IRAN - The Buy-Back Approach.

As the Islamic republic's constitution does not allow the granting of concessions, the government in 1990 worked out a buy-back formula under which foreign companies developing oil or gas fields are repaid their cost and given an agreed rate of return from initial production and a long-term access to the hydrocarbons. In rounds of offerings made in 1991 for 11 field projects, however, the response was poor because the rate of return was considered low by foreign companies. Subsequent efforts to attract companies failed. In 1995, the rate of return was raised and on that basis the first round of offerings attracted some companies. In subsequent negotiations, Tehran was compelled again to raise the rate of return to about 16-18%. That was after moderate President Khatami, elected in a landslide victory in May 1997, came to office in August. In September Total signed a $2 bn deal for South Pars Phases 2 & 3. Its rate of return was said to be 18%. However, Washington had imposed secondary sanctions in August 1996 (on top of earlier sanctions forbidding US companies from investing in Iran or buying Iranian oil or gas), under the Iran Libya Sanctions Act (ILSA). The ILSA meant that any company investing more than $20m/year in Iran's hydrocarbon sector would be punished in the US. Shell and other firms with operations in the US stopped pursuing Iranian projects. But in May 1998, the Clinton administration - under pressure from the EU, Canada, Russia, Malaysia and other countries - excluded the Total-led consortium from the ILSA measures. This encouraged Shell to resume South Pars negotiations. Most companies took the waiver to mean that Washington may no longer apply the ILSA as strictly as was first thought. For its part, NIOC informed US companies that they would be welcome to Iran. This added further pressure on the Clinton administration as most US oil firms attacked Washington's sanctions approach, which caused them to lose good opportunities in Libya, Iran, Iraq and other countries on the American blacklist. The second round was launched in a London conference on July 2-3, 1998, when NIOC presented four categories of projects: 20 areas for exploration, eight offshore fields for further development and EOR, 16 onshore fields for further development and EOR, and three projects for the Abadan oil refinery expansion and upgrading. The onshore fields were offered for the first time - the onshore areas having been closed to foreign companies since the May 1951 nationalisation of the industry. A new buy-back contract (BBC), passed by the Supreme Economic Council (SEC) weeks earlier, was offered at the conference. This requires foreign companies to give some of the work to local contractors. But again it limits the potential upside of investment and the duration of the foreign company's involvement in the field. The foreign company must guarantee the field's production capacity one year after termination of the BBC. The conference was attended by about 400 executives from 150 companies. The US firms included Mobil, Amoco, Exxon, Conoco, Arco, Unocal, Oxy, Chevron, Texaco and Brown & Root. The European companies included BP, BG, Total, Elf, Shell, ENI, Saga Petroleum, Neste Oy and Premier Oil - as well as Lasmo and Monument Oil & Gas, which were most prominent among the conference supporters. The Japanese companies included Mitsui, Tomen, JNOC, Itochu, Japan Energy and Marubeni. Total was developing two Sirri oilfields offshore under a $600m deal signed in 1995 (see Part Two). In April 1993, parliament had passed a law setting Iran's maritime boundaries at 12 nautical miles from the coast. Among other things, this had asserted Iran's sovereignty over islands in the Persian Gulf, the Sea of Oman, and a number of oil and gas rich structures shared by Arab states from Kuwait down to Oman and strategic isles (Abu Musa, Greater Tunb & Lesser Tunb) disputed by the UAE. All the former partners in offshore JVs had offered to return to Iran: Amoco in June 1990 had agreed with NIOC to receive $600m in settlement of its claims over the Ipac JV; and Arco had received a settlement over the Lapco JV and but could not develop Balal field (linked to the Lavan Island terminal by a marine pipeline with a potential to produce 40,000 b/d) because of the US sanctions, as in the case of Amoco. Conoco had been forced to drop the Sirri deal in March 1995 because of the US sanctions. Agip had settled disputes relating to the Iminoco and Sirip JVs; Total was interested in fields other than the Sirri group and South Pars. Elf, which lost the Sofiran JV, was negotiating several offshore structures. A partnership of Elf (55%) and Agip (45%) got the offshore Doroud field, under a $540m BBC signed on March 1, 1999 (see Part Two).