Iran To Change Buyback Formula.

The Managing Director of the state-owned National Iranian Oil Co. (NIOC), Qholam-Hossein Nozari, on Nov. 1 said Iran was soon to announce the outcome of changes in the controversial buyback formula used in oil development contracts. He said: "The modification of buyback contracts is being prepared as a directive and will be put at the disposal of the media next week". Nozari was talking to the press on the sidelines of a conference sponsored by NIOC.

The widely-criticised buyback formula skirts the constitution, which prohibits foreign firms from having equity in Iran's petroleum sector. Instead, the firms participate in a project for a limited period and are repaid in oil or gas revenue. Domestically, the scheme has come under much criticism for allowing the contractor to over-use the reservoir for maximum yield. Internationally, it is criticised for not providing adequate incentives for investing in an oil or gas field. According to Iranian oil officials, Tehran will have to invest around $100 billion in its petroleum sector within the next decade or so, the bulk of which would have to come from foreign sources.

Recently, Iranian Oil Minister Kazem Vaziri Hamaneh said "some substantive changes in connection to these [buybacks] have been made to make them more attractive to foreigners and eliminate their weak points". Oil Ministry officials have been silent on the details of what is being done to make buybacks more attractive. But they have made some comments with respect to domestic criticism of the formula. In the modified version, the protection of oil reservoirs is the prime consideration. Nozari has said NIOC will compile a field's master development plan (MDP), instead of the contractor, as was the previous practice.

When a field's MDP is compiled by NIOC, the risk to the reservoir in terms of pressure for more yield production is less, ensuring the long-term safeguarding of the reservoir. According to the NIOC chief, a large oil field will not be contracted for development in one piece but will instead be divided into parts for phase-by-phase development by the contractor. The gradual development of a field by a contractor helps in obtaining better knowledge of the characteristics of the reservoir and helps in safeguarding the field.