By Bijan Khajehpour, for Al-Monitor. Any opinions expressed are those of the author, and do not necessarily reflect the views of Iran Business News.
The signing of a heads of agreement (HOA) between Paris-based Total SA, China National Petroleum Corp. (CNPC) and Iran’s Petropars on the development of phase 11 of the South Pars gas field is an important development in post-sanctions Iran.
In fact, the country had been deprived of Western technology in its petroleum sector since the departure of major European companies in 2008-2009 due to an intensification of nuclear-related sanctions. Though an HOA is not considered a full-fledged contract, it is a symbolic step underlining that Western international oil companies (IOCs) are returning to Iran.
This specific HOA is symbolic for two more reasons: It was signed on Nov. 8, Election Day in the United States, indicating that the outcome of the election had no impact on Total’s decision to re-engage the Iranian market. Furthermore, the creation of a consortium consisting of a Western IOC, an Eastern IOC and an Iranian company is a reflection of what the Iranian stakeholders expect: Western technology, potentially some Chinese financing as well as capacity building for an Iranian company.
The question is whether this signing represents the starting point of a process in which European IOCs will return to the Iranian market. Evidently, being located in a low-cost, oil-producing region, oil and gas fields in Iran offer an opportunity for IOCs in the current low oil price era. Furthermore, Iranian projects do not present any major geological risks. However, political and legal risks are certainly the key factors influencing the investment decisions of IOCs with regard to projects with Iran.
To address the legal shortcomings, Iran has introduced the Iran Petroleum Contract (IPC), which has replaced the old buyback model. Compared to the buyback, the IPC is opting to integrate the exploration and production phases to expand overall capacity. Furthermore, contrary to the buyback model, the National Iranian Oil Company (NIOC) is looking to develop long-term relationships and offer more flexibility in investment costs in order to attract foreign investment, know-how and technology.
From an IOC’s point of view, the planned 20- to 25-year duration of an IPC agreement provides a greater level of certainty and incentive to invest.