A critical review of Iran's buyback contracts

Iran's oil and gas industry requires investments of US$ 15 billion in the short term and over US$70 billion in the medium term. Iran tries to interest international oil companies (IOC) in investing in Iran's oil and gas business by offering buyback contracts. Under a buyback contract an IOC invests and when production starts, the field is handed over to the National Iranian Oil Company (NIOC) or one of its representatives. The IOC gets its costs and an agreed upon profit paid out of the oil and/or gas gross profits, assuming the field produces as agreed upon and the international energy prices are high enough. According to the Iranian government, the buyback contract contains sufficient incentives for an IOC to invest in Iran. The IOCs, however, disagree. They claim that they solely bare the risks in a buyback contract, whereas the Iranian counterpart receives all windfall profits. Furthermore, the IOCs claim that the utilisation of Iran's oil and gas reserves will be sub-optimal if they are not involved in optimising long-term recovery. In this paper, we investigate these claims and show that they are partly correct. Given Iran's need for investment capital, Iran might have to change its policy.