Comparing Iran's Buyback Agreements and New Petroleum Contracts

Submitted in part fulfilment of the requirements for the degree of Master of
Science in Energy Economics and Policy
Analysing Iran’s Upstream Petroleum Fiscal Regime:
A Comparison between Buyback Agreements and Iranian Petroleum
Contracts
By
Anastasios Pazazachariou
Faculty of Business, Economics and Law
University of Surrey
September 2014
Word count: 10953
© AnastasiosPapazachariou

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Abstract
This thesis analysed Iran’s petroleum fiscal regime and examined the terms and
conditions of buyback contracts in comparison to those of the new Iranian
Petroleum Contracts.
The study aimed to comprehensively compare these two fiscal regimesin order
to form an opinion on whether the new contracts will be able to tackle the main
shortcomings of buybacks. In order to do that, it analysed the constitutional base
and the exact terms of buyback agreements in Iran and examined their strengths
and weaknesses. Moreover, it examined the structure of the Iranian Petroleum
Contracts as introduced by the Government in the presentation of the contract
draft in February 2014.
Under the comparative analysis of the two regimes, the study concluded that the
two contractshave significant deviations arising from their structure and the way
the government cooperate with the IOCs. Thus, it expects from the new contracts
to attract interest from the IOCs as they include improved terms in relation to the
buybacks. With the investment increase, Iran will be able to improve production
rates and, consequently, the country’s revenues.

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Table of Contents
List of Tables
List of Figures
List of Abbreviations
List of Appendices
Chapter 1: Introduction
1.1 Background...........................................................................................................................................................................1
1.2 Iran’s oil potential.............................................................................................................................................................1
1.3 Objectives...............................................................................................................................................................................3
1.4 Importance of the research..........................................................................................................................................3
1.5 Structure of the Thesis....................................................................................................................................................4
Chapter 2: Literature Review
2.1 Introduction .........................................................................................................................................................................5
2.2 Petroleum Fiscal Systems..............................................................................................................................................6
2.2.1 Tax and non-tax instruments frequently included in fiscal regimes ..................................................8
2.3 Iranian Oil Industry: Background ..........................................................................................................................11
2.4 US, UN and EU international sanctions...............................................................................................................16
2.5 Conclusion..........................................................................................................................................................................19
Chapter 3:Buyback contracts: History, Structure analysis and shortcomings
3.1 Introduction ......................................................................................................................................................................20
3.2 Introduction of Buyback agreements...................................................................................................................20
3.3 Existing form of buyback contracts in Iran.......................................................................................................24
3.4 IOC’s risks related to the Buy-back contracts..................................................................................................27
3.5 Conclusion..........................................................................................................................................................................32
Chapter 4:Iranian Petroleum Contracts (IPC)
4.1 Introduction ......................................................................................................................................................................33
4.2 New generation contracts of Iran’s upstream oil sector............................................................................34
4.3 Conclusion..........................................................................................................................................................................40
Chapter 5: Discussion and Conclusion
5.1 Discussion...........................................................................................................................................................................41
5.2 Challenges...........................................................................................................................................................................46
5.3 Future Research ..............................................................................................................................................................46
5.4 Conclusion..........................................................................................................................................................................46
REFERENCES AND BIBLIOGRAPHY

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List of Tables
Table 2.1: Fiscal Systems, Side-by-Side Comparison………………………….……………..8
Table 3.1: The Three Generations of Buyback contracts …………………….…………..25
Table 3.2: Summary of Buyback Contract terms …………………………………………….29
Table 4.1: Exploration and Development Fees in New Contracts ………………….....41
Table 4.2: Development Fee Matrix for Different RI and crude oil’s Production
Levels…..……………………………………………………………………………………………………….42
Table 5.1: Differences between buyback and Iranian Petroleum
Contracts...............................................................................................................................................44
Table 5.2: Improved terms for government and IOCs …………………………………......45

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List of Figures
Figure 1.1: World proven oil reserves ranking ………………………………………...……… 1
Figure 1.2: Iranian oil fields ……………………………………………………………………..…….. 2
Figure 2.1: Classification of Petroleum Fiscal Regimes ……………………………………. 6
Figure 2.2: Oil production during 1931-1950 ………………………………………….……. 14
Figure 2.3: Iran’s Revenue from oil exports 2003-2013 ………………………………… 19
Figure 2.4: Monthly Iranian exports of crude oil and condensate …………………... 20
Figure 3.1: Allocation process of oil revenues under PSCs ……………………….……. 28
Figure 4.1: Oil exports levels 1980-2010 ……………………………………………………… 35
List of Appendices
Appendix A: Data for world proven oil reserves……………………………………...………54
Appendix B: Iranian oil fields……………………………………………………………………..… 55
Appendix C: Iran’s Crude Oil Production 1931-1950……………………………..………. 56
Appendix D: Iran’s Oil Exports 1980-2010……………………………………………………..57

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List of Αbbreviations
APOC Anglo-Persian Oil Company
AIOC Anglo-Iranian Oil Company
AWP&B Annual Work Program and Budget
B/D Barrels per day
BT Brown Tax
CAPEX Capital Expenditures
CIT Corporate Income Tax
DF Development Fee
DMO Domestic Market Obligation
EDF Exploration and Development Fee
EOR Enhanced Oil Recovery
EU European Union
GDP Gross Domestic Product
GR Gross Royalty
HG Host Government
IEA International Energy Agency
IOC International Oil Company
IPCs Iranian Petroleum Contracts
IT Income Tax
KB/D Killobarrels per day
LIBOR London Interbank Offered Rate
MDP Master Development Plan
NIOC National Iranian Oil Company
NOC National Oil Company
OPEC Organization of Petroleum Exporting Countries
OPEX Operational Expenditures
PSAs Production Sharing Agreements
PSCs Pure Sharing Contracts
RI “R” Index
ROR Rate of Return
RSCs Risk Service Contracts
SAs Service Agreements
SCs Service Contracts
SPT Special Petroleum Tax
UN United Nations
US United States

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Chapter 1
Introduction
1.1 Background
Iran is currently the second largest economy in the Middle East region in GDP
terms, after Saudi Arabia, with US$ 484 billion and the second largest in
population levels with 78 million residents. A current member of Organization of
Petroleum Exporting Countries (OPEC), Iran holds the fourth largest proven oil
reserves in the world and it is the second largest oil producer, holding 10% of
the world’s total proven oil reserves. Thus, its economy is highly based on the
hydrocarbon sector which accounts for approximately 40% of GDP and 85% of
the total government revenue (World Bank, 2014).
Despite the dependence of Iranian economy on oil revenues, the country’s
domestic energy demand is also highly dependent on oil and gas consumption.
Specifically, the share of oil accounts for 44% of total primary consumption,
whereas gas accounts for 55%. Thus, oil and gas production is important for both
the economy and the domestic market of Iran (Enerdata, 2012).
1.2 Iran’s oil potential
According to Research and Market Iranian Review 2006, Iran has 50 onshore and
offshore oil fields (see also appendix B), all of which are depicted in figure 1.2:
Figure 1.1: World proven oil reserves ranking Source: CIA, 2014

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The largest of these fields is the Ahvaz-Asmari field, which is located in the area
of Khuzestan, with 750,000 barrels per day (b/d) production capacity. According
to the estimates of Business Monitor International 2014, the future potential of
oil reserves is expected to climb from 151.2 billion barrels in 2012 to 160 billion
barrels in 2023.
Although the estimates about the potential of Iranian oil resources during the
next years are encouraging, the international sanctions and lack of incentives for
investment companies in Iranian fiscal regime, limit the Iranian capability for
exploitation of new oil field discoveries (IEA, 2014).
Figure 1.2: Iranian oil fields Source:Kakhki, 2008

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1.3Objectives
The high potential of Iranian oil industry can provide the country with increased
revenues from hydrocarbon exports and supply the domestic market with low-
priced oil in order to enhance the country’s oil consumption. The study aims to
achieve two objectives:
a) Provide a comprehensive analysis of the Iranian fiscal regime, by
considering the legal barriers and analysing its shortcomings.
b) Introduce the structure of the new Iranian contracts revealed in February
2014 and compare them with the contracts currently applicable in Iran.
1.4 Importance of the research
The structure of the energy global mix, as formulated during the recent years, is
highly dependent on the consumption of hydrocarbons. The energy scenarios for
2030, represented by International Energy Agency (IEA) in 2011, indicate that
fossil fuels will remain the primary energy sources accounting for more that 80%
of global energy demand. Moreover,oil producing countries can play a vital role
in meeting global energy demand and generate substantial revenues to provide
their population with high standards of living (Walther, 2008). It is, however, the
country’s management of hydrocarbons extraction and revenue earning that
determines their successful exploitation.Each country has different needs, socio-
economic limitations and, of course, objectives. Johnston 2008 argues that, in
order for a country to successfully explore and exploit its natural resources, two
key stages in the development of its hydrocarbons should be met:
1) Allocation Strategy- the accurate design and execution to attract
investment projects.
2) Fiscal System design- the design of an effective fiscal system that will
provide the government with the maximum revenue expectations and
offer companies adequate returns on their operations.
For Iran, the extraction of hydrocarbons has been the centre of its political and
economic development for more than 100 years. However, with its current fiscal
regime, the country earns revenues below expectations and does not attract the

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desired investment projects. The study aims to examine Iranian fiscal regime and
introduce the new Iranian Petroleum contracts, with which the country targets
to increase its participation in the global petroleum supply.
1.5Structure of the Thesis
In the second chapter, the study provides a comprehensive and analytical
literature review related to the forms of fiscal regimes widely applicable, as well
as the main tax instruments implemented to these regimes. Furthermore, the
literature review emphasizes on the Iranian legislative history since its very
beginning and concludes with the export restrictions on Iran’s oil industry as
generated by the implementation of worldwide sanctions. Chapter 3 presents an
overview of Iran’s petroleum fiscal regime and the implementation of the
buyback contracts, with respect to its constitution barriers and the main
shortcomings of Iran’s legislative framework. Chapter 4 introduces the new
Iranian Petroleum Contracts (IPC) and highlights the key differences between
buybacks and IPCs. Finally, Chapter 5 summarizes, discusses and concludes on
the analysis of the study and provides recommendations for future research.

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Chapter 2
Literature Review
2.1 Introduction
The current world economic structure places each country in a strategic position
according to the development and exploitation of its sources and benefits that
the land or its people provide. As a consequence, the revenues generated from
these sources can contribute significantly to a country’s sustainability and the
welfare of its people (Boadway and Keen, 2010).
However, in order for a country to gain the most out of these sources, it is
important for the correct legal framework to be adapted.On the one side, this can
provide the host country with a fair share of its valuable reserves and, on the
other hand, it can attract the important investment and technical knowledge to
achieve the optimal exploitation of these sources (Nakhle, 2010).
This framework is even more complicated when it is applied for the taxation of
hydrocarbons. The cooperation between host governments and international
companies includesshared and conflicting interests. While both sides target to
reach optimal exploitation of the fields, international investors also aim to
achieve maximum profits from their investment decisions. By way of contrast,
host governments’ intentions are concentrated in the correct regulatory
framework that will generate the highest possible revenues for the country.
Moreover, the regulatory framework differs according to each country’s
economic and cultural background (UNDP, 2009).
This chapter aims to introduce the main fiscal regime forms and their relative
features. Furthermore, it highlights the most frequently used tax instruments for
the exploration, development and production stages. Finally, it provides an
extensive analysis of the legislative history of Iran since 1901 and concludes with
the later history of the country, in order to form a comprehensive view on the
taxation of Iranian oil industry.

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2.2 Petroleum Fiscal Systems
Since the beginning of the oil industry, governments and oil-related companies
have been reaching agreements on certain terms and conditions for the
exploration, development and production of oil. These agreements have been
included in the legislative framework of every country as laws and can be subject
to adjustments (Tordo, 2009). Over the years, these agreements were formulated
in two main categories:
 The concessionary systems and
 The contractual systems
These two systems are divided in subsections, as depicted in figure 2.1 below:
Based on figure 2.1, the study will analyse these systems, as well as the tax
instruments mainly used across the world.
Concessionary or Royalty/Tax (R/T) Systems
Concessions are agreements where a country entitles an investor with exclusive
access on the country’s petroleum reserves. Through these agreements, the
companies have rights to explore, develop, produce and distribute the
hydrocarbons extracted from a fixed area for a predetermined period of time.
The concessionaire bears all risks of the project, while the government
Figure 2.1: Classification of Petroleum Fiscal Regimes Source: Johnston, 2007, p. 60

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receivestaxes as compensation. These taxes usually include a synthesis of income
tax (IT), special petroleum tax (SPT) and/or gross royalty (GR), all of which will
be described thoroughly in section 2.3 of the chapter (Agalliu, 2011).
Contractual Systems
Under a contractual system, an oil company agrees with a government to operate
as contractor in a fixed area for a certain period of time. In contrast with
concessionary systems, ownership of hydrocarbons remains to the host country
and the company bears all risks linked with exploration and development stages,
under the supervision of the government or an authorized by the government
party. As compensation for its operations, the oil company receives the
reimbursement of its costs and a share of production or a fixed fee. Contractual
systems are divided into two categories according to the type of compensation:
a) Productions sharing agreements (PSAs)
Under a PSA contract, host governments and oil companies share the
profit oil1, according to shares predetermined in the contract. PSAs also
include royalties and taxes received by the host governments and a cost
recovery limit for the oil company operating in the field.
b) Service Contracts (SCs) or Service Agreements (SAs)
SCs differ from PSAs regarding the type of compensation received by the
companies operating a field. The contractor is reimbursed with its costs
and a fixed taxable fee, which is either linked to production or revenues of
the field. SCs are usually either pure service (PSCs) or risk service
contracts (RSCs). The difference between these two types of service
contracts is that RSCs are linked to the profit of oil production and do not
include exploration and/or development risks. In contrast, PSCs provide
contractors with remuneration and cost recovery independent fromthe
production profits and are linked with risks associated with the
operations of the field(Van Meurs, 2007).
1 “Profit oil is the amount of production, after deducting cost oil production allocated to costs and
expenses, which will be divided between the participating parties and the host government
under the production sharing contract. Cost oil is a portion of produced oil that the operator
applies on an annual basis to recover defined costs specified by a production sharing contract”
(Schlumberger, 2014).

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Table 2.1 providesa comprehensive analysis of the basic characteristics of the
main fiscal regimes:
2.2.1Tax and non-tax instruments frequently included in fiscal regimes
Gross Royalty (GR)
GR is considered to be one of the most common tax instruments used by host
governments (HG) under concessionary systems (Tordo, 2009).Royalty is a
remuneration fee paid to the HG by a company operating an oil/gas field. This fee
is either linked to the volume of field production (per-unit royalty) or the value
of field output (ad-valorem royalty). Due to the fact that royalty isconnected to
production rates or revenues, many governments do not include the profitability
rate of the field inthe royaltyreimbursement. Thus, GRs arepayable to
governments regardless of the project’s production levels and costs. Finally,
royalties are also used in contractual systems as additional tax instruments
(Nakhle, 2008).
Table 2.1: Fiscal Systems, Side-by-Side Comparison Source: Johnston, 2007, p. 71

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Resource rent tax (RRT)
RRT is another tax instrument used under concessionary systems, levied to
provide governments with revenues from the project’s net cash flow in specified
periods of time. The initial form of RRT, called Brown Tax (BT), specifies that,
when the project’s net cash flow is positive, companies have to pay
thepredetermined percentage of tax.However, if the net cash flow isnegative,the
government will provide companies with refund on the aforementioned cash
flow losses.RRT is an adjusted form of BT that includes the transfer of negative
cash flowsin later periods, so they can be subtracted by positive cash flows
generated in those periods (Nakhle, 2008).
Corporate Income Tax (CIT)
CIT is commonly levied on most businesses operating in a country and, thus, oil-
related companies. It is applied on a company’s revenues and it is usually 25-
35% of the company’s total revenues. Most countries apply CIT after the
deduction of company expenses and operating costs. CIT in oil contracts is
usually applied in a combination of two or more taxes and can provide
government with revenues unlinked with the field’s cash flow (IMF, 2012).
Special Petroleum Tax (SPT)
Many concessionary systems also include a SPT, which is levied on a project’s
cash flow. It is actually a supplementary tax instrument of income tax and it is
applied only when the project’s cash flows are positive, just like the application
of RRT (Nakhle,2008).
Bonuses
Bonuses are non-tax instruments used in both concessionary and contractual
systems. They are remunerations paid by companies to the state and can take the
form of signature, discovery or production compensations. Although they
provide governments with early revenues, they can significantly reduce
company capital capabilities and, as a consequence, discourage risk-adverse
investors (Tordo, 2009).

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State Equity or Participation
As examined by McPherson 2010, the equity or participation in the extraction of
hydrocarbons has been significantly increased during the last 50 years. The state
participation can take many forms,usually under the supervision of the country’s
National Oil Company (NOC). These forms are:
a) Full equity participation: the NOC fully undertakes the investment
projects without the involvement of private parties or bares the
investment obligations equally and jointly operates with private sector
participation.
b) Carried equity participation:private investors bare the project costs,
usually until the development stage. The project costs are then carried out
equally between the investors and the NOC during the production stage.
c) Free equity participation: it is typically a direct equity grant to the state
by the investor,with the absence of financial requirement or
reimbursement expectedby the state. This form of equity is not widely
applicable and was frequently used in mining resources.
d) Production Sharing: it is a form of state participation widely used in oil
agreements between investors and governments. Production sharing
contracts include state participation by the NOC, which operates the fields
along with the investors and shares the revenues after deducting the
projects costs (McPherson, 2010).
Domestic Market Obligation (DMO)
DMO is a non-tax instrument by which an oil company operating a field is obliged
to sell a portion of oil in the local market at a lower price than the average
international prices of oil. DMO can be levied in both concessionary and
contractual systems and is a tool frequently used by governments. (Tordo, 2009).
Ring fencing
Ring fencing isa specific oil industry characteristic. A company operating an
oilfield is usually paying taxes according to the contracted area or the projects’
cash flows. With the application of ring fencing, HGs forbidcompaniestooffseta

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project’s losses by using revenues generated from another. Another form of ring
fencing is the separation of a company’s upstream and downstream operations.
Through both types of ring fencing, HGs protect their potential revenues from
delays as the projects’ revenues are directly used to recover field costs and
shared between the company and the government (Tordo, 2009).
2.3Iranian Oil Industry: Background
Early Concessions
Middle East’s first petroleum agreement was actually signed in Iran between the
British Baron, Julius de Reuter, and the Persian Shah, Nasr-ed-Din, on the 25th of
July 1872. Although the agreement was signed for a 70-year period, it lasted for
only 15 months, due to public pressure and Russian objections. However,17
years later, the British Minister, Sir Henry Drummondolf, agreed with the Iranian
Chief Minister, Amin al Soltan Atabak, on the revalidation of a part of the Reuter’s
agreement (Kakhki, 2008).
The new concession was signed in 1989 and included:
 The establishment of “The Imperial Bank of Persia”2 and
 The exclusive right for exploitation of all mineral resources.
Pre-nationalisation Period (1908-1951)
The D’Arcy Concession
The D’Arcy3 Concession was signed on 28th of May 1901 and included all the
provinces of Persia apart from five territories in the north of the country
(Azerbaijan, Gilan, Mazandaran, Khorasan and Astarabad).
2 The Imperial Bank of Persia was established in 1885 and operated there between 1889 and
1929. Despite the fact that the legal part of the bank was based in London and it was under
directions of the British Law, its operation was based in Tehran and other Middle Eastern
countries.
3 William Knox D’Arcy was a British petroleum entrepreneur. His first exploration achievement
was the establishment of the Iron Stone Mountain, a mine which was opened in Australia in 1882.
Later, and during his stay in England, he agreed to fund exploration projects for mineral
resources in Persia. The exploration projects in Persia, as well as other provinces in the Middle
East, by D’Arcywereconsidered as the foundation of the oil industry in the entire area.

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The country would receive 16% of the annual profits of the company operating
the field and the concession was active for 60 years. Furthermore,on May26th
1908, the drilling operations leaded by William D’Arcy have resulted to oil
extraction, which was accounted as commercial and was found in the area of
Masjid-e-Solaiman. The discovery of the Masjid-e-Solaiman oil field led to the
establishment of the Anglo-Persian Oil Company (APOC)4 in 1909. APOC, then,
became the first company extracting oil from Persia (Library of Congress, 2008).
The 1933 Concession
Due to the fact that the government aimed for better conditions than the existing
terms of the D’Arcy concession, it suggested the following reforms to the British
government:
 25% of APOC’s shares would be transferred to the Persian Government
 75% of the area included in the concession would be returned to the
possession of Persia and the company’s taxes would be paid according to
the taxation system applicable in the country.
If these terms were accepted, then the government would extend the contract
duration until 1983 (Kakhki, 2008).
Thenegotiations were unsuccessful and led to the cancellation ofthe D’Arcy
agreement. Supporting the validity of the signed contract, the British
Government appealed to the League of Nations. Furthermore,on 24th of April
1933, the two sides reached an agreement including a 30-year extension of the
contract. The new terms of the 1933 Concession included, amongst others:
 Annual royalty per each tonne of petroleum sold to be granted to the
Persian Government
 Minimum amount of total annual payment to the government
 20% of the shares earned from distribution
4 Anglo-Persian Oil Company (APOC) was founded by the Bourmah Oil Company, the Concessions
Syndicate and the financial adviser Lord Strathcona. The D’Arcy concession licence was
transferred to the possession of APOC and William D’Arcy became a member of the board. In
1935, APOC was renamed Anglo-Iranian Company (AIOC) and in 1954 took its current name as
British Petroleum (BP).

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 Authorisation of the government to carry out investigations, in order to
avoid unfair share of revenues
 The involvement of the Court of International Justice as an arbitrator, in
case they fail to negotiate
 The opportunity of contract cancellation, in case thecompany is unwilling
to conformtoCourt suggestions.
During the period 1930-1950, Persia’s oil industry flourished. Production of oil
doubled and the refinery capacity increased by 3 million tonnes (Kakhki, 2008).
As noted in figure 2.2, the production increase was steeper after World War II,
when investment and technical resources increased significantly. During that
period,Iranian5 oil industry was subject to various foreign interests, specifically
from Britain, Russia and the US.
Nationalisation of the Iranian oil industry
The influence of the British Government onthe Iranian oil industry started
raising concerns in Iran on whether the country was making the most out of each
resource potential. The British were taxing the AIOC higher than the Iranian side
and that is another reason which supports the above statement. Thus, in
5 Persia was renamed as Iran in 1935, where Reza Shah Pahlavi asked the non-native
representatives to use the term Iran, which was the historical name of the country. ( The study
will use the term “Iran” and “Iranian” from this point on whenever is needed to refer to the
country)
Figure 2.2: Oil production during 1931-1950 Source: IEA, 2014

14
1951,the Majlis6 decided the Cancellation Bill. This was a single-article Bill which
stated that the Iranian oil industry will be nationalized in all parts and all stages
of exploration, extraction and exploitation. The government would be
responsible for all of these parts and stages of the oil industry (Shahri, 2010).
During the period 1951-1954, Iran faced deep financial crisis, which resulted
from previous deficits pending. The new Iranian government, which was in
charge since 1953, had intentions to negotiate with the previous AIOC in order to
settle their differences. The new government, however, was aiming for the
agreement to be also consistent with the nationalization law and, so, it was not
possible for the AIOC to have the exclusive rights on the oil industry as
previously (Iranica, 2014).
As a result, AIOC’s president organised a meeting in London with the
participation of Standard Oil of New Jersey, Socony-Vacuum Oil Company,
Standard Oil of California, Gulf Oil Company, Texaco, Royal Dutch-Shell and
Campagnie Francaise des Petroles. The outcome of this meeting was the 1954
Consortium which was signed amongst:
 Anglo-Iranian Oil Company (40% share)
 Royal-Dutch Shell (14% share)
 Standard Oil of New Jersey (8% share)
 Standard Oil of California (8% share)
 Mobil Oil Company Incorporated (8%share)
 Texas Oil Company (8% share)
 Gulf Oil Corporation (8% share)
 Campagnie Francaise des Petrols (6% share)
The Consortium agreement was signed for a period of 25 years and included
exact yearly remunerations for Iran, as well as reimbursement of income tax on
revenues. Specific role and involvement was also held by the National Iranian Oil
6 Before the Islamic Revolution in 1979, Majlis was the lower part of the Iranian Legislature. The
upper part was the Senate.

15
Company (NIOC)7 , which was responsible for the domestic consumption of oil
(Kakhki, 2008).
In 1957, the Iranian government introduced the first petroleum law, which
allowed the country to sign agreements outside the Consortium area. The new
fiscal regime included profit sharing percentages of 75/25 and 50% income tax
in favour of the country. Among these agreements were:
 The agreement between the NIOC and the Italian Azinde Generale Italiana
Petrole (AGIP) in August 1957
 The agreement between Pan American Petroleum Corporation and the
NIOC in 1958
 The agreement between Sapphire Petroleum Company of Canada and the
NIOC in June 1958
From 1960 until the Iranian Revolution8 in 1979, Iranian oil industry flourished,
as foreign investment was increasing, along with the revenues from oil
production. Following the rapid economic reform of the country during 1973-
1977, overcrowding from foreigners and economic stratifications resulted to the
Islamic Revolution of 1979 (Iranica, 2014).
The revolution resulted to the persecution of Mohammed Reza Shah Pahlavi,
who was the last Persian monarch of the Iranian country. On April 1st 1979, Iran
became the Islamic Republic of Iran by national referendum. The referendum
included the vote for the Islamic Constitution9, which has replaced the
Constitution of 1906 (Shahri, 2010).
7
The National Iranian Oil Company (NIOC) is a governmental corporation which was established
in 1948 and is under the full control of the Iranian Oil Ministry.
8 The Iranian Revolution of 1979 resulted from protest movements, leaded by the Grand
Ayyatollah Rudollah Khomeini. The reasons for the revolution was the discontent with the
monarchic dynasty of Pahlavi,the unfair social stratification and the westernization of the
country.
9
Comprehensive analysis of the Iranian Constitution of 1979 is included in chapter 3.

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As a result of the Islamic Revolution in 1979, all contracts between the NIOC and
foreign companies were cancelled. Thus, international oil companies (IOCs) were
suing Iran for not abiding with the agreements and, therefore, Iran was obliged
to pay high compensations, according to optimistic predictions connected to the
profits of the agreements (Library of Congress, 2008).
Iraq took advantage of the degraded and unstable political scene in Iran and
invaded the countryin September 1980. The war lasted until August 1988 and
caused numerous problems in Iran’s oil industry. The damages caused in oil
refineries and transportation lines resulted in the decline of oil production by
2/3, compared to the existing levels of 1986.
In the aftermath of the war, Iran faced severe financial and political crisis. The
losses from military operations exceeded US$ 500 billion, as Iran was using oil
revenues to “fuel” the military operations. As a result, the country fell in deep
financial crisis and its oil sector needed various reforms. These reforms are
extensively discussed in chapter 3 (EIA,2014).
2.4US, UN and EU international sanctions
The Iranian Revolution of 1979 hampered Iran’s relations with foreign
companies and, as a consequence, with the countries that these companies were
based in. Furthermore, afterthe political and diplomatic changes of 1979, several
countries imposed sanctions10 on Iran which affected the country’s petroleum
sector and its economy as a whole(Iran Watch, 2014).
The commencement of sanctions in Iran started in 1979, when the United
Statesimposed investment limitations for US companiesin relation to the Iranian
economic sector. The sanctions were implemented after the capture of US
citizens in the US Embassy in Tehran during the Iranian Revolution. In 1987, the
10 Sanctions are policies implemented by a country or legal authority (such as United Nations), in
order to penalize other countries for actions or policies which can negatively affect human rights
or the country’s interests (UNTERM, 2014). Sanctions include embargoes, export and import
reduction or suspension as well as diplomatic adjournment between the countries.

17
US government expanded the limitations by prohibiting imports of Iranian goods
in the US market (United States Institute of Peace, 2014).
Apart from US sanctions resulting from the hanging relationship between Iran
and the US, Iran has been subject to foreign prohibitions due to the government’s
unwillingness to drop its uranium program. Specifically, Iran’s efforts to acquire
nuclear expertise from Russia in 1994 resulted to the renewal of US sanctions by
US President Clinton.He also implemented the executive orders 12957 and
12959 with which US investment was banned in the energy sector of Iran and
trade and investment were forbidden in any other sector of the country
respectively (UN, 2014).
As a result, on September 8th 1995, the US government voted for additional
measures against Iran, which were named asIran and Libya Sanctions (ILSA) and
imposed prohibitions on US companies to provide Iran with technological and
economic support for its energy sector. Moreover,the United Nation’s (UN)
Security Council introduced in 2006 the Resolution 1696, which included
sanctions against Iranian economy and targeted to suspend Iran’s nuclear
program. Furthermore, whilethe US and the UN continued the application of
sanctions against Iran, the European Union (EU), under regulation 961/2010,
has alsoimplemented investment limitations against Iranian economy on
June17th 2010. The EU sanctions targeted Iranian economy and, especially,the
energy sector and banned European investment in Iranian oil and gas industry
(Katzman, 2003).
Over the years, the efforts of the US, the UN and the EU to prevent Iranian
nuclear programme continued to hamper Iranian petroleum industry by
prohibiting oil and gas imports from Iran,as well as investment projects in the
country since2011. The sanctions have negatively affected the Iranian oil
industry, as oil exports have decreased by 1.5 million barrels per day during the
period 2011-2013. The effect in Iranian oil exports is depicted in figure 2.3 and
2.4.

18
Figure 2.3 below illustrates the effect of sanctions on oil exports, government
revenues and oil export revenues. The implementation of further measures
against Iranian petroleum industry in 2011 significantly decreased oil exports
from 99 million barrels to 49 million barrels in 2013, while oil price and
government revenues followed the same trend from approximately US$ 340
million to US$ 140 million and from US$ 140 million to US$80 million
respectively (Harvard University, 2014).
Figure 2.3: Iran’s Revenue from oil exports 2003-2013 Source: Harvard University, 2014

19
As figure 2.4 below indicates, the Iranian oil exports have been significantly
decreased, due to the implementation of the EU sanctions and the renewal of US
and UN sanctionsin 2011. However, the interim agreement signed in November
2013 between P5+111 and Iran, includes the extenuation of these sanctions and
the gradual access of Iran oil industry to the global oil market (EIA, 2014).
2.5 Conclusion
This chapter examined the structure of the fiscal regimes frequently applied in
Iran. Moreover, it provided information related with the tax and non- tax
instruments used by governments, in order to increase revenues from the
country’s resource capability. Furthermore, it analysed the Iranian legislative
history since 1901 by giving a comprehensive analysis of the fiscal reforms and
implementations enacted in the country. Finally, the chapter analysed the
sanctions imposed by the US, the UN and the EU and discussed their effects on
the Iranian oil industry.
11 P5+1 is a group of countries formed in 2006 in order to enter negotiations with Iran to stall its
nuclear program. The group is consisted by the United States, Russia, China, United Kingdom and
Germany. All group members are also members of the UN Security council, which is responsible
for the adaptation of resolution related with sanctions against Iran.
Figure 2.4: Monthly Iranian exports of crude oil and condensate Source: IEA, 2014

20
Chapter 3
Buyback contracts: History, Structure analysis and shortcomings
3.1Introduction
This chapter aims to critically evaluate the implementation of the buyback
contracts currently applied in Iran. Firstly, it introduces the legal basis and laws
connected to the fiscal regime and it analyses the background of the buyback
agreements inIran. Secondly, it emphasises the current structure of the contracts
and it examines the advantages and disadvantages of their application. Last but
not least, the chapter concludes with a discussion on whether the Iranian fiscal
regime is in need of reforms or not.
3.2Introduction of Buyback agreements
The implementation of the buyback framework in Iran began with the enactment
of the Petroleum Law in 1974. Although the fiscal regime was not referring to the
agreements as “buyback”, the legislation allowed only the application of service
contracts,whileproduction sharing contracts and joint ventures were
forbidden.(Shiravi and Ebrahimi, 2006).Moreover, through Article 3 of the
Petroleum Law, the government announced the nationalization of the oil
industry and entitled the NIOC to exclusively hold the exploration, development,
production and distribution of oil, directly, or through agreements with foreign
companies (Kakhki, 2008).
The NIOC could reach an agreement with a foreign company, with the latter
working as a contractor in favour of the NIOC. The contract stated that the costs
of exploration and development would be borne by the IOC. Furthermore, the
company would be reimbursed with the costs only in case of commercial
discovery. The contract included:
 Cost recovery linked to a portion of oil produced in the operating field,
along with the embodiment of capital interest in year base prices

21
 The reimbursement of remuneration equal to 5% of total production,
with 5% discount on the existing prices (Shahri, 2006)
This legislative framework,along with all the active contracts up until that time,
was cancelled due to the Iranian revolution of 1979. The new government
enacted a newConstitution, which restricted participation of foreign companies
in every sector of the Iranian economy through the following articles:
 Article 45: “Public wealth and property, such as uncultivated or
abandoned land, mineral deposits, seas, lakes, rivers and other public
water-ways, mountains, valleys, forests, marshlands, natural forests,
unenclosed pastures, legacies without heirs, property of undetermined
ownership, and public property recovered from usurpers, shall be at the
disposal of the Islamic government for it to utilize in accordance with the
public interest. Law will specify detailed procedures for the utilization of
each of the foregoing items.”(Iranian Constitution 1979)
 Article 81: “The granting of concessions to foreigners for the formation of
companies or institutions dealing with commerce, industry, agriculture,
services or mineral extraction, is absolutely forbidden.”(Iranian
Constitution 1979)
 Article 82: “The employment of foreign experts is forbidden, except in
cases of necessity and with the approval of the Islamic Consultative
Assembly.”(Iranian Constitution 1979)
 Article 153: “Any form of agreement resulting in foreign control over the
natural resources, economy, army, or culture of the country, as well as
other aspects of the national life, is forbidden.”(Iranian Constitution
1979)
During the period of war between Iran and Iraq, and specifically in 1987, the
Iranian Government introduced the first Petroleum Law. This law was enacted
with respect to the constitution’s restrictions and targeted to maintain the power
of the Iranian government in the oil industry of the country. The study
emphasises on the following Articles, as they are highly related to the

22
implementation of the buyback contracts after the enactment of the Petroleum
Law:
 Article 2: “The petroleum resources of the country are part of the public
domain (properties and assets) and wealth and according to Article 45 of
the Constitution (of the IslamicRepublic of Iran) are at the disposal and
control of the Government of the IslamicRepublic of Iran and all
installations, equipment, assets, property and capital investments which
have been made or shall be made in future within the country and abroad
by theMinistry of Oil and her affiliated companies, will belong to the
people of Iran and remainat the disposal and control of the Government of
the Islamic Republic of Iran.”(Petroleum Act 1987)
 Article 5: “Conclusion of important (major) contracts between the
Ministry of Oil or petroleum operational units and the local and foreign
natural persons and legal entities and determination of the important
(major) cases shall be subject to and governed by the By-Laws to be
approved by the Council of Ministers upon the proposal of the Oil
Ministry. The contracts concluded between the Ministry of Oil and other
governments shall fully conform to Article 77 of the Constitution of the
Islamic Republic of Iran.”(Petroleum Act 1987)
 Article 6: “All capital investments shall be proposed through the Ministry
of Oil on the basis of thebudget of the operational units and be included
upon approval of the General Assembly,in the General State Budget.
Foreign investment in these operations in any manner willnot be allowed
whatsoever.”(Petroleum Act 1987)
Following the Petroleum Law in 1988,the Iranian Government authorized the
NIOC to negotiate with IOCs in order to attract investment for the development
of the Pars and South Pars gas fields, expecting the investment to reach US$ 3.2
billion. The NIOC was offering a contract similar to the framework of service
agreements introduced in 1974, where the IOCs would develop an oil field as

23
contractors. The IOC would be compensated, according to the output of the field,
at the start of the production stage. However, throughthese contracts, the risks
were to be borne by the NIOC,because, in case of failure, the Iranian Central Bank
guaranteed the reimbursement of the costs to the IOCs (Shiravi and Ebrahimi,
2006).
The terminology and implementation of the buyback contacts was actually
introduced through the Budget Act of 1994, where the NIOC was entitled by the
Ministry of Oil to enter into negotiations with IOCs. The Act targeted to reach
investment of US$ 3.5 billion and the buyback contracts were the legal legislative
mechanism to achieve the investment targets. The contract was used only for the
development stage of the projects and the reimbursement of the costs wasto be
completed in equal instalments, from the output of the projects and in a
predetermined period of time. Furthermore, the contract did not include
guarantee for the reimbursement of costs in case of lower production levels
and/or shortfall of oil prices. Since 1994, and with the introduction of buyback
agreements, the form of the contracts has been subject to various modifications
until reaching its current form (Kakhki, 2008).
Table 3.1 indicates the three generations of buyback agreements along with the
implemented reforms.
Table 3.1: The Three Generations of Buyback contracts Source: Ghandi and Lin 2014, Shiravi and Ebrahimi, 2006

24
3.3 Existing form of buyback contracts in Iran
Buyback contracts are risk service contracts which are designed to grant access
to investors (i.e. the IOCs) for the exploration and development stages of an oil
field. Through a buyback contract,investors explore and/or develop oil fieldsfor a
predetermined period of timeand, when the projects reach the production stage,
theyare handed over to the NIOC. The developers are compensated from the
sales revenues until theyare fully repaid and have no share on the profits after
the repayment (Groenendaal and Mazraati, 2005).
Specifically, an IOC beginsthe exploration of a field and, if it is successful, the
NIOC determines whether the field is accounted as a commercial discovery and
enters into negotiations with the IOC for the development phase. The
information and data derived from the exploration process are examined by the
IOC, in order for the company to develop a comprehensive master development
plan (MDP)12. The MDP is examined by the NIOC, whichsets objectives for the
IOC to reach, based on the elements of the plan. These objectives include:
 The achievement of predetermined production targets related to the MDP
 Completion of the development phase, successfully and on time
 Acceptance of the developed facilities by the NIOC
Any deviations from the plan during the development of the field must be
approved by the NIOC, in order to be taken into consideration for the
reimbursement of the costs (Shiravi and Ebrahimi, 2006).
The MDP includes the following costs:
 Capital costs(capex), which result from the establishments of the
development procedure
 Non-capital costs (non-capex), which are related to the costs being paid
by the IOC to the Iranian authorities, including taxes and other legal
obligations
12 Master Development Plan (MDP): A master development plan is a plan generated by the IOC
before the start of the development phase. This plan includes the determination of the costs of
the project, the future production rates, as well as milestones of the development phase.

25
 Operating costs (opex),which derive from the operations until the field
reaches the production phase and are handed over to the NIOC for the
exploitation of the production stage
 Bank charges, which are obligations that the IOC has, due to financing and
exchange rates related to capex and non-capex costs. Bank charges are
calculated according to LondonInterbank Offered Rate (LIBOR)13 and a
predefined percentage of 0.75% (Jannatifar, 2010).
These costs are to be borne by the IOC during the development of the field. As a
reward for the operations, the contractor receives a remuneration fee14 linked to
the production of oil, the repayment of the costs from both exploration and
development phases and an agreed upon rate of return (ROR). The contracts also
include specific limitationsrelated to the remuneration fee, cost recovery and
rate of return. These are:
 Thecontract’s ROR should not exceed 16% and is usually between 12-
15% depending on the difficulty of the field
 The portion of oil allocated for the reimbursement of the remuneration
fee and the cost recovery should not exceed 50% of total production
 Total remuneration and costs are equally divided according to a specified
period agreed in the contract (cost recovery period), which is usually 7-
12 years.
13London Interbank Offered Rate (LIBOR) is an interest rate estimator, which measures the costs
of inter-bank lending and produces the average interest rate that banks need to pay in order to
borrow from other banks. The estimator measures for 10 different currencies in 15 different
periods and are published by Thomson Reuters (Citywire Money, 2014).
14 The remuneration fee represents an amount of money generated from the sales of oil
production of the field. However, the IOC can be repaid with barrels of oil, if the NIOC faces cash
shortages.

26
The remuneration fee is usually about 50-60% of the total amount invested by
the IOC. The structure of the buyback contracts is presented in figure 3.1 as
follows:
Figure 3.1: Allocation process of oil revenues under PSCs Source: ZhangandGao, 2014

27
Based on the analysis above, the study concludes on the main features of the
existing framework under the buyback service contracts in Iran in table 3.2 as
follows:
3.4IOC’s risks related to the Buyback contracts
The structure of the buyback contracts as service contracts is designed to bare
therisks of exploration and development phases on the contractor. Although the
Iranian government believes that buyback contracts can provide the IOCs with
sufficient returns of their cost expenditures and a fair remuneration fee, the IOCs
argue that they are exposed to several risks that neither the remuneration nor
the cost returns cover.
Table 3.2: Summary of Buyback Contract terms Source: Groenendaal and Mazraati, 2005

28
According to the nature of these risks and the concerns of the IOCs, the study
divides them in three categories:
i) Risks arising from the MDP structure
ii) Risks arising from unpredictable market conditions and
iii) Further IOCs’ concerns and views on Iranian buyback concerns
i) Risks arising from the MDP structure
Based on the analysis of Ghandi and Lin 2013, IOCs are exposed to several risk
factors which affect their net cash flows. Many of these factors are related to the
structure and terms of the MDP and are to blame for various confrontations
between IOCs and the Iranian government.As mentioned in section 3.3, IOCs are
required to develop a MDP after the end of the exploration phase. The MDP has
to include accurate predictions related to:
a) The productivity rate
b) Project production rates
c) Investment and projects costs
d) Projects’ time profile
Failure to meet these predictions can affect the cost recovery,as well as the
remuneration fee and the ROR accounted to the IOCs (Otillar and Sonnier, 2010).
Firstly, the productivity rate predictions should be accurate in order for the NIOC
to secure shares of productionand theIOCs’ cost recovery. If the productivity rate
falls below the predicted levels, the NIOC secures the country’s share and
decreases the IOCs’ share for that repayment period. This results to the delay of
the cost repayment and postpones the IOC’s cost recovery.
Secondly, imprecise predictions about the project production rates can result to
penalties for the IOC’s remuneration. These penalties are related to decreases in
the remuneration fee or expansions of the cost recovery period. However,
thepenalties vary according to the difficulty of the field, as well as the specific
agreement between IOCs and the NIOC (Groenendaal and Mazraati, 2005).

29
Thirdly, the contract indicates that the MDP should precisely predict the capital,
non-capital and operating costs related to the exploration and development
phase. Althoughnon-capital and operating costs are allowed to exceed a
predetermined amount, withthe extra costs to be shared between the IOCsand
the NIOC, this is not the case for the capital costs. The NIOC sets ceiling on the
capital expenses of the project, which the IOC should not exceed. If the project
costs are higher than originally estimated (due to technical issues or market
changes), the IOCs are expected to cover the extra costs in order to achieve the
project objectives, but they will be repaid only for the costs agreed under the
ceiling.
Finally, IOCs should accurately predict the time-plan of the operations, as well as
the completion of the project. The short duration of the contracts, along with any
delays in the project operations, can postpone the IOCs compensations or even
cancel them if the delays exceed the contract length. Thus, IOCs are exposed to
delays in construction, which can generate losses for the companies (Ghandi and
Lin, 2014).
ii) Risks arising from unpredictable market conditions
Due to the structure of buyback contracts, IOCs remuneration and cost recovery
can be affected by several market changes that may occur during the exploration
and development phases. These changes can be divided in three categories:
a) Additional costs generated by market and/or operational changes
Under the current contractual framework, any additional costs15 that may
occur from several market or operational changes are to be borne by the
IOCs. These changes will require modifications to be applied on the MDP,
but extra costs will be compensated only in case of increase in the project
objectives. However, the companies argue that these costs should be
recovered by the NIOC after the completion of the development
15 These costs may include increases in contractual equipment, modification in surface facilities
or disruption of exploration and development procedures.

30
phase,along with the costs included in the MDP, even without improved
objectives(Shiravi and Ebrahimi, 2006).
b) Oil price fluctuations
Oil price volatility can generate several risks for the companies, as the
structure of buyback contracts does not include favourable terms for the
IOCs related with the price changes. Specifically,decreases in oil prices are
to be borne by the IOCs, as buyback contracts include a cost recovery limit
to a fixed amount and a maximum percentage of 50-60% of the total
production. Consequently,decreases in oil prices are likely to lower the
cost reimbursement for that period and, therefore, postpone and delay
the cost recovery. By way of contrast, in case of increasingoil prices, IOCs
will only receive the fixed amount as specified in the contract terms, while
NIOC would benefit from increased revenues as a result of high oil prices
(Ghandi and Lin, 2014).
c) LIBOR rate reduction
In the case study of Ghandi and Lin 2014 about Shell’s exploitation of
Soroosh and Nowrooz oil fields, it is indicated that LIBOR constitutes
8.82% of the total potential change of the company’s ROR. The study
stated that the LIBOR reduction can decrease the contractual ROR of the
company by 1.73%, while the contribution of actual terms of LIBOR rate
affects the ROR by 12.72%. Thus, based on the study’s outcomes, the
decrease of LIBOR rate can delay the cost recovery as the ROR is
significantly affected.
iii) Further IOCs’ concerns and views on Iranian buyback contracts
The IOCs oppose to the existing form of buyback contracts in several points in
relationtotheir terms and rewards. These points are:
 Ownership of production: As mentioned in section 3.2,the Iranian
constitution forbids foreign ownership on the country’s reserves.
However, IOCs argue that the ownership of production constitutes an

31
important factor for their portfolio, as it can provide the companies with
financial guarantee for money loans. Although the contracts include the
purchase of certain amount of production by the IOCs, the reserves are
not bookable16 and the NIOC acts according to its interests. In particular,
the NIOC may sell shares of production to a third party and then repay the
IOC from the profits of this sale (Otillar and Sonnier, 2010).
 IOC participation in production: As previously mentioned, at the end of
the development phase, the project is handed over to the possession of
the NIOC. However, as project costs and remuneration fee are linked to
the revenues generated from production, the IOCs aimfor the optimal
exploitation of the field during the production stage. Thus, companies
argue that the NIOC does not take advantage of the IOCs expertise and
capital and, therefore, production is exposed to possible shortfalls or
delays. In an effort to offset that risk, the NIOC established a production
monitoring committee which would be able to deal with production
problems and issues. However, IOCs would prefer direct participation to
ensure cost recovery and fee reimbursement(Groenendaal and Mazraati,
2005).
 Limited rewards: Under buyback contracts, the IOCs have to meet specific
objectives related to project completion and production
rates.Furthermore, even if the IOCs meet these objectives, they only
receive a fixed remuneration fee and the reimbursement of their costs.
Consequently, the IOCs argue that, during the exploration and
development phase of the fields, they are exposed to several risks and are
expecting to be benefited according to their contribution and efforts, as
well as the fields’ prospective (Shiravi and Ebrahimi, 2006).
16 Bookable reserves: A share of production that an IOC is allowed to acquire and can keep it in its
portfolio. This share is predetermined in the contract terms and provides IOCs with financial
guarantee for loan granting and cost coverage.

32
3.5 Conclusion
This chapter has analysed the implementation of buyback contracts in the
Iranian oil industry. Firstly, the legal barriers arising from the country’s
constitution have been highlighted, targeting to support the application of
buyback agreements in Iran. Furthermore, the chapter presented the history of
buyback contracts and the reforms implemented to improve them. Moreover, the
existing framework has been thoroughly analysed, along with the terms and
conditions applicable in Iranian buyback agreements. Last but not least, the
chapter provided comprehensive analysis on the buyback shortcomings with
respect to the risks in which IOCs are exposed, as well as the IOCs’ views on the
Iranian contracts.

33
Chapter 4
Iranian Petroleum Contracts (IPC)
4.1 Introduction
The long-term application of buyback contracts, in conjunction with the
international sanctions targeting Iran’s oil industry, has resulted to lower than
expected investment and production targets. Figure 4.1 depicts the level of oil
exports from 1980 to 2010. The notable increase in Iranian oil exports from
2001 to 2007 was followed by a decrease of US$ 11 billion, which was mainly
generated from the sanctions implemented on the Iranian bank system and oil
industry.
As competition amongst oil producers is increasing, Iran aims to maintain its
leading position in the oil and gas industry. Iran’s intentions for the oil industry
are captured in the country’s Fifth Development Strategy, where it is clearly
stated the need for investment projects. Specifically, based on the study of
Abbaszadeh et al 2013, Iran needs to attract $200 billion of investment for its oil
industry in the short term, while this amount is expected to reach $500 billion in
the period from 2013 to 2028.The imperative need for investment projects in
Figure 4.1: Oil exports levels 1980-2010 Source: EIA, 2014

34
Iran’s oil industry has resulted to the introduction of the new Iranian Petroleum
Contracts, as announced by the Iranian government in February 2014.
This chapter aims to provide a comprehensive analysis of the new terms
introduced in the new Iranian Petroleum Contracts. Moreover, it emphasizes on
these terms and analyses the modifications implemented in order to tackle the
shortcomings of the buyback framework.
4.2 New generation contracts of Iran’s upstream oil sector
The ‘new’ type of contracts is,like the buybacks, a type of service agreement, but
it seems to combine some features of production sharing contracts.The Iranian
committee17, which was authorised to design the new fiscal regime of Iran,
studied the Iraqi contracts, as well as the shortcomings of the buyback
framework and through the new contracts targets to make the Iranian oil
industry the apple of discord18 (Katebi, 2014). Although the details of the new
contracts are yet to be published and the contracts are not yet finalized,
according to Nasseri (2014), the head of the committee emphasised on the
following differences between buyback and new Iranian contracts:
 Integrated petroleum stages
The new contracts will be differentiated by the buyback framework, as it will
provide IOCs with agreements including integration between the project’s stages.
As Mr.Hussaini stated, “[i]n the new contracts, different stages of the petroleum
industry (exploration, development and production) are awarded in an
integrated manner”. Thus, the new contracts will also include participation of the
17 The Iranian committee was consisted by: Mr.Seyed Mehdi Hussaini (Former deputy oil
minister and chairman of the committee), Mr.Seyed Mehdi MirMoezi (Former M.D of NIOC and
deputy Minister), Dr, SeyedMostafaZeineddin (former legal manager and board member of
NIOC), Mr. Ali Kardor ( Investment Deputy Managing Director of NIOC), Dr.Gholam Reza
Manuchehri (Former Managing Director of PetroPars Company), Mr.Espiari (former managing
director of South field oil company), Dr.Salari ( Member of International Institute for energy
studies (IIES), Dr. Hassan ShokrollahZadeh (former Engineering Director of the South Fields
Operating Company) and Dr. Ali Emadi (Member of the NIOC Board of Director) (Katebi, 2014)
18 Apple of discord: In Greek classical mythology, “a golden apple thrown into a banquet of the
gods by Eris (goddess of discord-who had not been invited in the feast of gods held for the
wedding of Peleus and Thetis); on the apple it was inscribed for it to be given “for the fairest” and
was claimed by Hera, Athena and Aphrodite. The decision of Paris (prince of Troy) to award the
apple to Aphrodite resulted after a sequence of events, to the Trojan War.

35
IOCs in the production stage of the field and the contracts will be signed for
integrating the different stages of the project (Katebi, 2014).
 Flexible development plan
One of the main shortcomings of buyback contracts was the fixed Master
Development Plan, which required accurate cost predictions and time-plan.
However,the Iranian government realised the risks under this requirement and
modified the structure and conditions of the MDP. Specifically, the MDP will be
flexible according to cost recovery and the duration of the project operations.
Although under buyback companies were operating for a medium term of 5-7
years, the new contracts are designed for the long term, 15-20 years. Moreover,
the contracts will not include a capital cost ceiling as implemented in buybacks
and the company, along with the NIOC, will revise the MDP on an annual basis.
Thus, the costs and duration of the program will be allocated according to
updated field’s condition and capabilities (Akhlaghi et al., 2014).
 Annual work program and budget as opposed to the fixed capped costs
As mentioned in Section 3.2.3, the existenceof fixed capital cost ceiling was an
important barrier for the IOC’s, as any additional capital costs would be borne by
the companies and would not be recovered. The Iranian government has
proposed through the new petroleum contracts the formation of an annual work
program, so that the budget can be allocated according to each year’s
expenses.IPCs do not include capital costs ceiling as contract term and the NIOC
controls the operational and development costs through an “Annual Work and
Budget Program (AWP&B) (Nasseri, 2014).
 Full cost recovery
Through the new petroleum contracts, Iranian government introduced a plan for
the full recovery of the IOCs’ costs. Specifically, in case of successful exploration,
both the exploration and development costs will be fully repaid during the
production stage. These costs can only constitute half of the production levels or
revenues in each year as the rest 50% will be collected by the NIOC.

36
The total costs include the costs of exploration, development, bank charges and,
if existing, the costs for the production of oil. Thus, the Iranian government
abolished the term of capital cost ceilingwhich existed in the buyback contracts
and, if development costs exceed the contracts’ predetermined capital costs, the
IOCs would be allowed to recover any additional costs.Furthermore, the
company has the benefit to extend the repayment period up to seven years in
case of insufficient recovery of the costs, compared to the fixed five year period
applicable in the buyback contracts(Nasseri,2014).
 Reward flexibility with adaptation of oil price fluctuations
As mentioned in section 3.4, IOCs’ compensation and cost recovery could be
delayed by oil price volatility. However, through the new contracts, the Iranian
government aims to offset that delay by providing the IOCs with adaptation of
their monthly instalments and cost recovery according to oil price fluctuations.
Specifically,IOCs’ cost recovery will not be affected by oil price decreases, as
remuneration and cost recovery will be guaranteed at a minimummonthly
instalment. Moreover, in case of increase in oil prices, NIOC and IOCs would
share the benefits and the companieswould be able to recover their costs to a
maximum amount and in a predetermined allocated percentage of production
(Nasseri, 2014).
 Cost minimizing incentives with the implementation of cost saving index
With the introduction of the cost saving index19, the NIOC aims to minimise the
exploration and development costs in order to increase the projects’ gross
revenues. Specifically, the IOCs would be provided with incentives to minimize
project costs in order to receive improved remuneration fee.Indeed, the cost
saving index will be separated from the cost recovery and will be added as a
parameter to the rewards of the IOC (Creed and Kordvani, 2014).
19 Cost saving index is a tool used for the adjustment of remuneration fee, in relation with cost
minimizing techniques. IOCs are provided with incentives to use cost minimizing techniques in
order to receive additional compensation that will be generated from the cost saving index and
will be added to the predetermined remuneration fee.

37
 Cooperation and partnership
The IPCs are to build a long term relationship between the NIOC and IOC and, in
order to do so,they provide companies with fullcost recovery and attractive fees
related to exploration and development phases. Specifically, according to the
contracts, contractors and NIOC will set joint ventures that will be supervised by
a non-profit organization responsible for the cooperation and the preservation of
conditions and terms of the contracts. Through this cooperation, the NIOC will
obtain important technological and managerial skills in order to achieve (along
with the IOC) optimal rates of production and recovery of the field. (Akhlaghi et
al., 2014)
 Increased duration of the cooperation should the project proceed with
Enhanced Oil Recovery (EOR)20
The new contracts are also taking into consideration the cooperation between
IOCs and the NIOC in order to use EORtechniques for the optimal exploitation of
the field. In this sense,the cooperation will be extended again under the
supervision of a non-profit organization which will supervise and secure the
terms and conditions under which the companies will operate. This extension
will be 2-3 years before the end of the expected field life and will target to
optimize the field’s exploitation (Katebi, 2014).
20 Enhance oil recovery technique: “An oil recovery enhancement method is using sophisticated
techniques that alter the original properties of oil. Once ranked as a third stage of oil recovery,
which was carried out after secondary recovery, the techniques employed during enhanced oil
recovery can actually be initiated at any time during the productive life of an oil reservoir. Its
purpose is not only to restore formationpressure, but also to improve oil displacement or fluid
flow in the reservoir. The three major types of enhanced oil recovery operations are chemical
flooding (alkaline flooding or micellar-polymer flooding), miscible displacement (carbon
dioxide [CO2] injection or hydrocarbon injection), and thermal recovery (steam flood or in-
situ combustion). The optimal application of each type depends on reservoir temperature,
pressure, depth, net pay, permeability, residual oil and water saturations, porosity and fluid
properties such as oil API gravity and viscosity. Enhanced oil recovery is also known as improved
oil recovery or tertiary recovery and it is abbreviated as EOR” (Schlumberger, 2014).

38
 Improved development fee
The reimbursement of the development fee (DF) starts with the beginning of the
production stage and its duration is between 15-20 years. In order for
thecompanies to be fully repaid, MDP should be on target with:
 The plateau duration21 and
 The production rates
If the project fails to meet the above two targets, then the repayment will be
adjusted according to the formula below:
DF= (US$ per bbl)*P (Plateau percentage)*D (Plateau duration percentage)
Despite the application of the above formula, the repayment should reach a
minimum of 50% of the DF, if the plateau fails to reach 80% of the targets in the
MDP (Nasseri,2014).Furthermore, as Mr Hussainistated, “[o]wnership of the
reservoirs belongs to the people, so ownership is never possible to be
transferred. However, the ownership of produced oil can be negotiated”.
Through this statement, it is notable that due to the constitution restrictions
discussed in section 3.2 of the study, oil fields in Iran are exclusively in the
possession of the Iranian country. However, Iranian government considers
including production sharing terms in order to create attractive contract
environment for the IOCs.
 Improved exploration and development fee (EDF)
In case of exploration and development operations, the new contracts are
modified in order for the EDF to be adjusted to different field conditions. The
EDF is calculated after taking into consideration several factors related to the
exploration phase, which can affect the difficulty of the project. These factors
include the position of the field, either onshore or offshore, as well as the type of
the offshore field (shallow or deep water).
21 Plateau duration is the period in which the production of an oil field is stabilized after reaching
its peak levels. This period varies according to the size of the field and the oil recovery techniques
used(Schlumberger, 2014).

39
Thus, if the repayment of the DF is denoted with (A), then the EDF will be
(A+1),in order to capture the exploration fee. EDF is, then, adjusted according to
figure 4.1:
Figure 5 indicates that EDF is calculated with respect to the field’s position and
its possible risks. For example, if a field is located on a high-risk onshore area
and the company meets the MDP’s objectives, then the EDF will be increased by
[(A+1)*0.2]. With the adjustment of EDF, Iranian government rewards IOCs in
case of successful exploitationof high-risk oil fields.Finally, the government, in
order to provide incentives for the IOCs to invest in projects with high risk and
costs or low production fields, introduced two more features in the IPC contracts.
1. Fees and rewards are fully linked to the international oil prices in order for
IOC’s to fully enjoy the market fluctuations (Nasseri, 2014).
2. For the adjustment of the operators’ rewards, the contracts use the “R” Index
(RI). RI is defined at each point in time by the ratio of ‘total cumulative amounts
received by IOC at that point in time’ to the ‘Total costs incurred and paid by IOC
up until the same time’.
Table 4.1: Exploration and Development Fees in New Contracts Source: Nasseri, 2014, p. 4

40
Exploration and development fees, as well as the rewards of the project, are then
determined at each point in time by referring to the development fee matrix,
which has production rate on one side and RI ratio on the other. The above figure
illustrates that the largest fee is assigned to the smallest fields (with production
up to 50 kb/d) as long as the RI is less than 1 (i.e., received amount is less than
the total cost) (Nasseri, 2014).
4.3 Conclusion
This chapter introduced the main framework of the new Iranian petroleum
contracts. Firstly, it discussed the main investment targets as introduced by the
Fifth Development Strategy and provided the basic framework of IPCs, as
revealed by the Iranian government in February 2014. Furthermore, it
introduced the main differences between buyback agreements and the new
Iranian contracts and analysed the modifications implemented in IPCs by the
Iranian authorities, in order to tackle the shortcomings of the buyback contracts.
Table 4.2: Development Fee Matrix for Different RI and crude oil’s Production Levels Source: Nasseri, 2014, p. 4

41
Chapter 5
Discussion and Conclusion
5.1 Discussion
Based on the above analysis, the study discusses on whether the modifications in
Iranian oil contracts will help the country tackle the main obstacles of its fiscal
regime and increase investment projects. The discussion section is separated in
two parts:
a) Comparison between buybacks and Iranian Petroleum contracts
b) Government and foreign investors’ views on the new contracts
In order to construct the Iranian petroleum contracts, the government carefully
examined the shortcomings arising from the structure of the buyback
framework. This is supported by the fact that the new contracts include
improved terms, based on the drawbacks of the buyback agreements as
examined in chapter 3. Firstly, the Iranian oil contracts will be granted for all
stages of project life,which are: exploration, development and production. This is
an important difference between buybacks and the new contracts, as it will
provide companies with full exploitation of the fields they operate. Moreover,
they will build a long-term relationship that will help Iran’s domestic human
resources to be equipped with the latest technology and management skills.
Secondly, changes in the MDP can decrease the risks arising from its structure as
implemented in the buybacks. With the annual review program and budget, the
company will have the chance to re-estimate the project costs annually and avoid
additional costs resulting from misspecifications of early estimates made in the
beginning of the project. In addition, as far as the cost recovery is concerned, the
abolishment of capital costs ceiling and the extension of cost recovery period
provide the company with full cost recovery, without being concerned about
extra costs in case of exceeding capital cost ceiling.The increase in contract
duration will also help the transfer of technology and management skills and will
build a long term relationship and cooperation between the two parties for
benefits shared between both parties.

42
Thirdly, the replacement of the fixed remuneration fee with a modifiable
exploration and development fee will attract investment for fields with higher
risks, while increasing IOCs’ rewards from the exploitation of these fields. The
companies will also have the chance to enjoy oil price fluctuations, as their
rewards and costs will be adjustable according to oil price changes.
Last but not least, the cooperation between IOCs and the NIOC throughout all
stages of the project will establish a win-win long-term relationship with shared
objectives and targets for both sides.
a) The modifications implemented in the Iranian fiscal regime are
summarized in table 12 below:
Based on table 5.1 and the discussion above, table 5.2 highlights the benefits
generated from the modifications in Iranian fiscal regime for both the
government and the IOCs:
Table 5.1: Differences between buyback and Iranian Petroleum Contracts Source: Author

43
The new contracts will provide IOCs with increased incentives and secure cost
recovery and rewards. Furthermore, they willachieve to transferto Iran
important technological and management skills that will provide domestic
human resources with extended knowledge, in order to effectively exploit the
country’s oil fields. Moreover, they will increase foreign investment in the
Iranian oil industry and consequently the revenues generated from oil exports.
b) In this section the study presents the views of the Iranian authorities, as
well as the IOCs’, on the structure of the new Iranian Petroleum contracts.
The intentions and efforts of the Iranian Contracts Revision Committeewere
clearly addressed through the comments of Mr.Hussaini and Mr.Zeineddin.
Table 5.2: Improved terms for government and IOCs Source: Author

44
Specifically, during the “Oil industry contracts revision forum” the two members
of the committee stated:
Mr Zeineddin: “The current contracts are based on a combination of principles
and rules derived from the country’s constitution and statute of National Iranian
Oil Company. The new system for oil contracts has been modified and optimized
in a way that all the legal obligations will be considered regarding the national
interests, but at the same time the new contracts will be attractive enough for
international companies and contractors”.
And he continued: “According to the article 125 of Iran’s 5th five-year
development plan, National Iranian Oil Company has been allowed to issue
permissions for exploration in all the provinces except Khuzestan, Bushehr, and
Kohkiluye & Boyer Ahmad. So naturally there will be a higher risk for the
exploration contractors. The new contracts in Iran’s oil industry will consider
more rewards for the contractors so that the reward and the risk will be in
balance for the contractors. The new models must encourage the investors to
enter the low-risk regions and so the rewards must be in proportion with the
risks. In fact, the new contracts will be attractive enough for the global
companies to enter Iran’s energy market”(Oil Industry Contracts Revision
Forum, 2014).
Subsequently, Mr.Hussaini discussed the inequity between risks and rewards in
the previous contracts stating: “The committee has tried to create incentives for
giant contractors to come and start explorations”. He continued by mentioning
the integration between the stages of a project in the new contracts, saying
that:“In the past, the contractors who did exploration were not generally allowed
to take part in extraction and production phases. But in the future, the
contractors will be able to benefit from the commercial fields they explore and
discover, and they will take part in both development and product phases”.
What is more, Mr.Hussaini mentioned the partnership between the NIOC and
IOCs, stating that: “Clarity is the most outstanding advantage which will come out
of partnership”. He also added: “The new contracts will shed weight to the MERs

45
(Maximum Efficiency Rates) for the common fields”. Mr.Hussaini, finally,
mentioned that:“Iran will maximize the production in common fields.
Meanwhile, if a neighbour is using the field with a different model of the contract,
we are flexible to unitize with them. Instead of formulating seven different types
of contracts, the committee decided to design one model only, but the model is so
flexible that the world can easily understand it” (Oil Industry Contracts Revision
Forum, 2014).
IOCs’ representatives seemed to welcome the structure of the new fiscal regime.
Specifically, as Mr. Kumar (country manager of Indian Oil and Natural Gas
Corporation Limited) stated: “The most important thing is they [the contracts]
have no ceiling which was a hurdle in old contracts, and it’s good for Iran as a
country and also for the operator because these is no ceiling. One can always do
additional development of a field and as mentioned one can go for IOR, EOR, and
other things. So, this will lead to ultimately higher recovery from the fields and
its ideal for IOCs”.
Moreover, a representative of China National Petroleum Company mentioned:
“There are some positive points. One is there is no such ceiling. Another is there
is flexibility, for example, in the development of the field. Then there is flexibility
in cost and recovery system which is good. It is good but now we need to see the
final draft of the contract because it is just the outline and we cannot comment in
details. It’s not finalized yet” (Oil Industry Contracts Revision Forum, 2014).
The above comments from both the Iranian Committee and IOCs’ representatives
formulate a positive manner for the establishment of the new Iranian
contracts.Thus, based on the analysis in part (a) and (b) of this section, the study
estimates that Iran will eventually be able to reach its investment targets
through the implementation of the new contracts, as they are much more
flexibleand competitive against other oil producing countries, such as Iraq and
Saudi Arabia. Moreover, the improved terms will set an advantageous
opportunity for foreign companies to expand their operations in the promising
oil industry of Iran.

46
5.2 Challenges
Despite Iran’s oil potential and the improvements in its petroleum legislative
framework,the Iranian oil industry has still enough challenges to overcome. The
easing of sanctions is a positive change of scene in Iran’s efforts to increase its
share in the world oil supply; however, Iran is still subject to numerous
international sanctions from the US, the UN and the EU and, unless these
sanctions are withdrawn, the country’s export and financial abilities are limited.
Additionally, the unstable political scene of the country adds another barrier to
Iran’s efforts of attracting foreign investment. Specifically, the strict constitution
articles, as well as numerous modifications in the fiscal regime of Iran during the
recent years, may discourage investment plans in the country due to the risks
arising from regime instability.
5.3 Future Research
The absence of the exact terms in the new Iranian Petroleum Contracts was
mentioned as a barrier in this research. The Iranian government has only
revealed a draft document of the new fiscal regime inthe 22nd of February 2014
and the official presentation of the contracts is scheduled for the 23rd-25th of
February 2015. Thus, the implementation of the real terms of the contracts and
how they will affect investment decisions and planning in Iranian oil industry
will be subject to future research. This research will be able to provide accurate
estimates through field case studies and data derived from comprehensive
analysis on the exact terms and conditions of this legislative framework.
5.4 Conclusion
Iran’s hydrocarbon potential places the countrysecondacross the main oil
producers in the world. However, the structure of its fiscal regime, along with the
implementation of international sanctions against Iranianeconomy,deters the
development of its oil sector and limits its export capabilities.
Thus,this study aimed toanalyse Iran’s petroleum industry by the view of its
fiscal framework and legal base, in order to delineate its advantages and

47
disadvantages. Furthermore, it targeted to present the key differences between
buyback and the forthcoming Iranian petroleum contracts and concluded on
whether Iran could increase investment projects and oil exports, through the
implementation of the new contracts.
In order to achieve these objectives, the study started with an analysis on Iran’s
oil potential providing accurate data, as well as outlining the structure of the
Iranian oil industry. Likewise, it considered the two basic systems used to grant
investors with rights on hydrocarbon resources and highlighted the main tax and
non-tax instruments that follow each system.
In order for the study to deepen in the analysis of the country’s fiscal system,
itpresented a comprehensive retrospection of the legislative history in Iranian oil
industry since 1901. The latest history of the country has important reference
value, as its economy and oil exports are targeted by international sanctions, all
of which are thoroughly examined in the study as well.
Thereafter, the study addressed the constitution barriers on the Iranian oil
industry and identified the current structure of the buyback contracts. It
highlighted the main risks that the IOCs are exposed to through these contracts
and presented their concerns.
Moreover, the study continued with the introduction of the new Iranian
contracts and discussed the modifications applied and structured the terms of
the new contracts.Based on the aforementioned discussion, the new contracts
are thought to improve the IOCs’ rewards while limiting the project risks. Thus,
taking into account the easing of the sanctions on Iran, it is concluded that
investment projects may and will be increased and the country will be able to
achieve the investment targets and sustain its position in the global energy
supply.

48
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54
APPENDIX A: DATA FOR WORLD PROVEN OIL RESERVES(FIGURE 1.1)
COUNTRIES MILLION BARRELS
Venezuela 297.60
Saudi Arabia 267.90
Canada 173.10
Iran 154.60
Iraq 141.40
Kuwait 104.00
United Arab Emirates 97.80
Russia 80.00
Libya 48.01
Nigeria 37.20
Kazakhstan 30.00
Qatar 25.38
United States 20.68
China 17.30
Brazil 13.15
Algeria 12.20
Angola 10.47
Mexico 10.26
Ecuador 8.24
Azerbaijan 7.00

55
APPENDIX B: IRANIAN OIL FIELDS
1. Abuzar Oilfield
2. Aghajari Oilfield
3. Ahvaz-Bangestan Oilfield
4. Anaran Oilfield
5. Azadegan Oilfield
6. Bahregan and Hendijan Oilfield
7. Balal Oilfield
8. BibiHakimeh Oilfield
9. Binak and Golkhari Oilfields
10. Caspian Sea Oilfield
11. CheshmehKhosh Oilfield
12. Darkhovin Oilfield (Onshore and
Offshore)
13. Daroud Oilfield (Onshore and
Offshore)
14. Dashte Abadan Oilfield
15. Dehloran Oilfield
16. Farsi Oilfield
17. Forouzan and Esfandyar Oilfields
18. Gachsaran Oilfield
19. Haftgel Oilfield
20. Hengam Oilfield
21. Jofair Oilfield
22. Kabood Oilfield
23. Karanj Oilfield
24. Kharg Oilfield
25. Khesht Oilfield
26. Khorramabad Oilfield
27. Kuhmund Oilfield
28. LavanA Oilfield
29. MalehKooh Oilfield
30. Mansouri Oilfield (Asmari Reservoir)
31. Maroun Oilfield
32. Masjid e Soleiman Oilfield
33. Monir Block
34. Nosrat Oilfield
35. Nosrat Oilfield
36. Paydar Oilfield
37. Pazanan Oilfield
38. Rage Sefid Oilfield
39. Saadatabad Oilfield
40. Salman Oilfield
41. Sarkan Oilfield
42. Sarvestan Oilfield
43. Saveh Block
44. Shadegan Oilfield
45. SirriA Oilfield
46. Sirri E Oilfield
47. Soroush and Nowruz Oilfields
48. South Pars Oil Layer (South Pars Gas
Field)
49. Yadavaran Oilfield
50. Zagheh Oilfield

56
APPENDIX C: IRAN’SCRUDE OIL PRODUCTION 1931-1950 (FIGURE 2.2)
Year Million
barrels
1931 5.7
1932 6.4
1933 7.1
1934 7.5
1935 7.5
1936 8.2
1937 10.2
1938 10.2
1939 9.6
1940 8.6
1941 6.6
1942 9.4
1943 9.7
1944 13.3
1945 16.8
1946 19.2
1947 20.2
1948 24.9
1949 26.8
1950 31.8

57
APPENDIX D: IRAN’S OIL EXPORTS 1980-2010 (FIGURE: 4.1)
Year Oilexportsbillion(US$)
1981 11.491
1982 20.168
1983 21.15
1984 16.726
1985 13.71
1986 6.255
1987 10.8
1988 9.7
1989 12.037
1990 18
1991 16.012
1992 16.88
1993 14.333
1994 14.603
1995 15.103
1996 19.271
1997 15.465
1998 9.933
1999 17.089
2000 24.28
2001 19.339
2002 22.966
2003 27.355
2004 35.776
2005 53.82
2006 62.011
2007 81.567
2008 82.403
2009 66.21
2010 81.127

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