Investing in the Iranian Oil & Gas Industry: From a Business and Legal Perspective

Introduction The history of foreign investment in the Iranian petroleum industry

Table 1: Gulf Country Share of Total Proven World Oil Reserves

Table 2: Gulf Country Share of Gas Reserves Iranian Politics under US Sanctions. E&P Industry.

Table 3: Signed Buy-Back Agreements. Petrochemical Industry. Legal Background Iranian Constitution. Iranian Petroleum Law New Foreign Investment Law Area of coverage

Table 4: Relevant Shortcomings Arbitration Law The Contract's Governing Law. Legal Regime Surrounding Bank and Insurance-matters Labor Law Company Law Tax Law The history of Iranian Buy-backs in the international oil & gas contract perspective Concessions Production Sharing Agreements Buy-back Agreements Key Issues of the Iranian Buy-back Agreement

Table 5: The basic structure of a buy-back arrangement: Commercial terms of a buy-back agreement.

Table 6: Relevant figures of the N.I.O.C.-Dutch/Shell buy-back agreement Criticisms of the Iranian Buy-back Agreements Deficiencies from the Contractor's perspective Deficiencies from the Iranian perspective Implications of the New Foreign Investment Law for Buy-back Contracts. Buy-back Project Economics

Table 7: Iranian Buy-back Project.

Table 8: Project Schedule and Costs in 1995

Table 9: Iranian Buy-back Project, Simplified Cash Flow

Table 10: Revenue Distribution From a Buy-back Offshore Development

Table 11: Relationship of Capital Expenditures and IRR & NPV in the Iranian Buy-back Program for a Typical Offshore Development The Future prospects for foreign investment in the Iranian E&P industry

Introduction

After years of political instability, Iran has been identified as a high priority market for the oil and gas sector. This is a result of the current and anticipated high level of investment, in both the oil and gas sectors. The focus will be on how to increase oil production from existing fields, develop new oil and gas fields and increase the capacity of the country's refining and petrochemical sector to meet domestic requirements. Large reserves of both oil and gas ensure that this market represents a long-term business opportunity, which will progress as foreign investment is secured.

Currently Iran is the second largest oil producer globally with approximately 9% of the world's oil. Oil production is important to the country, contributing 30% of the state budget and 80% of hard currency. 14.9% of the world's gas reserves are also found in Iran placing the country second only to Russia worldwide. Still, the petroleum industry's contribution to the state's gross domestic product (GDP) counts for only 8%, and is much below the 30-40% that the industry contributed prior to the conflict between Iran and Iraq.

This aim of this paper is to identify the foreign investment opportunities in the Iran energy and petroleum (E&P) sectors. The structure to achieve this is as follows.

First, an overview of the history of foreign investment in the Iranian Petroleum sector will be provided. This will include a brief description of the sanctions imposed by the US government. Secondly, an analysis of the oil and gas reserves and petrochemical industry in Iran will be completed. It will be shown that energy products produced in Iran account for a considerable amount of worldwide consumption already, despite growth opportunities being available. Thirdly, a broad analysis of the Iranian laws, which may affect potential foreign investment, will occur. The final section will consider the buy-back agreement, the most commonly used form of agreement that the Iranian government concludes with foreign investors for energy and petroleum projects. In the examination, the principle features of the agreement and the identifiable shortcomings will be focused upon.

It is hoped this paper will provide potential foreign investors with the information they require to enable investment decisions to be made.

About the Authors of Investing in the Iranian Oil & Gas Industry :

Dr. Christian Ule is a German attorney with 14 years of legal experience in the Middle East and North Africa (MENA). He is the founder and partner of the Middle East boutique law firm MENA Legal based in Frankfurt, Germany. Before establishing his own Middle Eastern practise in 2004 Dr. Ule has been a senior associate in the reputed German law firm of Schürmann & Partner, Frankfurt/Main and was the head of the Middle East Practice Group of the multinational law firm Coudert Brothers LLP. Dr. Ule grew up in Iraq, Libya, Jordan, Egypt and the U.S. His main areas of practice are foreign direct investments in Middle Eastern countries with an emphasis on Iran. Dr. Ule is experienced in advising international corporations, SMEs and private investors on all aspects of foreign investments, technology transfer, joint ventures, dispute resolution, oil and gas and other major projects in Iran and the MENA region. He has published many articles (incl. an Investment Guide on foreign investment in Iran and the Gulf States) and is a frequent speaker at seminars on commercial and investment laws in the GCC States and Iran. Dr. Ule is Vice-Chairman of the Arab Regional Forum of the IBA and a founding and board member of the German-Arab Lawyers Association.

Alexander Brexendorff is working within the Middle East boutique law firm MENA Legal. He is a lawyer with 5 years of legal experience in the Former Soviet Union, Caspian and Middle East regions. He worked as an independent legal consultant for a number of international law firms and international organisations, e.g. Shearman & Sterling LLP, Coudert Brothers LLP and the Energy Charter Secretariat. Alexander Brexendorff was born in Germany. He studied law and Russian in Germany and England and is going to obtain his Doctorate in International Oil & Gas Law in 2004. His areas of practice are international trade law, foreign direct investment, arbitration, oil & gas contracts, structured commodity trade finance and construction contracts in Middle Eastern countries. He advises international companies on all aspects of foreign investment, project and export finance related to the FSU and the MENA region. He has published various articles on legal aspects for foreign investment in Iran and the Caspian region and is a speaker at seminars and conferences on related issues. Alexander Brexendorff is a member of the German Institution of Arbitration.

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