Investment Challenges in Iranian Oil

1
Investment Challenges in Iranian Oil Gas
SectorsA Legal Approach
Leila Zabbah Institute for International Energy
Studies (IIES) IRAN

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Iran holds almost 11.2 of the world's total oil
reserves, and 15.7 of total gas reserves. This
country as the first holder of natural gas
reserves in Middle East and second in the world
is followed by Qatar as the second in the Middle
East and third in the world.
Introduction
Source OPEC, World Outlook 2008

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Considering Significant geopolitical location of
Iran and very beneficial conditions of the fields
for investment, this country is having a very
much talented bed to attract foreign capitals

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How is the Iranian Legal Environment for Foreign
Investors in Oil Gas Sectors?

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Main body of Iranian Legal Structure Regarding
Foreign Investment in Oil Gas Sectors

• Foreign Investment Promotion and Protection Act
  (FIPPA)

• The Constitution of Iran

• Petroleum Acts adopted in 1957, 1974 and 1987

1st

• Iranian Budget and Plan Code

• Others

Ambiguities Problems for Foreign Investment in
Oil Gas Sectors
2nd

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• Iranian Legal Structure Regarding Foreign
  Investment in Oil Gas Sectors

FDI in authorized sectors
Acceptance of Investment
FIPPA
FI Civil Sharing Service Contract - BOT

• Turning point in the Iranian economy

• Protection provided for Foreign Inv.

• Treatment after acceptance Standard of National
  Treatment

• Fiscal facilities National Treatment

• Transferring the capitals and Profits

• Settlement of Dispute Domestic courts
  International Arbitrations is possible

• Compensation Appropriate compensation

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• Iranian Legal Structure Regarding Foreign
  Investment in Oil Gas Sectors

Constitution Law
Article 44 Contains restrictions for private
investors to invest in upstream oil and gas
Article 45 Natural Resources belongs and are
controlled by the government
Article 81 Limits entrance and establishment of
foreign companies and enterprises
Article 139 limitation of referral the claims
relating to public and state property to
arbitration
Petroleum Acts
1957 Act was revoked, 1974 and 1987 Acts are
current Petroleum Acts of Iran
1987 Act, Article 2 follows article 44 of
Constitution Law is against investing in
Natural Resources
1987 Act, Article 6 , Foreign investment in
these operations in any manner will not be
allowed

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• Iranian Legal Structure Regarding Foreign
  Investment in Oil Gas Sectors

Budget Plan Law
Balance and Place for Investment through Buy-Back
is determined and approved by parliament of Iran
(ICA)
Labor Law Tax Law
Work License requirement Protective insights
toward national work force
As per national treatment standard, Foreign
investors are subject to the Iranian Law of
Direct Taxations adopted on 1997 by Assembly of
Iran

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• Limitations related to Private Investment in oil
  and gas upstream sectors

Cooperative
Mother Industries
Divisions of Economy in Iran
Article 44
Governmental
Owned administered by the state
Private

• Oil gas sectors will be publicly owned and
  Private Sector cannot invest for Upstream Sectors
  as Mother Industries

• Worries to expand Develop an Industry

Articles 2 6 of Petroleum Act

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• Legal Restrictions for foreigners to establish
  company

2 Obstacles for foreigners to establish company
Problem of Private Investment
Article 44

• Foreigners cant establish co.
• Necessity to attract nationals to Join the
  investment

Article 81
Article 81

• only 49 Foreigner-51 Locals

• Establishing a new Co.

• Art 5 of Free Zone
• To enter into a JV agreement
• with an Iranian partner

• Opening a branch

• JV at Free zone

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• Limited methods to conclude contracts

Contracts
Companies
State Party
Technologies Capitals
Concession
Investment
Sharing Contract
Service Contract

• Ownership of the reserves

• Proper Incentives

• Controlling the production

• Share of Changing the oil Price

• Managing the project

Buy-back 1990
Iranian Revolution (1979)

• Concession

• Concession

• Sharing Contract

• Sharing Contract

• Service Contract

• Service Contract

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• Concession

1st Petroleum Act

• Sharing Contract

1957

• Service Contract

• Concession

2nd Petroleum Act

• Sharing Contract

1974

• Service Contract

• Concession

3rd Petroleum Act

• Sharing Contract

1987

• Service Contract

Under Buy Back method in Iran, the contractor
develops the field and NIOC repays the costs that
contains capital expenditure (CAPEX), operating
expenditure (OPEX) and accrued bank charges.
Additionally, the contractor receives a
negotiated remuneration fee. Buy back was first
operated in 1998, which give differing returns to
the parties depending on the oil price.

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Const Law Article 44

• National Sovereignty State Ownership is a must

What to do?
Const Law Article 45

• National Sovereignty State Ownership is a must

Const Law Article 81

• Formation of Company by foreigners is not
  authorized

Petroleum Act Article 2

• National Sovereignty State Ownership over
  natural resources

Petroleum Act Article 6

• No Foreign Investment in upstream oil Gas is
  possible

• To keep sovereignty over natural only by the
  state
• To keep ownership of natural resources by the
  state
• Not to be invested by foreigners
• To provide adequate ROR for the risks being
  taken

Buy-back 1990

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• Taxes, Work force,

Foreign investors as per national treatment are
subject to the Iranian Law of Direct Tax adopted
on 1997 by parliament (Islamic Consultative
Assembly). The rate of tax according to the
present Iranian law of taxations is high which
with regard to other charges is one of the weak
points of Iranian laws to attract foreign
investment.
There are several limitations for foreign workers
to obtain legal work license and considering
protective insight of the Iranian laws and
regulation toward national work force, this
causes difficulties for foreigners to have their
license issued.

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• Political Issues

Because of some political issues, USA looks for
balancing powers in the region and attempts to
control Iran by economic political boycotting.
Because of no satisfactory outcome to limit the
economic contribution of the countries in Iran
not being able to force countries to observe such
a policy. USA decided to put Iran under the ban
through ratifying the Act of the Iran-Libya
Sanctions (1996).
Under international law and based on the Charter
of United Nations and also as per some bilateral
treaties Iran will be able to claim and cope with
this interferences through some fundamental
policies.
Although political and economic international
limitations such as boycotting oil and gas
sectors can be effective and be an obstacle for
entering American companies in to Iran, however
many of European countries and affiliated
companies have invested in Iran.

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Challenges Opportunities for Foreign Investment

• As per some of the laws and regulations private
  sectors are limited to invest in oil and gas
  upstream industries

• Oil gas sectors are owned administered by the
  state

• Foreigners cant establish co. and they need to
  nationals to Join the investment, they cannot
  even open a branch

• State sovereignty and ownership over natural is a
  must

• Limited methods to conclude contracts Only
  Buy-back is authorized

• Buy-back may not be attractive enough for the
  companies who are expected to explore develop
  the reserves located in deepwater

• Tax system is an obstacle to attract foreign
  investment

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Challenges Opportunities for Foreign Investment

• The balance and place that the budget for Buyback
  arrangements are determined by the Islamic
  Consultative Assembly (ICA) at the time that
  country annual budget is ratified. Therefore, the
  government is obligated to arrange such contracts
  according to the legislation approved in Islamic
  Consultative Assembly.

• Political issues may be considered as some of
  those challenges that Iran is able cope with it
  by some fundamental policies and active diplomacy
  to change the minds.

• But this should be noted that As per UNCTAD
  statistic the most significant incentives for the
  investors is the level of resources in Oil and
  Gas countries. Iran has major hydrocarbon
  reserves, of varying size and complexity in need
  of development she only needs to arrange her
  strategies efficiently with regard to the present
  world situations and special attention to the
  current world economic crisis.

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Challenges Opportunities for Foreign Investment
Very attractive Rival
100 Years Experience
OPEC Membership
Located In Persian Gulf
Gas reserves 2nd in the world 1st in the Middle
East
Reserves close To seaways to Access to world
market
Low Price Workforce
High Pressure Reserves
Low Cost Production
Possibility of Natural Production

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Challenges Opportunities for Foreign Investment
Not in the right Place

• Level of Reserves

Gas Industry

• Geographical Position

• Regional Weight

• Decision making structure for gas industry is
  imprecise

• NIOC Coordinate all hydrocarbon matters with
  others

• NIGC Responsible for distribution marketing
  the gas

Reform the structure and change all the companies
to a National Gas Company Responsible for all
aspects

• NIORPDC Refineries

• NPC Petrochemicals

• NIGEC A new body responsible for gas exports

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Concluding Remarks

• As to the arguments about application of
  Buy-back, that is a fact that in recent years
  especially in governmental sectors and huge
  industrial projects such as oil and gas
  industries, this method of investment has been
  widely used. According to statistical report
  which is annually published by the Central Bank
  of Iran, during 1997-2003 the amount of 46
  billion dollars has been totally invested in oil
  and gas sectors from this 41 invested through
  Buyback contracts which is enough to be more
  explained.

• As to the Political issues, Iran will be able to
  cope with this situation through some fundamental
  policies and active diplomacy. Although political
  and economic international limitations such as
  boycotting oil and gas sectors usually are
  effective and is an obstacle for entering
  American companies in to Iran, however many of
  European countries and companies affiliated to
  them, have declined such limitations and have
  invested in Iran.

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Concluding Remarks

• The Laws and Regulations related to oil and gas
  sectors look to be proper in comparison with
  other countries in the region except as to the
  specific cases. In fact, we may say that such
  regulations do not totally need to be changed
  instead minds need some changes.

• Considering the mentioned ambiguities about gas
  industries, if Iran intends to find its right
  place in the world gas industry, she should solve
  part of the problems through reforming the
  structure of National Companies related to Gas
  and change them to a National Gas Company
  responsible for all aspects of gas issues. She
  must urgently create an appropriate structure to
  achieve the intended aims, and because of the
  importance of gas resources, the formation of a
  Gas Ministry parallel to the Oil Ministry might
  be justified. Alternatively a ministry of energy
  with separate divisions for oil, gas and other
  energy matters is suggested.

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• References

• The Constitution of the Islamic Republic of
  Iran.
• Iranian Petroleum Acts adopted on 1957, 1974 and
  1987.
• The Forth Iranian five-years of Economic, Social
  Cultural Development Plan (1384-1388), Adopted
  in 11/06/1383 Iranian Calendar.
• The 1386 Iranian Budget Code.
• Foreign Investment Promotion and Protection Act
  (FIPPA) approved by the Islamic Consultative
  Assembly on 09 March, 2002 and adopted by the
  State Expediency council (SEC) on 25 May, 2002.
• Executive regulation of the FIPPA, as per Article
  25 of the FIPPA, approved by the Council of
  Ministers on 15 Sept, 2002.
• Iranian Labor Law.
• The Law of Direct Taxations, adopted by Islamic
  Consultative Assembly on 1987.
• The Law of Registration Companies, adopted on
  1931.

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• References

• The Law of the Free Trade Industrial Zone.
• The General Policies of Article 44 of the
  Constitution of the Islamic Republic of Iran.
• The order of government to Ministries and
  Governmental Organizations concerning Suggesting
  referral of settlement of disputes to Iranian ICC
  Center of Arbitration, Letter No. 36/8487, dated
  22/06/1386 Iranian Chamber of Commerce.
• NIOC, Petroleum and Development 5, (1376-1382).
• The Act of Perspective for I.R.I. Petroleum
  Industry in the light of 1404 Iranian calendar
  year, planning deputy of Petroleum Ministry,
  spring 1385.
• BP Statistical Review of World Energy, June
  2008.
• OPEC, World Oil Outlook, 2008.
• OPEC, Annual Statistical Bulletin, 2007.

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Thank youfor your attention

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