Iranian political battles pose risk for oil contracts

TEHRAN (Dow Jones) -- Iran is struggling to finalize the terms under which foreign energy companies can drill for oil there, as a political battle rages between the country's more moderate forces and its conservative hard-liners. 

 

Iranian oil officials canceled a conference set to be held this month in London where Iranian officials had said new contracts for Western companies would be presented. Officials blamed the cancellations on the inability to secure enough British visas for the event. 

 

According to people familiar with the matter, another reason for the conference's cancellation are conservative factions—inside and outside the energy industry—that believe the contracts drawn up by President Hassan Rouhani's oil ministry are too generous to foreign companies. At a time of low oil prices, the country also is under pressure from international oil companies to sweeten the terms of agreements known as Iranian Petroleum Contracts. 

 

The disagreements have delayed the publication of the contracts' final terms, the people said. 

 

"The contracts are simply not ready," one of the people said.

 

Production

 

The controversy over the new contracts underscores the challenges Iran faces in rebuilding its oil industry into the global powerhouse it was before western sanctions over its nuclear program crippled its exports. Global crude-oil prices slid to their lowest levels in a decade in January on fears that new Iranian production would add to the world's oversupply. 

 

Iran is trying to ramp up its production by 500,000 bopd in the next few months and by 1 MMbopd by the end of the year. By the end of 2020, the country seeks to nearly double oil production capacity to 5.7 MMbpd. 

 

To accomplish this, Iran would need the help of the western oil giants that once worked there. France's Total SA and Russia's Lukoil have signed preliminary agreements to re-enter Iranian oil and gas fields. But they are unlikely to return until the terms of the contracts are set. 

 

The contracts are a sensitive political matter in Iran because the country bans foreign ownership of its natural resources like oil and gas. For decades until 1979, western oil companies owned Iran's oil, stirring resentment. Before sanctions, Iran's contracts for foreign companies were seen as inflexible money-losers in the industry. 

 

Iran has laid out the broad terms of the new deals, saying they would allow flexibility in recovering costs and an involvement in the development of oil fields of typically 20 years.

 

But 19 appendices on topics such as crude liftings, accountancy rules or arbitration, which would be a key part of any contract, have yet to be completed, according to people familiar with the matter. 

 

Dissension 

 

The delay is due to disagreements between members of the committee tasked to draft the deals, along with dissension from within the broader state-run National Iranian Oil Co., they said. 

 

Mehdi Hosseini, the head of the committee, and Ali Kardor, the national oil company's director in charge of foreign investment, didn't return requests for comment by email and telephone. 

 

In addition to technical clauses, some oil officials disagree on whether foreign companies should be required to develop natural gas and how to involve private Iranian companies with little experience of managing exploration and production projects. 

 

But behind the internal debates, lie two main concerns, "the low oil prices and political opposition," said another person familiar with the matter. 

 

Some oil officials are worried the contracts won't be attractive enough to offset the majors' reluctance to invest globally due to low oil prices. Others fear mounting criticism by hard-liners who say the deals would give too much away of the country's natural wealth. 

 

The new deals have been criticized by the Basij, a hard-line militia formed to uphold the principles of the Islamic Republic. On Saturday, members of Basij's student wing were arrested after protesting against the contracts, the semi-official Tasnim news agency reported. 

 

But in an interview with the oil ministry's Shana news agency that same day, Mr. Kardor denied such criticism was behind the cancellation of the conference.