Financial Terms
Other Requirements
The Ministry of Oil convened a session on March 10 2001 to discuss a key energy project that is in the pipeline. The project involves:
- the implementation of phases 9 and 10 of the South Pars Gas Field Development Project;
- the establishment of a second refinery in Bidboland; and
- the establishment of a fourth national gas transfer pipeline, located in Bushehr, Khuzestan, Fars and Isfahan provinces, by National Iranian Oil Company (NIOC), utilizing funds pursuant to a buy-back scheme.
The project was thoroughly reviewed and examined by the Council of Economy, which approved and endorsed its implementation subject to the following terms. The terms are set out in Decree 34/2321 of the Council of Economy, dated March 18 2001.
The government has allocated a budget of $1.8 million to be used for:
- creating a daily gas refining capacity of 40 million cubic metres at the Bidboland refinery;
- establishing an ethane acquisition unit at the Bidboland refinery, with a daily capacity of 6,500 tonnes, which meets the requirements for petrochemical raw materials; and
- laying 750 kilometres of 56-inch pipeline for the transfer of gas between the relevant stations.
The contractor must raise an additional $2.7 billion to cover expenses, interest, charges and other fees.
Meanwhile, $2 billion will be needed to facilitate the daily production of 50 billion cubic metres of natural gas together with 80,000 barrels of liquefied natural gas, 400 tonnes of sulphur and 3,000 tonnes of liquefied gas. The contractor may finance this amount itself or may borrow it from the government as part of a buy-back scheme. However, an additional $4.1 billion must be raised to meet costs such as banking changes, insurance, taxes and wages.
If the projects are effected as part of a buy-back scheme, the maximum rate of return on the contractor's investment will be 15%. However, if the project is self-financed the rate of return must comply with the rules and regulations of the Central Bank of Iran.
Any funds received must be repaid over an eight-year period with the profits earned through the sale of products including liquefied natural gas, ethane, petrol and/or additional substances mentioned in Article 120(a) of the Law on the Third Five-Year Economic, Social and Cultural Development Plan of the Islamic Republic of Iran. The collection and repayment of funds must comply with the established repayment schedule.
If the project is carried out pursuant to a buy-back scheme and it proves impossible to achieve the estimated capacity, the amount that must be repaid will be adjusted in proportion to the shortfall.
If the contract changes from a buy-back scheme to a self-financed scheme, the costs of the project shall be adjusted to reflect the conventional rates and levels that apply to similar contracts.
At least 51% of the executive operations of the project must be carried out using domestic resources. Operations relating to the construction of reservoirs, towers, metal structures and thermal converters, and to pipe-laying, must be carried out by domestic contractors and manufacturers and/or domestic-foreigner partnerships. The relevant tenders must be held to award these contracts.
The Department of Environment's approval must be obtained before work on the projects can commence.
The auditing of the project shall be carried out jointly by domestic-foreign auditors.
NIOC is required to make the necessary provisions in its domestic and international contracts with respect to penalties and liquidated damages, which will be claimed in case of delay in carrying out obligations and responsibilities, or if the services provided are of sub-standard quality.
NIOC is obliged to prepare bi-annual reports on the progress of the project and submit them to the State Management and Planning Organization, until such time as exploitation of the project commences.
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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