Iranian Contracts

Iran is in the process shooting itself in the foot over oil contracts. Historically Iran has been offering the big oil companies “buy back” contracts to develop their fields. The way these work is an oil company comes in and does all the work to get a well up and running, then sells the operation to the national Iranian petroleum company. They are then reimbursed for the start up costs and an agreed upon amount out of the profits. This seems like an OK deal, but they never really work out to be one. If a field is not productive then the Iranians won’t pay for it and the oil companies are on the hook for all of the costs while Iran bears no risk. This doesn’t sit well with the big petros, some of whom have lost a lot of money on these deals. This year though things looked like they were changing. Iran’s new president Hassan Rouhani is somewhat of a moderate (in terms of Iranian rulers) and has been trying to make changes towards working with the west. One of his initiatives has been to rewrite the oil contracts to make them more enticing to oil companies. This sparked a lot of interest and seems to be just what was needed to jump start Iran’s floundering oil industry. However it looks like this might all come crashing down. The hard line Iranian oil minister looks like he will not sign off on the new contracts, and wants to stick with the old buy back deals. And he is not doing this for any good reason, it looks to be a purely political motivation. It is all to spite the president and make him look bad. Unless this is worked out it looks like Iran will continue on their path and delay their development into a global petroleum powerhouse.