contracts because Iran's petroleum industry is the main economic artery of the country's economy.
Iranian oil managers are well aware that conditions in the competitive markets, particularly in the Middle East, have changed and one-sided financial regimes that existed in Iran's buyback deals and ensured maximum benefits for the client, are no longer effective. Therefore, such contracts are no longer attractive enough for investors.
Foreign companies should take into account the fact that National Iranian Oil Company (NIOC), which safeguards Iranian oil reservoirs on behalf of the Iranian government, has to include economic, political, social and technical concerns in the contracts. Striking such a balance to the contracts is not easy, but Iranian oil managers finally managed to decide on a format of contracts that would secure the interests of all parties to a contract.
Now conditions are ripe for foreign companies and those willing to enter a win-win game that would secure their long-term interests, should not hesitate to enter the Iranian market.