The Iranian constitution prohibits the granting of Petroleum rights on a concessionary basis or direct equity stake. However, the 1987 Petroleum Law permits the establishment of contracts between the Ministry of Petroleum, state companies and "local and foreign national persons and legal entities." Buyback contracts, for instance, are arrangements in which the contractor funds all investments, receives remuneration from NIOC in the form of an allocated production share, then transfers operation of the field to NIOC after the contract is completed.
The buyback system has drawbacks for both sides: by offering a fixed rate of return (usually around 15-18 percent), NIOC bears all the risk of low Oil prices. If prices drop, NIOC has to sell more oil or Natural Gas to meet the compensation figure. At the same time, companies have no guarantee that they will be permitted to develop their discoveries, let alone operate them. Finally, companies do not like the short terms of buyback contracts. In response, Iran has considered revisions to buyback terms (e.g., extending the length of contracts, allowing for continued involvement of oil companies after the field is handed over to NIOC), but these have been controversial and generally have not moved forward. In early December 2005, acting Iranian oil minister, Kazem Vaziri, questioned the future of buyback contracts but emphasized that Iran would continue to seek foreign investors in the energy sector.
The buyback system has drawbacks for both sides: by offering a fixed rate of return (usually around 15-18 percent), NIOC bears all the risk of low Oil prices. If prices drop, NIOC has to sell more oil or Natural Gas to meet the compensation figure. At the same time, companies have no guarantee that they will be permitted to develop their discoveries, let alone operate them. Finally, companies do not like the short terms of buyback contracts. In response, Iran has considered revisions to buyback terms (e.g., extending the length of contracts, allowing for continued involvement of oil companies after the field is handed over to NIOC), but these have been controversial and generally have not moved forward. In early December 2005, acting Iranian oil minister, Kazem Vaziri, questioned the future of buyback contracts but emphasized that Iran would continue to seek foreign investors in the energy sector.
The first major project under the buyback investment approach became operational in October 1998, when the offshore Sirri A oil field (operated by Total and Malaysia's Petronas) began production at 7,000 bbl/d. The neighboring Sirri E field began production in February 1999, with production at the two fields expected to reach 120,000 bbl/d.
In March 1999, France's Elf Aquitaine and Italy's Eni/Agip were awarded a $1 billion contract for a secondary recovery program at the offshore, 1.5-billion-Barrel Doroud oil and natural gas field located near Kharg Island. The program is intended to boost production from around 136,000 bbl/d to as high as 205,000 bbl/d. Total is Operator of the project, with a 55 percent share, while Eni holds the other 45 percent.
In April 1999, Iran awarded Elf (46.75 percent share), along with Canada's Bow Valley Energy (15 percent share), a buyback contract to develop the offshore Balal field. Eni is also involved, with a 38.25 percent stake. The field, which contains some 80 million barrels of reserves, started producing at a 20,000-bbl/d rate in early 2003, and reportedly reached 40,000 bbl/d in February 2004.
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