The Development of Iran’s Upstream Oil and Gas Industry

The Potential Role of New Concession Contracts

Mahmoud Fard Kardel

• Publisher: Routledge
• Year: 2019
• Print ISBN: 9781032240398
• eBook ISBN: 9781000699791
• Edition: 1
• Topic: Law
• Subtopic: Commercial Law
• Index: Law

This book critically examines different forms of petroleum contracts, the historical perspective of the oil and gas industry and the political economy of the petroleum development in Iran. In doing this, the author provides analysis of the concept of concession in oil and gas development. This is discussed through the main forms of concession contracts; namely, the classic concession contract (CCC) and the new concession contract (NCC). The book ties together much of the existing work on the history of oil and gas regulation in Iran and builds on that foundation to propose a coherent and balanced approach within the framework of the NCC. To consider the role of the NCC in developing national upstream oil and gas industry, comparative examples are drawn from countries currently using, or having previously used, NCC oil and gas contracts. The selected developed and developing countries are Brazil, Thailand, the United Kingdom, Australia and Norway. The analysis considers the extent to which the NCC has served to advance the objectives and national interests of the national governments in this industry. The book involves a comparative exploration of the utilisation of NCCs in other jurisdictions and synthesises a framework through which Iran may develop its underutilised oil and gas resources. Of interest to academics, students and practitioners throughout the world, this book focuses on the relevant aspects of Iran's Constitution and natural resource laws and makes recommendations for law reform to Iran's legal frameworks.

1 Introduction

1.1 Classic concession contract

A CCC is a contract by which a government, or a governmental organ, hands over the administration of an organisation or a public service such as mines to natural or juridical persons. These persons put in their own capital to cover costs within a specified and limited time against which sums are collected from the users of the public services.¹ Payments are made to the government in consideration of the benefits gained from the use of public resources for a lengthy, but also fixed, period of time through mechanisms such as royalty payments.² The features of a CCC include a long time period public service lease (usually 75 years or more) and territorial coverage that in some cases includes the whole or large part of countries such as Iraq, Libya, Oman and Iran.³ In these contracts, arbitration is used to resolve disputes between the parties, and the formula for calculating taxation is simple, or there is no provision for taxation.⁴ This older form of concession contract is sometimes referred to as the CCC.

1.2 New concession contract

The NCC is an agreement between a government and an international oil company (IOC). The government authority grants rights and agrees to the obligations to be undertaken by the IOCs in relation to the construction, refurbishment or provision of infrastructure, or to explore for and exploit the country’s petroleum. It also reserves and transfers considerable discretion over most aspects of development to the country.⁵ The term ‘new’ not only suggests a new area in which the contracts are concluded but also refers to the incorporation of new trends into the contract and an attempt at a rational development of the country’s natural resources. To take control over resources, the relationship between developing countries and IOCs evolved from collector of royalty payments to equal profit sharing. In addition, the role of the host country had essentially changed from a passive rent collector to an active partner. An example of an NCC is provided by Thailand. The Thailand concession system, patterned on the traditional concession agreement which is a model contract of standard terms and conditions, clearly represents an example of NCC, and this is discussed in Chapter 4 of this book.

1 Ezzatollah Taher Estakhti, Concession on Tract and Its Legal Evolution (Dissertation for LLM of Public Law, Shahid Beheshti Law Faculty, 1999) 22.

2 Sinturug Savana, World Petroleum Arrangement and the Role of the State (Dissertation submitted to the CEPMLP, University of Dundee, 1986) 117.

3 Keith W Blinn et al (eds), International Petroleum Exploration and Exploitation Agreement (Barrows Company Inc, 2nd ed, 2009) 60.

4 Taher Estakhti, above n 1, 32.

5 Rainer Geiger and Aril Seren, Basic Elements of a Law on Concession Agreements’ (Organization for Economic Co-Operation and Development (OECD), Multilateral Centre for Private Sector Development Istanbul, 2001) 8.

The NCC has several distinguishing features from the CCC such as shorter contract periods, a work obligation, relinquishment clause, bonus payment and higher royalty.⁶ In fact, the NCC provides for the host country to have a more active role and a corresponding decrease in the responsibilities and rights of the IOC. Such modifications, however, did not alter the legal nature of the concession agreement. Only the terms were different under the early concession systems with the result that the features most disadvantageous for the host country were progressively eliminated.

It should be noted that the NCC has advantages and satisfies most of the major demands of the host countries including its authority to exercise some review of, and control over, the concessionaire’s decision. However, it is extremely persuasive IOCs to expand their investments in new oil and gas fields and its high revenues.

1.3 Need for Iran to transition to NCC

Governments can select different kinds of contracts depending on their circumstances; resource geology and economic, social and political conditions. A state can negotiate many types of contractual frameworks, taking into consideration different conditions in matters such as global markets, geographical situation, production costs and field-related risk factors. Iran requires hundreds of billions of dollars in investments to explore and exploit its oil and gas fields over the next two decades. For this to occur, Iran needs to address the desirability and interests of international investing companies in the types of concession contracts it offers.⁷

The NCC and associated legal regime for Iranian oil and gas fields may help to attract overseas investors with the appropriate technical expertise. The costs and risks are high in some Iranian oil and gas fields such as those which have no exploitation record, no extraction infrastructure installations, the possibility of yielding no product and located in difficult and mountainous regions.⁸ While an NCC often grants an oil company exclusive rights to explore, extract, develop, sell and export oil or minerals extracted from a specified area for a fixed period of time, the biggest advantage of NCC for a country like Iran is that the state bears no liability as to the different risks inherent to every oil and gas project.⁹

6 Blinn et al, above n 3, 276.

7 F. Ameri and M. Shirmardi, ‘The New Concession Agreements and the Interests of Oil Producer Countries: With Specific Reference to Ownership of the Oil, Host State’s Control and Management and the Fiscal Regime of the Agreements’ (2016) 4(15) Journal of Private Law Research.

8 Abbas Ansari, The Nature and Efficiency of Buy-Back Contracts (Dissertation for LLM of International Trade Law, Shahid Beheshti University, Persian Abstract, 1387).

9 Ameri and Shirmardi, above n 7, 89.

This research study examines the legal framework of Iran’s oil and gas contracts with legal and comparative analysis between them (Chapter 2). The analysis involves identifying the distinguishing characteristics of NCC and CCC (Chapter 3), discussing comparative contractual approaches in selected countries (Brazil, Thailand, Australia, the UK and Norway) that used, or are still using, the NCC in their oil and gas fields (Chapter 4). The purpose of the comparative examples is to consider the appropriateness of NCCs for the future development of Iran’s upstream oil and gas industry. This book considers other current oil and gas contract frameworks (e.g., production sharing agreement, participation agreement, joint venture, service contract), and the book also considers the positive and negative aspects of the CCC and NCC compared to these other contracts (Chapter 5). Finally, the book reviews the existing legal framework in Iran and the opportunities and barriers to adopting the most appropriate form of contract (Chapter 6).

1.4 Main question

The main question addressed is:

How desirable is the NCC for the future development of Iran’s oil and gas fields?

This is the major focus of the related main questions detailed below:

1. What are the legal frameworks and key characteristics of past and present oil and gas contracts in Iran?
2. What are the strengths and weaknesses of these past and present contractual forms (considered through comparative legal analysis) having regard to Iran’s national interest in the development of the upstream oil and gas industry and in the context of Iran’s legal system?
3. What contractual form is most appropriate to develop the future upstream oil and gas industry in Iran having regard to the interest of the government of Iran?
4. To what extent would the chosen contractual form need to be modified to overcome weaknesses in prior practices and to meet the future needs of developing Iran’s upstream oil and gas industry?
5. What reform is necessary to Iran’s legal frameworks that would be required to implement this recommendation?

1.5 Background of Iran’s oil and gas contracts

Iran, as one of the Organisation of Petroleum Exporting Countries’ (OPEC)¹⁰ founding members, is the OPEC’s second largest oil producer and the fourth-largest crude oil exporter in the world. Iran holds around 158 billion barrels of proven oil reserves,¹¹ which is approximately 10 percent of the world’s total proven petroleum reserves. Iran also holds the world’s second-largest natural gas reserves.¹² The legal frameworks of the Iranian oil industry have generally been classified into three distinct time periods.¹³

1.5.1 Pre-nationalisation period (1901–1951)

There was never an oil law before the oil Nationalisation Law of 1951.

Generally, in that time, agreements were through bilateral negotiations for producing oil. In other words, there were no existing legal frameworks in place to inform the negotiation process between the two parties.¹⁴

Basically, concessions were typically signed between Iranian rulers and foreign individuals or companies like other oil-rich countries at the time. Regarding the absence of oil legislation, the rulers were not subjected to legal restrictions on the type of contracts, terms and conditions that they could agree upon. The two main agreements entered into, before the nationalisation of Iran’s oil industry in 1951, w...

Table of contents

• Cover
• Half Title
• Series Page
• Title Page
• Copyright Page
• Dedication
• Table of Contents
• Abstract
• List of selected acronyms
• Key definitions
• Acknowledgements
• 1 Introduction
• 2 History and legal framework of Iran’s oil and gas contracts and sectors of oil and gas industry
• 3 The nature and features of classic and new oil and gas concession contracts
• 4 New concession contract: comparative national framework
• 5 Current oil and gas contract framework in the world and comparisons between them
• 6 Discussion of the challenges in proposal a New Concession Contract for Iran’s oil and gas industry
• 7 Conclusion
• Bibliography
• Index