On 3 August 2016, Iran's Council of Ministers passed a regulation governing the general conditions, structure and terms of upstream oil and gas contracts (the IPC Regulation).

The IPC Regulation is a material step in securing the Iranian government's approval of the terms of the Iran Petroleum Contract (IPC). The IPC Regulation still needs to be approved by Iran's parliament, but the risk of a reversal at this stage is unlikely. This update is based upon our review of an English translation of the IPC Regulation.[1]

The parties to the IPC will be the National Iranian Oil Company (the NIOC) and a consortium of oil companies (the Contractor). As expected, the IPC will be a risk service contract. The Contractor bears all the risks of petroleum operations. The Contractor recovers its costs and is compensated by a service fee only if petroleum operations are successful. In contrast to production sharing contracts, the Contractor is entitled to a fixed fee rather than a share of production. The fixed fee may be paid in kind in oil. The IPC will be governed by Iranian law.

The IPC Regulation provides that there will be three types of IPC: a contract for exploration, development and production (Exploration Terms); a contract to develop existing discoveries (Development Terms); and a contract for improved/enhanced oil recovery at existing fields (IOR Terms). The Development Terms and IOR Terms will be focused on improving recovery rates from the relevant field and we assume that the service fee will only be payable if the Contractor meets certain production targets. Because of the fixed upside and potentially extensive downside of exploration for the Contractor, service contracts are more typically used for brownfield projects and very rarely used for exploration projects.

Given Iran's desire to increase production quickly, we would assume that, at least initially, the NIOC will be more focused on deals based on the Development Terms and IOR Terms. This approach is likely to find favour with international oil companies (IOCs) too, as it is much more challenging to secure investment for exploration deals in the current oil price environment.

The IPC Regulation sets out (in some detail) the principles which will govern the IPC, but does not disclose the full terms and conditions of the IPC. The areas where more clarity is needed include:

Joint venture arrangements

The IPC Regulation provides that each Contractor must form a joint venture between one or more IOCs and an Iranian entity. According to the IPC Regulation, the purpose of this joint venture is to facilitate technology transfer. The NIOC has pre-qualified eight Iranian entities who can serve as joint venture partners. The requirement to work with an Iranian partner raises a number of questions:

  • Will the Iranian partner pay its share of the costs of petroleum operations and what credit risk do IOCs assume?
  • What is the minimum participating interest that the Iranian partner must hold?
  • What effective remedies will an IOC have if such partner fails to pay its share of the costs of petroleum operations or otherwise breaches its obligations?

Alignment between the Contractor and the NIOC during times of low oil prices and high oil prices

Because the Contractor will be paid a fixed fee, it is somewhat insulated from changes in the oil price. Falling oil prices, however, would make the Contractor's services seem relatively more expensive and could cause friction between the Contractor and the NIOC. IOCs will want to evaluate whether the IPC ensures that the parties' interests are aligned.

Control over investment

IOCs will take all the risk of petroleum operations under the IPC. Accordingly, they will look very closely at how decisions regarding major investment decisions are made. With respect to the Exploration Terms in particular, IOCs will be very interested to learn how decisions regarding the commerciality of discoveries will be made and how much discretion the Contractor has in this regard.


Decommissioning and restoration of a contract area can be an expensive undertaking. The Contractor will want to understand how such operations will be paid for and any potential liabilities it has in relation to decommissioning.

While the IPC will not deliver everything on the wish list of IOCs, there are some key improvements on the buyback contract previously utilised by Iran and the following changes will be particularly welcomed:

  • A longer term
  • No aggregate limit on cost recovery of capital costs
  • A remuneration fee per barrel/mscf linked to production rates
  • Foreign investor participation in operatorship during production

Finalising the IPC is a major milestone in the re-opening of Iran to foreign investment. It has been reported that the NIOC will start pre-qualification of IOCs shortly and it is possible that the first deals will be awarded before the end of the year. This would be a remarkable achievement as Implementation Day occurred less than twelve months ago.