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Interview: Iran ready to give Production Sharing Agreements

Source: Menas Associates' Iran Energy Focus, February 2003

Many key decisions for the future of Iran's oil and gas industry and foreign contracts are made in the Majlis Energy Commission (MEC). In this issue, Iran Energy Focus (IEF) interviews MEC Chairman Hossein Afarideh to shed light on what this important body thinks about key issues of concern to international oil companies. Dr. Afarideh holds a PhD in nuclear energy and has served in different academic positions, including research directorate of Iran's Atomic Energy Organisation.

IEF: We have been hearing different reports about the budget bill and the estimated oil prices and revenues in it. Specifically, we have come across two different figures being used to calculate average oil revenues and therefore the government's income: $19 per barrel and $23 per barrel. The conflicting figures have confused analysts. Which one is the correct figure being used in the coming budget? Is it realisable?

Afarideh: Our forex budget is $15.3 billion. This amount need not necessarily be realised through crude sales alone. That is, if we manage to sell this amount of crude, the money will be taken directly from the revenue; if not we will use Oil Surplus Fund to cover up the deficit.

The [average] price of crude is estimated at $23 per barrel in next year's budget [March 2003-March 2004]. Of course, we think that this estimate [by the administration] is a bit high. Our neighbouring countries have not gone beyond $21 per barrel and we had better be more careful in that regard.

Whether or not the figure is realisable is another issue. This will very much depend on the Venezuelan and Iraqi crises. Continuation of status quo in Iraq combined with the return of Venezuelan exports will mean that crude prices would range between $22 to $25 per barrel. An American attack or installation of a US-led government in Iraq might lead to a short-term price hike, but will eventually result in a price fall.

In any case, we believe that this upward trend of prices will continue for the next three months and there will be a slump in prices afterwards. Of course, OPEC members are meeting on the 12th of March in Vienna, Austria, to make new decisions with respect to the instability of the market.

IEF: We hear that the Majlis approved an article in the budget bill allowing NIOC to award development projects to companies that successfully carry out explorations on the same field. Could you verify this news and explain a bit more about the plan?

Afarideh: This was a government proposal in the budget bill. It suggested granting development projects to those carrying out explorations in border areas as well as central regions. The Energy Commission initially rejected the central areas, but the Majlis floor later approved it.

IEF: Why did the MEC object to giving such incentives for exploration projects in the central areas?

Afarideh: What everybody approves of is to give such a concession in border areas, since we all believe that Iran still has many undiscovered shared fields. In these shared fields, we would like to offer companies that carry out the exploration activity the opportunity also to develop the field. But in the case of central areas, we are not in rush. NIOC can put aside some money and explore the areas itself.

IEF: How much foreign commitment is the government allowed to take on according to next year's budget?

Afarideh: In addition to the previous year's permissions, the government is allowed to sign contracts for the production of 600,000 barrels [per day] from shared fields.

IEF: How much is that in total?

Afarideh: Our last year's buy-back commitments in the oil industry were about $40 billion plus this year's 600,000 barrels, which is around $5 billion to $6 billion.

IEF: Talking about shared fields, for the past few years the Majlis has consistently insisted on giving them priority when it comes to signing development deals. Yet we still have South Pars oil layer and Dorra gas field that haven't been awarded, in addition to the various gas projects in South Pars. What is Parliament's policy in this regard? Is there any plan to expedite the awarding of these oil fields, considering that some of the deals have fallen into a standstill?

Afarideh: Yes. We may even have shared fields on the Iraqi border or in the Persian Gulf. We also think that we have shared fields in Ahwaz's Husseinia.

About the deadlock in the agreements, I have to disagree with you. It is not fair to call it a standstill. Sometimes companies offer proposals that do not meet our demands. So amending the proposals and bids may be time consuming for the companies, but this does not mean a stalemate in the process.

We took significant steps forward for the development of South Pars gas field, which is as you know, is shared with Qatar. Last year, we were active in phases 6, 7, and 8 and also have had some progress in phases 4 and 5. These are all our achievements in the shared fields.

Some contracts, as you know, have to go through a long process. Sometimes the scope of the work changes and it requires a change in the proposals. Therefore, I think these are the reasons behind small delays, but I have to say there is no stalemate.

IEF: How about other onshore projects, such as Cheshmeh Khosh and Bangestan?

Afarideh: Well, the Majlis is pushing mainly for shared fields at this moment, but permissions for the fields you mentioned have also been issued and NIOC should decide on that. We have no objections.

IEF: Some foreign companies are complaining that some Iranian development projects, including the South Pars oil layer, are not sufficiently attractive in commercial terms as currently framed. What is your view?

Afarideh: This is not true. This is their interpretation. We believe it is attractive, but they may want more. You know that more attractiveness means more concessions and it is natural that offers are not as attractive as they used to be in the early days.

IEF: Foreign oil companies certainly prefer working within the framework of a PSA. Iran, however, generally offers its projects in the framework of the buy-back scheme, and recently as finance deals. Could you please tell our readers more about these schemes and how they differ?

Afarideh: Well, in a buy-back scheme the company carries out the project and is reimbursed from the sale of its production, but finance is in fact a sort of loan. You get the loan for development of your field and guarantee that you will pay it.

Also, in buy-backs, if the company fails to produce the agreed amount, it will be penalised and the reimbursement will evidently be less than earlier agreements. That is why these contracts are more risky in comparison with finance deals. But I have to say that the buy-back deals we have signed so far have had no risks, because we were all certain about the huge deposits of oil in those areas.

About PSAs, or production sharing agreements, we all know that there are legal restrictions [in the Iranian Constitution], but still, we are ready to offer PSAs for companies that risk investing in the Sea of Oman or Iran's 13 per cent to 20 per cent share of the Caspian Sea.

I believe that each of the two parties has its own restrictions here. Foreign companies want to have long-term investment, while buy-backs are short-term agreements by nature. We are therefore changing them to medium-term contracts. Also, these companies want to have an optimal production when they discover a field and take as much oil as possible out of it. We don't disagree, but we want this to be done through buy-backs.

IEF: So Iran does not have any intention to opt toward finance instead of buy-backs?

Afarideh: Why should it? Buy-backs bring us no commitments, so why should we create debts for ourselves?

IEF: But we have to agree that once a US-supported government is installed in Iraq, that country is likely to offer PSAs for developing its huge oil fields, while we are offering buy-backs for our Azadegan or Bangestan with relatively low rates of return. Is this a source of concern for Iran?

Afarideh: No, by no means. These agreements all depend on the situation. As I said, we are ready to give PSAs as well, but not in the oil-rich Persian Gulf.

IEF: What do we do with constitutional restrictions in order to give PSAs in the areas you defined?

Afarideh: We will find a solution for that. You see, we will not overlook our national interests and will deal with problems when necessary. But for the time being we are not in an emergency, in the way that Iraq is. There are lots of companies working with us in the framework of buy-backs, so why should we go for PSAs, which have legal constraints and cause us problems? There are lots of companies that are ready to work with us even in the current situation.

IEF: About the foreign companies working in Iran, what type of firms do you prefer to work with? Some analysts say that Iran would rather work with medium-size companies rather than giant outfits. Is that true?

Afarideh: No, it is not. What Iran wants is sincerity. No matter which company is working with us, we want it to respect our national interests and be honest with us in all aspects including technology transfer. We even welcome American companies, but they are barred by their own government's sanctions policy. We think that their presence could increase the rivalry among foreign oil companies.

We believe that the two sides [i.e., Iran and the foreign firm] should have a logical, mutual cooperation in a way that the interests of both parties are respected. So, naturally, we are looking for our own interests and any company that conforms to our goals is the ideal one.

The fact that Norwegian Statoil won the offshore portion of South Pars phases 6, 7, and 8, was not because of its size. That was because other big companies did not show any interest in the project and did not forward us attractive offers.

You can see that both large and medium-sized companies are reviewing and studying our projects and there is no priority for any one of them. As I said before, we want the companies to be involved in all projects that we offer, not only a few lucrative offers. In a nutshell, we want them to be honest with us.

IEF: Let us move to local outfits. Why do you think Petropars is being nationalised?

Afarideh: Petropars did a great job. It was a project management company that stood against huge companies such as TotalFinaElf, Shell or the rest and led to price breaks in South Pars development. This is a great job.

For this to happen some grounds had to be paved and the government had to grant some supports. The supports, as you saw, drew a lot of criticism and at this point we think Petropars' nationalisation will leave the government with a freer hand to back the company.

Petropars entered the race as a private company and the Petroleum Ministry as well as other organisations backed it to go ahead with its plans. It has so far completed South Pars phase 1 by 90 per cent and has caused the project costs to drop day by day. Accordingly, phases 6, 7, and 8 were awarded at a much lower price than other phases. That is an important impact Petropars has had on the process.

But the supports, though logical, were being objected to and this prompted us to nationalise the company irrespective of the Third Development Plan's policies for downsizing the government.

We need to support Petropars and help it survive, but as long as it is a private company we will have difficulty doing so. Therefore, we will keep Petropars governmental until the ground is prepared for private companies to perform in a competitive market.

Our only concern about Petropars' nationalisation is its impact on the management of the company. We have learned through experience that governmental companies cannot perform as efficiently as private ones, especially in project management.

IEF: You mentioned earlier that giving buy-backs to foreign companies for central fields is a hasty move. Could you anticipate a day when Iranian firms are given the opportunity to explore and develop these fields? Are the local companies capable of carrying out projects and entering joint ventures with foreign companies?

Afarideh: If we are supposed to award a project, even to an Iranian firm, it should be done through tenders. We believe in the rule of law and we think that Iranian companies should also bid in tenders and win. But when the Iranian outfit is in a similar position to that of a foreign firm, we think that the local company should be supported. We should encourage local firms, give them enough facilities, and support them to carry out the job.

IEF: What do you think is the biggest problem of Iranian firms?

Afarideh: Financial resources. I believe that these companies should be [financially] supported and facilities should be granted to them from the Oil Surplus Fund. Of course, we are taking some steps forward and little by little these companies are enjoying more support. When they find their own reputation, they will no longer need government support. This, of course, requires Iranian firms to merge and form a giant company in order to have better credit in international arenas.

IEF: How about on the technical front? We see that local companies say they have the best reservoir engineers, technicians, et cetera. As far as we have understood, Iran is weak in project management. What do you think Iran's weakness is? What type of companies do we need more of?

Afarideh: As a country with huge oil reservoirs, Iran should have numerous oil companies active in upstream, downstream, pipeline, drilling, and refineries. They should all have international standards and use modern technologies in their works in order to be able to compete with giant companies. They can as well form joint ventures with foreign companies and use their know-how and technology and improve their capabilities.

IEF: Do you think that a foreign company is ready to play as an engineering partner in a joint venture with Iranian companies?

Afarideh: Foreign companies always care for their interests. They know that they may even lose the joint venture opportunity if they don't go for it. So I think these firms will prefer to stay in the market, even in the form of a joint venture, instead of leaving it.

IEF: Thank you very much.

... Payvand News - 3/5/03 ... --

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