A review of IPC contracts; Structures and divisions

Iran has only been using the buy-back model till 2013. Despite the significant successes during the low oil price era, this contractual model had some unsatisfactory limitations; such as: lack of a reasonable connection with market changes, limited financial structure, and difficulty in change of scope depending on reservoir behavior. The new model was designed by considering all limitations. In the following, it will be discussed in three phases: legal, implementation & finance, and supervision.
Legal structure:
The IPC model was designed to meet the needs of the National Iranian Oil Company (NIOC) in these three fields: Exploration, development of green fields and recovery factor improvement of brown fields. This is a sort of risky service contract in which the contractor undertakes the operation of exploration, development and production from the NIOC Company.
In the new model, the ownership of the reserves (included in the contract) and the produced oil remains for the NIOC, and the contractor can purchase the produced oil. The ownership of the facilities and all the equipment is also for the NIOC and the contractor will use them during the contract period. If the contractor decides to replace itself with another party to operate, it shall continue to fulfill the terms of the contract with the NIOC until the end of the contract. However, the replaced company shall also continue to operate by the written approval of the NIOC. Regarding the settlement of possible claims and disputes, the dominant law is the laws of the Islamic Republic of Iran and conflicts referral through both parties’ agreement has been anticipated as well. The relationship between the NIOC and the International Oil company is a relationship between a client and a contractor. Obligation to finance and use the modern technology to optimize production is one of the main commitments of the contractor. The duration of the contractor’s presence on the fields is longer than the Buy-back contracts and the contractor will be present there for 25 years since the start of the contract.

Implementation and financial structure:
According to the implementation structure of the new model regarding the exploration, in case of finding any new economical fields, the contractor is allowed to start the development and production phase. If the contract is on a green field, the contractor will be paid according to predetermined base of production for the field; while in brown fields, the recovery factor is the baseline for payment terms.
In all three types, the contractor has to choose an Iranian partner. The selection of the Iranian partner is on the International Oil Company and the NIOC will only present a list of the qualified Iranian companies or it can select any other qualified local companies verified by the NIOC.
There is a need to review the development plan based on the reality of the project and field behavior due to unpredictable reservoir behavior in the implementation stage of the development operation. However, this possibility did not exist under the terms of the buy-back contracts. In this way, the probable changes are reflected regarding the field behavior and its financial implications in the annual budget and planning that are recoverable. Exploration costs will be paid in case of economical fields after the development and achievement of economical production with the contractor’s revenue through 50% of the field’s income in 5-7 years and there is the possibility to pay in cash or by goods regarding the costs and wages. In buy-back contracts, income was provided from a fixed percentage of the capital costs which were set when signing a contract. However, in the new model, the income totally depends on the production (per barrel). Furthermore, this income is not constant during the contract period and can change after oil price/production rate according to a pre-determined formula. Additionally, in the new model tax is considered as a certain percentage of the contract and it will be repaid to the contractor as it is a side cost. Due to some environment issues and for the optimal use of resources, gas is not allowed to be burned at all, and the contractor is committed to take all necessary steps to collect, inject or do any other actions to avoid burning excess gases by the request of the NIOC as all the related financial issues are on the NIOC as well.
Supervision and making decisions
In the new model of oil contracts, in order to improve the decision making structures of the technical-financial disputes, there has been considered a limited amount of time so that in case of not reaching to an agreement during the contract period, the dispute could be referred to a third party and he is supposed to make a decision in a limited time to avoid time and money waste.
Another concern of the contractors is the financial issues of the contract which usually creates a lot of difficulties for them. In the new model, it is anticipated to dispute resolution through internal finance and accounting of NIOC within a particular period and then it will be shifted to a third-party verified by both sides to solve the issue.
In summary, it can be said that in the new model, it was tried to eliminate all the restrictions of the buy-back contracts and also defects raised by the contractors. To this end and in order to improve the implementation of this contract, a new structure has been designed by the NIOC as the client to take the responsibility of signing, implementation and supervision for these contracts.
It seems that technical engineering capacities promoted in the recent years in Iran along with the technical knowledge of international companies can not only help projects succeed, but also create a long-term relationship under win-win conditions for both sides to alleviate concerns about the lack of stability of long-term energy supply worldwide.

Ayeh Kautebi
Energy expert

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