Despite Reform Talk, Iran is Keeping Unfavourable International Oil Contract System

Ayatollah Ali Khamenei, supreme leader for Iran

Although Ayatollah Ali Khamenei, supreme leader for Iran, last weekend said that no new oil and gas contracts for international companies will be awarded without reforms, it seems the Islamic Republic will still be able to develop its infrastructure via buy-back deals that have put majors at a business disadvantage since the 1990s.

The reforms Khamenei refers to are new Iran Petroleum Contracts (IPCs) that provide more flexible terms compared to the buy-back system in which foreign companies are banned from booking reserves or taking equity stakes in local companies, thus giving the bulk of profits to the Iranian government.

The buy-back system, which has been in place for over two decades, is said to be a major impediment in the majors resuming business with Iran: France's Total and Italy's Eni claim they made no money off them and in some cases even incurred losses.

Reportedly, hard line rivals of President Hassan Rouhani have resisted any deal that could end the buy-backs and effectively blocked the launch of IPCs, but Khamenei seemed to have the last word on the topic when he was quoted by the Tasnim news agency on Sunday as saying, "These contracts will not be signed unless the necessary reforms are implemented in the framework of national interests."

Rouhani has been pushing for reforms in order for Iran to be able to boost crude production to pre sanction levels of 4 million barrels per day, which will only be possible with $200 billion in foreign investment.

But on Monday, Ali Kardor, the new managing director of state-run National Iranian Oil Company, said oil fields could be developed either through buy-backs or Engineering, Procurement, Construction and Financing Contracts (EPCF); the new contracts will be offered for joint fields, while   a number of fields would be developed by Iranian companies.

Bijan Zanganeh, oil minister for Iran (and who appointed Kardor last month), told the press a final draft for the contracts would be approved by government after amendments were made to appease both critics and foreign companies; but he confirmed the contracts would still allow his nation to develop its oil and gas fields either through buy-back or other methods.

An Iranian oil source, referring to Iran's 2017 presidential election, told Reuters that "I'm a little puzzled, and it seems to be because of the election; they do not want Rouhani to succeed."

While Iran's initial return to the international market was impressive, a slip of crude exports by almost 20 percent in the first three weeks of June combined with other factors is kindling speculation that its oil boom has passed its apex.