Wary Western oilmen seek new deal in Iran
London - J.W. Williamson’s 1927 book In a Persian Oil Field, subtitled A Study in Scientific and Industrial Development, waxed lyrical over the work of the Anglo-Persian Oil Company. As well as examining the company’s technical work, the book showcased the housing, medical facilities and vegetable bazaar provided by the company for local workers, “many of them simple nomads”. British employees were largely segregated.
A preface by the Earl of Balfour — he of the 1917 British declaration backing a Jewish state in Palestine — reflected the importance attached by the London government to Anglo-Persian’s exclusive rights, derived from the 1901 D’Arcy concession, to exploit Iran’s oil reserves.
The terms that had been accepted by the Qajar shah became a growing source of contention for nationalists, as the British government famously received more in tax from the oil company than the Iranian government received in royalties.
The bitter taste lasted beyond nationalisation in the 1950s and the 1979 revolution and lingers today as Iran gears up to entice Western energy majors back with international sanctions set to ease following Tehran’s nuclear agreement with world powers.
The September visit to Iran by executives of BP, the successor to Anglo-Persia, had a particular sensitivity in Iran. But BP is hardly alone. Total, Eni and Shell will lead the way as majors that had greater involvement in Iran before the United States pressured them to withdraw around 2009-11.
Even US companies are eyeing Iran’s carbon reserves, the largest in the world with 157.8 billion barrels of oil (9.3% of global total) and 34 trillion cubic metres of gas (18.2% of global total).
The attraction is mutual. Iran badly needs international investment and expertise and there is widespread dissatisfaction with the quality and speed of Chinese contractors.
Iranian Deputy Oil Minister Hossein Zamaninia said in July that Iran had identified oil and gas projects worth $185 billion which it aimed to sign by 2020 and Iran is especially keen to gain access to the advanced technology needed to convert the vast undersea reserves of the South Pars field into liquid natural gas, its most exportable form. Without the majors’ know-how, progress has been slow: while Iran holds 18.2% of global gas reserves, its production in 2014 was only 5% of the world total.
But given the history, there is still suspicion in Iran and a persistent desire for “self-reliance”. When Supreme Leader Ayatollah Ali Khamenei decreed in 2005-06 that much of Iran’s state-owned industries should be privatised, he stipulated that upstream oil and gas would remain in public hands.
In order to safeguard public ownership of energy reserves, the Islamic Republic in the 1990s evolved a system called “buy-back”. Essentially this meant the contractor funded all development, received an agreed production share and then transferred operation of the field to the Iranian authorities after a set number of years, so completing the contract.
The majors disliked “buy-back”, partly because it gave them no real incentive to maximise production and profits and partly because contracts were restricted to five to eight years.
This is set to change, with recent cabinet approval of a new arrangement, the so-called Iran Petroleum Contract (IPC), and a conference is scheduled in Tehran for the Iranian month of Aban (October 23rd- November 21st) to announce the terms, with a follow-up conference in London in February 2016.
Vagueness over the date of the conference may reflect the “complex” issues involved, an Iranian business journalist told The Arab Weekly.
The Oil Ministry and the state-owned National Iranian Oil Company have been trawling through possibilities since legislation in 2012 gave them power to examine new models and terms.
Just how far they have decided to go remains to be seen. In 2014, Mehdi Hosseini, chairman of a contracts revision committee, said international companies taking part in “joint ventures” would be “paid” with a share of the output — giving them an incentive not present under “buy-back”, to maximise production and profits. Iran might go further in taking a fee per barrel, and there has also been talk of contracts lasting 20-25 years.
The majors are wary, not just about their bottom lines in a less-than-vibrant world market but over who their Iranian partners might be in “joint ventures” and also regarding technology transfers. The government’s intention appears to be to offer sufficiently attractive terms to attract investment and expertise.
Rather like the July 14th nuclear agreement with world powers, Iran has set its “red lines” discretely and will now look for common ground between its belief in “self-reliance” and international pressure to fall into line.
In his speech to the UN General Assembly in September, Iranian President Hassan Rohani portrayed the nuclear agreement as a blueprint for solving problems through dialogue.
No doubt he also believes Iran can pursue its national interest through compromise in energy.