The Iranian constitution prohibits the granting of petroleum rights on a concessionary basis or direct equity stake. However, the 1987 Petroleum Law permits the establishment of contracts between the Ministry of Petroleum, state companies and "local and foreign national persons and legal entities." Buyback contracts, for instance, are arrangements in which the contractor funds all investments, receives remuneration from NIOC in the form of an allocated production share, then transfers operation of the field to NIOC after the contract is completed.
The buyback system has drawbacks for both sides: by offering a fixed rate of return (usually around 15-18 percent), NIOC bears all the risk of low oil prices. If prices drop, NIOC has to sell more oil or natural gas to meet the compensation figure. At the same time, companies have no guarantee that they will be permitted to develop their discoveries, let alone operate them. Finally, companies do not like the short terms of buyback contracts. In response, Iran has considered revisions to buyback terms (e.g., extending the length of contracts, allowing for continued involvement of oil companies after the field is handed over to NIOC), but these have been controversial and generally have not moved forward. In early December 2005, acting Iranian oil minister, Kazem Vaziri, questioned the future of buyback contracts but emphasized that Iran would continue to seek foreign investors in the energy sector.
The first major project under the buyback investment approach became operational in October 1998, when the offshore Sirri A oil field (operated by Total and Malaysias Petronas) began production at 7,000 bbl/d. The neighboring Sirri E field began production in February 1999, with production at the two fields expected to reach 120,000 bbl/d.
In March 1999, Frances Elf Aquitaine and Italys Eni/Agip were awarded a $1 billion contract for a secondary recovery program at the offshore, 1.5-billion-barrel Doroud oil and natural gas field located near Kharg Island. The program is intended to boost production from around 136,000 bbl/d to as high as 205,000 bbl/d. Total is operator of the project, with a 55 percent share, while Eni holds the other 45 percent.
In April 1999, Iran awarded Elf (46.75 percent share), along with Canadas Bow Valley Energy (15 percent share), a buyback contract to develop the offshore Balal field. Eni is also involved, with a 38.25 percent stake. The field, which contains some 80 million barrels of reserves, started producing at a 20,000-bbl/d rate in early 2003, and reportedly reached 40,000 bbl/d in February 2004. On March 18, 2005, a much-sought-after contract to develop the giant Bangestan field was awarded to Petro Iran Development Co., after having been delayed several times since 2001. Bangestan contains an estimated 6 billion barrels of oil reserves and produces about 250,000 bbl/d of oil, but the field is one of the oldest in the country, requiring investment and technological applications to compensate for natural decline. In April 2003, Shell stated that it was frustrated with the slow pace of negotiations on Bangestan, including numerous changes to terms of the project. Total and BP then bid on the project, which is now reported likely to be awarded to a local firm (PetroIran) instead. Development of Bangestan could cost $3 billion over 10 years, and aims to raise output to 600,000 bbl/d.
In May 2002, Irans Oil Ministry signed a $585 million buyback contract with NIOC subsidiary PetroIran to develop the Foroozan and Esfandiar offshore oilfields. PetroIran is expected to increase production at the fields to 105,000 bbl/d by late 2005. The two oilfields straddle the border with Saudi Arabias offshore Lulu and Marjan fields.
In other news related to buyback deals, the Cheshmeh-Khosh field, which previously had been awarded to Spains Cepsa for $300 million, was re-awarded in January 2004 to state-owned Central Iranian Oil Fields Company (CIOFC). In December 2003, Cepsa and OMV withdrew from lengthy negotiations after a reported failure to agree on development costs and buyback terms. It remains possible, however, that Cepsa and OMV could still be involved at Cheshmeh-Khosh in some way. The objective is to raise crude production at the field from 40,000 bbl/d currently to 80,000 bbl/d within four years.
Recently, Iran appears to have had some second thoughts about buybacks (including charges of corruption, insufficient benefits to Iran, and also worries that buybacks are attracting too little investment), and reportedly is considering substantial changes in the system. In late May 2002, Canadas Sheer Energy became the first foreign company since Enis Darkhovin deal to reach agreement -- $80 million to develop the Masjed-I-Suleyman, or MIS, field. Sheers goal was to boost MIS production from 4,500 bbl/d to 20,000 bbl/d (the historic field, discovered in 1908, peaked at 130,000 bbl/d in the 1930s), but the company was replaced by Chinas CNPC, which bought the subsidiary of Sheer working on MIS. CNPC began work on the field in June 2005.