Iranpour & Associate legal is the lead Legal In Iran With more than 20 years of professional experience and as the Founder of Iranpour Law Firm

IRANIAN PETROLEUM AGREEMENT (IPC) - (Part 2)

Iranian fourth generation petroleum contracts:
Changes in oil contracts and creation of the fourth generation of petroleum contracts as the results of oil industry hardworking experts are based on four main pillars: (1) diversity of contracts and intervention of foreign oil companies in production, (2) the ability of contribution and reliance on contractor’s functioning, (3) the ability of making costs real, (4) repayment certainty and the way to compute and pay awards as discussed below.

chapter 1: the diversity of contracts and intervention of foreign companies in production
In this model called Iranian Petroleum Contracts, it is attempted to provide a comprehensive contractual model for different explored or unexplored oil fields with possibility of oil and gas existence by considering different risks of oil fields. In fact, this comprehensive model is able to be adapted to all field and all oil and gas operations.
On the other hand the most important feature of such models is to provide a model in which Exploration, Development, production processes are continuous; this is a method which can be a basis to attract oil companies due to their intervention in production step and limiting their risks.

chapter 2: the ability of contribution and reliance on contractor’s functioning (JV)
Another feature of petroleum contracts fourth generation is to use contributive entities for better relationship among clients and contractors. Although in this model, foreign countries are still boring the risk of exploration operation, contracts allow client to create a contract and to improve its knowledge especially in development step. Then, they allow it to establish a joint venture for production operation so that it can assure foreign company on participation in production step and to provide a guideline to transfer know-how and management knowledge for client (NIOC).

chapter 3: the ability to make costs real
We remember that that in the third generation, there was a broad and prudential effort through phasing and tenders in determining the prices to make the costs re3al in development step so that one can mitigate relevant financial costs and development risks. This generation of contracts attempts to make the costs of development step real. To realize this aim, it is necessary to provide a comprehensive definition on costs initially. (Paragraph one: types of costs) and then it is merit to study how to determined acceptable costs (Paragraph 2: expenditure annual plan)

part 1: types of costs
These are petroleum costs which include exploration, interpretation, development, post – development and production operation costs.
The most important one is development cost which can be divided into four groups:
(a)    Direct Capital Cost or DCC
(b)    Indirect Costs or IDC
(c)    Cost of Money
(d)    Saving Costs

I: direct costs:
Direct costs are almost seen as “capital costs” and include all necessary costs to realize Objectives of Development. They are divided into two categories: “DCC for the First Production or F.D.C.C” and “Production on Plateau basis”.

1.    The first production costs: these include Appraisal Phase and Development Costs until primary production in oil field.

2.    Production on plateau basis: these include all costs from primary production to fixed production based on comprehensive development plan.
Based on contract terms, in the case of approval by technical committee, NIOC accepts 5% increase in costs. In Improved Oil Recovery and Enhanced Oil Recovery, if more investment is needed to achieve development goals, NIOC should conduct necessary supports. Such commitment can be seen as commitment to result.

II: indirect costs
Indirect costs include those costs considered as non-capital costs in past generation of contract which consist of governmental fees and taxes.


III: costs of money
Since foreign company is committed to finance operation, exploration and development processes, based on contract terms , finance costs is computed by Libor+ X% as cost of money and a receivable.

IV: saving costs
In this model, the oil company considers an award to save direct costs as operation, exploration and development cost.

part 2: expenditure annual plan
One of the historic concerns of oil companies has been the uncertainty of work commitments and, as a result, non-decisive amount of expenditures for development operations. While more serious efforts were done to clarify the boundary of oil companies’ commitment in the third generation of contracts, in the fourth generation, such effort was seen more seriously and operationally. Based on the terms of such contracts, the amount of expenditure and job description are defined annually in terms of specifications and activities of different tanks in each oil field. Hence, the oil company can define job description and, consequently, development costs based on achieved information in a one-year interval.
Total costs are seen as acceptable cost and its repayment starts by the beginning of production as below:

chapter 4: repayment certitude and contractual award sum:
In this discussion, we address repayment certitude and contractual award sum.

part 1: repayment certitude
In such contracts, the time of repaying of costs toward the primary production is between 5 to 7 years upon primary production. By starting primary production, the costs are repaid based on annual budget. Considering the costs in final year, they are added to the term of contract conditioned to results.
In the case the primary period does not cover repayment, NIOC is committed to act based on an agreed method to extend contract deadline. Although this kind of commitments are seen as commitment to tool, in procedures governing international commerce, it can be seen as a commitment to result while the contractor is granted fair respite for repayment.
In the case of any force majeure, in the first step, the contract is postponed for a time and if the force majeure is not removed, the contract is terminated and the costs till time of force majeure is repaid from the income of the contract upon removing the force majeure or other incomes of NIOC with the same conditions.
The most important element of Iranian petroleum contract is contractual award.

part 2: contractual award
Contractual award is studied in two sections: commitment to pay (part 1) and award payment time (part 2).

I: commitment to payment realization
In such contracts, four main factors are considered based on commitment definition basis: (1) production rate; (2) plateau duration; (3) risk factor, (4) annual income to expenditure (R factor)
1.    Production rate: one factor which indicates qualitative function of contractor in petroleum contracts is production rate. Based on technical appendices to a contract, contractor is obliged to conduct a developmental plan to achieve certain economic goals. If contractor is successful in realizing such aims, it would receive a percentage of production commensurate to its score and it can enhance its award by this way.
2.    Plateau duration: another factor which indicates the quality of client’s function in development and production step is to continue production threshold continuance. Plateau duration is computed as a score in calculating contractor’s award.
3.    Risk factor: another determinant for contractor’s award is the scope of contract. More danger in project, contractor’s award will be determined by danger ratio.
4.    Annual income to expenditure: it is another determinant for award. Contractor’s expenditure includes all direct and indirect costs and contractor’s incomes mean the price from oil selling in each fiscal year. On this basis, contactor can use oil price increases. Lower expenditure or higher prices would enhance contractor’s award by certain ratios. Therefore, four determinants of contractor’s award is determined. However, questions arise on the time of paying this award.


II: the time of award payment
Upon finalizing the debts and commitments of NIO, award payment will be five years from initial production times and 20 years after final production based on contract terms. Therefore, the relevant interval is the beginning of primary production and maximum 20 years.
Ultimately, by paying such award along with costs, the contractor would achieve its financial interests and NIOC benefits from oil earnings. In terms of legal analysis, this kind of contract is defined as a service contract with risk – taking external petroleum in exploration step.
By the beginning of exploration step, we are facing with a kind of limited risk – taking by NIOC since based on the contract model conditions, the costs and awards have the high capability of extension during contract term and are finally repaid. On this basis and considering more risk – taking by contractor, the commitment by the oil company in such contracts is getting closer to result in past models and we are encountering a kind of “Cost Plus” service contract even though we face with a threshold concerning costs repayment and particularly award payment theoretically. This is a guideline which can be justified legally and economically in joint fields, high risk fields or fields where recovery is necessary.