Energy Projects


As defined by Article 2 of the executive rules approved by the Council of Ministers on June 4 1993, a 'buy-back transaction' refers to a deal in which the supplier wholly or partially puts the goods and services necessary for the establishment, expansion, reconstruction, improvement or continued production of a manufacturing enterprise in Iran at the disposal of the producer. The price of these goods and services, once down-payments and related costs disbursed on the basis of the concluded contract have been deducted, is paid to the supplier or buyer through delivery of goods or services of the producer, and/or through delivery of other industrial goods or services produced in Iran.

'The supplier' is any natural person or legal entity that provides the Iranian producer with goods or services in a buy-back transaction. 'The buyer' refers to any natural person or legal entity that, by receiving good and services from the producer or exporter, pays the supplier's claim with respect to the producer. 'The exporter' refers to any Iranian natural person or legal entity that pays the price of goods and services received by the producer from the supplier, by delivery of his goods and services to the supplier or buyer.

Buy-back contracts are supported by the government as a means of overcoming constitutional limitations on attracting foreign capital, services and technical know-how, while reducing foreign expenditure and increasing exports.

In the 1999-2000 Budget Bill the value of buy-back contracts was increased to $8 billion. Following the decision several international energy companies, such as TotalFinaElf, Petronas, Gazprom and Shell, concluded contracts with National Iranian Oil Company (NIOC) to implement projects, and efforts to conclude more such deals continue.

Energy Projects

One obvious benefit of buy-back schemes is that they enable Iran to improve field productivity, generate new onshore and offshore capacities, and obtain new technologies without spending the significant sums that are usually needed to realize such objectives. It is expected that the schemes will increase domestic oil output to six million barrels per day (bpd) by 2005, assist gas extraction from offshore fields and halt gas burning. Foreign firms work as contractors for NIOC. They are obliged to develop Iran's oil equipment and reserves by using the latest technology without making any claims on natural resources and installations. When the production phases have commenced, investors receive the full amount invested plus interest accrued on the capital, but do not own the product. Iran will exercise sole ownership over reserves, fields, installations and production. NIOC will exert full control over utilization, marketing, sales and repayment of investments once production starts.

These arrangements have been established because Principle 81 of the Constitutional Law of Iran states that the granting of concessions to foreign companies to conduct industrial, agricultural or mining activities is not permitted. In addition, Article 2 of the Petroleum Act, ratified in 1987, states:

"The petroleum resources of the country are part of the public domain (properties and assets) and wealth, and according to Article 45 of the Constitution are at the disposal and control of the government, and all installation, equipment, assets, property and capital investments which have been made or shall be made in future within the country and abroad by the Ministry of Petroleum and its affiliated companies will belong to the people of Iran and remain at the disposal and control of the government of the Islamic Republic of Iran.

The authority for exercising sovereignty and ownership right over petroleum resources and installations is vested in the government of the Islamic Republic of Iran which, on the basis of the regulations, rights and powers prescribed in this act, shall be undertaken and executed by the Ministry of Petroleum in accordance with the general principles and policies of the country."

Generally, oil contracts are made on a royalty, production-sharing or finance basis. The first two methods are not feasible in Iran due to the fact the foreign investors would hold shares in Iranian natural resources, which would contradict the aforementioned national laws. The experiences of recent years have proved that demand for investment capital in the oil sector is very high and it is often difficult to attract capital. Therefore, experts decided to choose a contract model which would allow for the attraction of foreign investment and technology, but also for the preservation of national identity, and the control and management of oil reserves. According to the experts, buy-back contracts provide the best means of achieving these aims. Nonetheless, pursuant to Article 5 of the Petroleum Act, the conclusion of major contracts between the Ministry of Petroleum or petroleum operational units and local and foreign natural persons and legal entities shall be subject to and governed by bylaws to be approved by the Council of Ministers upon the proposal of the ministry.


The advantages of buy-back contracts for NIOC include the following:

  • The governing law is Iranian law;

  • Bids and competition will lead to strict control over work plans and costs;

  • The contractor is obliged to perform the project in a limited time period and otherwise is legally responsible for the delay;

  • The budget will be capped and costs will be incurred under control and supervision;

  • The contractor is responsible for any additional expenditures that might occur;

  • NIOC can exercise strict control over the exploitation phase and thus can prevent the costs of this phase from escalating unnecessarily; and

  • The contractor can utilize advanced technology and equipment to reduce costs. However, since the contractor does not participate in the exploitation phase of the project, the owner company of the oil must use other service companies in this regard.


The disadvantages of buy-back contracts for NIOC are as follows:

  • The contract period is short and the possibility of cooperating with the contractor on a long-term basis is minimal;

  • The foreign investors may seek to complete the project quickly so as to obtain a swift return on their investment. This could prevent them from implementing plans that could enhance the long-term optimum performance of the oil wells;

  • As the project's scope is pre-defined, it is unlikely that NIOC will undertake any further studies of the oil or gas field specified in the contract. Even if NIOC obtains new information on the fields and wishes to modify the contract, it will be difficult to revise the contract terms;

  • The interest which NIOC must pay on the foreign capital invested accrues at a rate which is relatively high when compared with the costs of investing in blocks where oil has already been discovered and produced;

  • When the price of oil or Iran's production share falls, Iran's interests in the project will also be threatened;

  • Foreign oil companies often avoid direct investment in the exploration of oil, preferring instead to pursue projects that involve the redevelopment of existing oil and gas projects, as the project-length for these ventures is much shorter; and

  • The oil companies are reluctant to guarantee their output.


Foreign oil companies have objected to the buy-back scheme for the following reasons:

  • The investors are considered only as contractors and hold no ownership in the oil and gas fields. If the price of oil rises in the future, they have no rights to a share of the increased revenue;

  • The investment period is short and cannot be made more long-term. It is thus initially difficult for foreign companies to build long-lasting relationships with the NIOC for future projects;

  • NIOC will cover only 10% of any extra costs incurred during the execution of the project. Additional expenses are the responsibility of the foreign investor; and

  • Iranian law and the terms of the buy-back contract stipulate that 30% of the work which the project entails must be contracted out to Iranian firms. Some foreign oil companies argue that this requirement could add to their expenses and possibly lower their return on investment.


The details of the buy-back contract have been kept strictly confidential. Even the ministry declared in July 2001 that it would not disclose the details to the Parliament, for the benefit of the project.

The deal which was signed with ENI on June 30 2001 concerning the Darkhovein oil field was the first signed under the modified and 'enhanced' buy-back project regime after discussions between foreign companies and NIOC over the terms of a new buy-back framework. Iranian buy-back contracts have been criticized by both foreign investors and Iranian experts, and the oil ministry has been working for some time on their improvement to satisfy the two factions. Proposals have been made on clauses that would require the developers to achieve their output targets or face penalties. Another recent buy-back contract between BHP Billiton and Petro Pars is expected to incorporate the revised terms. It is expected that BHP will have to triple oil output from the offshore Forouzan and Esfandiar fields to 150,000 barrels per day in about four to five years, and guarantee its output.

In addition, NIOC has proposed to reward the oil companies if a higher output is achieved. Upon completion of the project up to the exploitation phase, an international committee would then have to supervise and control production. In this respect, responsibility for the realization of optimum production targets would fall on both parties to the contract. However, NIOC and the foreign oil companies have not been able to agree on this issue, although they have welcomed discussion on the subject. NIOC believes that increases or decreases in oil production are dependent on the performance of the contractor. On the other hand, the foreign oil companies argue that since they will have to leave the project after completion, they will not be able to play a role in production performance.

For further information on this topic please contact Behrooz Akhlaghi at International Law Office Dr Behrooz Akhlaghi and Associates by telephone (+98 21 873 21 38) or by fax (+98 21 873 41 29) or by e-mail ([email protected]).

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