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What's fueling opposition to Iran's new oil contracts?

The future of a new framework for Iranian oil contracts remains blurry as political infighting seems to be preventing its finalization.
A gas flare on an oil production platform in the Soroush oil fields is seen alongside an Iranian flag in the Gulf July 25, 2005. REUTERS/Raheb Homavandi/File Photo - RTX2AOPF

Iran’s current buyback scheme, which reduces the role of international partners to that of service providers, has been very unpopular among international oil companies. It has been a major factor in the reduction of investment in the Iranian energy sector.

Upon taking office in August 2013, President Hassan Rouhani vowed to amend the fiscal terms for cooperation with international partners. His efforts led to the November 2015 unveiling of the framework for a new oil contract scheme, the Iran Petroleum Contract (IPC), which aimed to attract investment and technology to Iran’s energy sector. Making the case for a “win-win” solution, Petroleum Minister Bijan Zanganeh noted that the IPC was designed to meet Iran’s needs while being attractive to international partners.

In contrast to the buyback scheme, the IPC seeks to take into account the concerns of foreign companies. It allows for more flexible remuneration and longer engagements while international companies are also allowed to book oil reserves. At the same time, the IPC is intended to empower the Iranian energy industry as international investors are required to partner with an Iranian counterpart.

Against the backdrop of the IPC announcement and the Jan. 16 Implementation Day of the Joint Comprehensive Plan of Action, which led to the lifting and termination of several energy and financial sanctions, international energy companies have rushed to Tehran. Numerous memoranda of understanding have been signed, including by France’s Total, Germany’s Wintershall and Italy’s ENI.

However, no investment decisions have yet been made and Iran has yet to present the IPC's actual details. A conference in London to this end has been repeatedly postponed in the past two years. Iranian officials have suggested that the latest cancelation was due to visa issues, although this explanation falls short of clarifying why Iran has not come forward with precise details on the IPC.

It appears as though political tensions over the IPC are mounting in Tehran, leaving the future of the new framework for oil contracts up for debate. In this vein, two main issues are at stake.

At the forefront, there is an internal debate in Tehran about whether Iran should seek cooperation with international partners at all. Supreme Leader Ayatollah Ali Khamenei and ultra-conservative politicians argue that self-sufficiency and independence are the way to protect the Islamic Republic’s economy. Attaching first priority to the economy, Khamenei argues that the “main point is that the people of Iran should do something to liberate themselves from vulnerabilities in the face of the enemies’ threats and enmities.” On the other side of the debate, Rouhani and his administration are calling for moderation. In politics and economics alike, the administration emphasizes constructive interaction with the outside world.

Underneath this debate lies another competition between the two camps. Here the struggle is about the economic benefits of a potential re-integration of the Iranian energy sector into the global markets. In the past decade, when EU and US sanctions forced Western companies out of the Iranian energy sector, the Islamic Revolutionary Guard Corps (IRGC) took over large swaths of the industry. In doing so, they were aided by former hard-line President Mahmoud Ahmadinejad, who in 2011 handed the Oil Ministry over to Gen. Rostam Qassemi, an IRGC commander.

Since assuming office in 2013, moderate-leaning Rouhani has been challenging the IRGC’s role in politics and the economy. The opening of Iran’s energy sector threatens the IRGC’s position. As such, the fine details of the IPC remain a highly politically sensitive matter.

In this struggle, the hand of the Rouhani administration may have been strengthened recently as Iranians elected a rather moderate parliament, voting out several hard-liners and giving mandates to many of the president’s allies. As a result, disputes between the government and parliament — a regular feature of Iranian politics — might become milder. This could give way to IPC policies more in line with the president’s approach of reaching out to international partners. Although the conservative-controlled Guardian Council would still need to approve any IPC bill passed by the parliament, endorsement by both government and parliament would constitute a crucial step forward.

Government officials have recently announced that the IPC will be ready by July, a timeline that accounts for several months for the incoming parliament to take shape. Nonetheless, it should be borne in mind that the political and economic clout of the conservatives is still substantial, as they command key positions in the Guardian Council, the judiciary as well as the security apparatus. Significant portions of the Iranian economy, including the energy sector, continue to remain under the de facto control of institutions linked to this camp.

Hence, for any IPC legislation to be successful, some form of elite consensus will be necessary. It remains to be seen whether a proposal can be found that will be acceptable to the various political factions at home while attractive enough to companies abroad to serve its purpose. The reality is that the future of the IPC remains uncertain. Only time will tell whether the Rouhani administration will succeed in opening a new chapter for Iran’s troubled energy sector.

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