How Iran's new petroleum contracts are producing more than oil

After Iran and the six world powers signed the nuclear deal last summer, the Iranian Cabinet on Sept. 30 approved the general terms for new upstream oil and gas contracts, known as the Iran Petroleum Contract. The aim? Facilitating the inflow of foreign investment. The Oil Ministry presented the Iran Petroleum Contract to more than 300 major international energy investors at the Nov. 28-29 Tehran Summit. However, it seems that parliament is not yet in full agreement with the general terms of the new oil contract.  

On Jan. 4, Oil Minister Bijan Namdar Zangeneh said that the parliament’s Committee for the Evaluation of Government Acts’ Compliance with the Law had approved the general terms of the Iran Petroleum Contract, and that work related to the contract had therefore been “finalized.” However, two days later, nine members of the parliamentary committee denied that they had evaluated the general terms. Further twisting the situation, the parliamentary committee does not actually have the power to change the legal status of the general terms of the contract, which have already been approved by the Cabinet.

Al-Monitor spoke with Iman Rajabi, a Tehran-based lawyer, to clarify the legal situation. He explained that when parliamentary action on a document can change its legal status, the latter is considered to be a bill submitted by the executive branch. However, the Cabinet-approved general terms of the Iran Petroleum Contract are not a bill in this sense. Rajabi noted that the Cabinet made an executive decision that simply defines the general terms of a future contract to be signed between Iran and a foreign party. Rajabi said, “At this point, the general terms of the [Iran Petroleum Contract] are only an executive decision, and not an international agreement. Only the Court of Administrative Justice can stop it [the general terms of the Iran Petroleum Contract] from developing into a contract.”

Sahar Seyedipour, another lawyer based in Tehran, agrees with Rajabi. She told Al-Monitor that all government organizations must comply with Cabinet decisions. Of note, based on Articles 77 and 125 of the Iranian Constitution, international agreements require parliament’s approval. However, contracts in which one side is a government entity or company and the other side is a privately owned foreign company are not considered international contracts and are therefore not subject to Article 77. Seyedipour told Al-Monitor, “Even if parliament’s Committee for the Evaluation of Government Acts’ Compliance with the Law rejects the general terms of the [Iran Petroleum Contract], this has informative rather than legal value.” But does this stop parliament from criticizing the Cabinet’s decision?

Ever since being passed by the Cabinet, the general terms of the Iran Petroleum Contract have been under attack by the conservative-dominated parliament. Critics, who mostly belong to right-wing factions, argue that the general contract terms violate Articles 44 and 45 of the Iranian Constitution. Article 44 says that the state should be in charge of major industries and large mines, while Article 45 states that anfal — the collective property of the Muslim community, which includes mines — must be managed under the exclusive control of the Islamic leadership for the benefit of the public. Of note, oil and gas reservoirs are considered to be mines. In this vein, critics of the new oil contract terms claim that future agreements will transfer ownership of anfal to foreign companies, either through giving them oil and gas or via excessive payments.

To ascertain the validity of these arguments, it is necessary to take a closer look at the general terms of the Iran Petroleum Contract.

First, the Iran Petroleum Contract is not a production sharing agreement because it does not create any right of ownership of reservoirs for foreigners. In fact, the contract is a “buy-back” or “service contract” that offers more incentives to foreign contractors than previous agreements. According to the contract’s Article 3, Section 1, Iran's right of ownership of oil and natural gas fields and reservoirs, which is managed through the Oil Ministry, should be respected. Article 11, Section 5 also clearly states that any produced commodity is the property of the Oil Ministry.

Second, in addition to being the sole owner of the reservoirs, the Oil Ministry is also the owner of the contractor’s assets. Moreover, all contractor operations are under the supervision of the Oil Ministry. In other words, the contractor is a mediatory vessel through which the Oil Ministry conveys its right of ownership. Thus, the Iran Petroleum Contract is not in violation of Article 44 of the Iranian Constitution because even during the operational phases, the government remains the owner of major industries, which include all contractor operations, assets and the extracted commodities.

Third, based on Article 3, Section 3 of the Iran Petroleum Contract, while contractor operations to extract oil and gas do not create a right of ownership for the contractor, the Oil Ministry covers the contractor’s expenses from two sources: a maximum 50% amount of the extracted commodity (not what is inside the reservoir) and from the revenue generated by selling the commodity in the market, based on the commodity spot price. However, the same described methods of remuneration do not apply to paying the fee to the contractor. The fee, which is a reward for each barrel of produced oil or each 1,000 cubic meters of natural gas in excess of the agreed-upon depletion base line, is provided through either cash or delivering commodities or a combination of both. This is to encourage the contractor to expand improved oil recovery procedures and enhanced oil recovery techniques that are crucial for maximizing the amount of extracted oil and gas from fields.

Thus, the question is: Could delivering oil or gas to the contractor be a violation of the laws prohibiting the government from sharing ownership of anfal with foreigners?

The answer is simple. Delivery of oil or gas to the contractor in return for the contractor’s services is no different than the Oil Ministry selling the merchandise on the market and paying the contactor from the revenue of that transaction. This is remuneration and not an automatic right of ownership for the contractor as a result of its operations. Therefore, the argument that the Iran Petroleum Contract makes the foreign contractor the owner of anfal has no legal basis, since under no circumstances can the contractor claim ownership while getting paid either in the form of cash or commodities by the Oil Ministry.   

Regardless of the legal debate, it can be expected that the war of words between the government and the Iran Petroleum Contract critics, and particularly those in parliament, will intensify as Iran’s political environment is heating up ahead of the upcoming legislative and Assembly of Experts elections.