Investment Challenges in Iranian Oil & Gas Sectors
A Legal Approach
Leila Zabbah
Institute for International Energy Studies (IIES)
IRAN
Title: Investment Challenges in Iranian Oil & Gas Sectors–A Legal Approach
L.ZABBAH@IIES.NET ; L_ZABBAH@YAHOO.COM
Introduction
Iran holds almost 11.2% of the world's total oil reserves, and 15.7% of total gas reserves. This country as the first
holder of natural gas reserves in Middle East and second in the world is followed by Qatar as the second in the
Middle East and third in the world.
Source: OPEC, World Outlook 2008
Title: Investment Challenges in Iranian Oil & Gas Sectors–A Legal Approach
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Considering Significant geopolitical location of Iran and very beneficial conditions of the fields for investment, this
country is having a very much talented bed to attract foreign capitals
Title: Investment Challenges in Iranian Oil & Gas Sectors–A Legal Approach
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How is the Iranian Legal Environment for
Foreign Investors in Oil & Gas Sectors?
Title: Investment Challenges in Iranian Oil & Gas Sectors–A Legal Approach
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Main body of Iranian Legal Structure Regarding
Foreign Investment in Oil & Gas Sectors
Foreign Investment Promotion and Protection Act (FIPPA)
The Constitution of Iran
Petroleum Acts adopted in 1957, 1974 and 1987
1st
Iranian Budget and Plan Code
Others
Ambiguities & Problems for Foreign Investment in Oil & Gas Sectors
Title: Investment Challenges in Iranian Oil & Gas Sectors–A Legal Approach
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2nd
Iranian Legal Structure Regarding Foreign Investment in Oil & Gas Sectors
FIPPA
Acceptance of
Investment
FDI in authorized sectors
FI: Civil Sharing – Service Contract - BOT
 Turning point in the Iranian economy
 Protection provided for Foreign Inv.
 Treatment after acceptance: Standard of National Treatment
 Fiscal facilities: National Treatment
 Transferring the capitals and Profits
 Settlement of Dispute: Domestic courts; International Arbitrations is possible
 Compensation: Appropriate compensation
Title: Investment Challenges in Iranian Oil & Gas Sectors–A Legal Approach
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Iranian Legal Structure Regarding Foreign Investment in Oil & Gas Sectors
Constitution Law
Article 44: Contains restrictions for private investors to invest in upstream oil and gas
Article 45: Natural Resources belongs and are controlled by the government
Article 81: Limits entrance and establishment of foreign companies and enterprises
Article 139: limitation of referral the claims relating to public and state property to arbitration
Petroleum Acts
1957 Act was revoked, 1974 and 1987 Acts are current Petroleum Acts of Iran
1987 Act, Article 2: follows article 44 of Constitution Law & is against investing in Natural Resources
1987 Act, Article 6: , Foreign investment in these operations in any manner will not be allowed
Title: Investment Challenges in Iranian Oil & Gas Sectors–A Legal Approach
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Iranian Legal Structure Regarding Foreign Investment in Oil & Gas Sectors
Budget & Plan Law
Balance and Place for Investment through Buy-Back is determined and
approved by parliament of Iran (ICA)
Labor Law & Tax Law
Work License requirement; Protective insights toward national work force
As per national treatment standard, Foreign investors are subject to the Iranian Law of Direct Taxations
adopted on 1997 by Assembly of Iran
Title: Investment Challenges in Iranian Oil & Gas Sectors–A Legal Approach
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Limitations related to Private Investment in oil and gas upstream sectors
Divisions of
Economy
in Iran
•
Cooperative
Article 44
Governmental
Private
Mother Industries
Owned & administered by
the state
Oil & gas sectors will be publicly owned and
Private Sector cannot invest for Upstream Sectors
as Mother Industries
 Worries to expand & Develop an Industry
Title: Investment Challenges in Iranian Oil & Gas Sectors–A Legal Approach
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Articles 2 & 6 of
Petroleum Act
Legal Restrictions for foreigners to establish company
Article 44:
Article 81:
Problem of Private Investment
• Foreigners can’t establish co.
• Necessity to attract nationals to Join
the investment
2 Obstacles for
foreigners to
establish
company
Article 81
only %49 Foreigner-%51 Locals
Establishing a new Co.
Art 5 of Free Zone:
To enter into a JV agreement
with an Iranian partner
Opening a branch
 JV at Free zone
Title: Investment Challenges in Iranian Oil & Gas Sectors–A Legal Approach
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Limited methods to conclude contracts
State Party
Contracts
Technologies
Capitals
Concession
 Ownership of the reserves
Service Contract
 Proper Incentives
 Share of Changing the oil Price
 Managing the project
 Concession
 Service Contract
Investment
Sharing Contract
 Controlling the production
 Sharing Contract
Companies
Concession
Iranian Revolution
(1979)
Sharing Contract
 Service Contract
Title: Investment Challenges in Iranian Oil & Gas Sectors–A Legal Approach
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Concession
1st Petroleum Act
1957
 Sharing Contract
 Service Contract
Concession
2nd Petroleum Act
1974
Sharing Contract
 Service Contract
Concession
3rd Petroleum Act
1987
Sharing Contract
 Service Contract
Under Buy Back method in Iran, the contractor develops the field and NIOC repays the costs that contains
capital expenditure (CAPEX), operating expenditure (OPEX) and accrued bank charges. Additionally, the
contractor receives a negotiated remuneration fee. Buy – back was first operated in 1998, which give
differing returns to the parties depending on the oil price.
Title: Investment Challenges in Iranian Oil & Gas Sectors–A Legal Approach
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Const Law
Article 44
National Sovereignty & State Ownership is a must
Const Law
Article 45
National Sovereignty & State Ownership is a must
Const Law
Article 81
Formation of Company by foreigners is not authorized
What to do?
Petroleum Act
Article 2
National Sovereignty & State Ownership over natural resources
Petroleum Act
Article 6
No Foreign Investment in upstream oil & Gas is possible
 To keep sovereignty over natural
only by the state
 To keep ownership of natural
resources by the state
 Not to be invested by foreigners
 To provide adequate ROR for
the risks being taken
Title: Investment Challenges in Iranian Oil & Gas Sectors–A Legal Approach
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Taxes, Work force, …
Foreign investors as per national
treatment are subject to the Iranian Law
of Direct Tax adopted on 1997 by
parliament (Islamic Consultative
Assembly). The rate of tax according to
the present Iranian law of taxations is
high which with regard to other charges
is one of the weak points of Iranian
laws to attract foreign investment.
There are several limitations for
foreign workers to obtain legal
work license and considering
protective insight of the Iranian
laws and regulation toward
national work force, this causes
difficulties for foreigners to have
their license issued.
Title: Investment Challenges in Iranian Oil & Gas Sectors–A Legal Approach
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Political Issues
Because of some political issues, USA looks for balancing powers in the region and attempts to
control Iran by economic & political boycotting.
Because of no satisfactory outcome to limit the economic contribution of the countries in Iran
& not being able to force countries to observe such a policy. USA decided to put Iran under the
ban through ratifying the Act of the Iran-Libya Sanctions (1996).
Under international law and based on the Charter of United Nations and also as per some
bilateral treaties Iran will be able to claim and cope with this interferences through some
fundamental policies.
Although political and economic international limitations such as
boycotting oil and gas sectors can be effective and be an obstacle for
entering American companies in to Iran, however many of European
countries and affiliated companies have invested in Iran.
Title: Investment Challenges in Iranian Oil & Gas Sectors–A Legal Approach
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Challenges & Opportunities for Foreign Investment
•
As per some of the laws and regulations private sectors are limited to invest in
oil and gas upstream industries
•
Oil & gas sectors are owned & administered by the state
•
Foreigners can’t establish co. and they need to nationals to Join the
investment, they cannot even open a branch
•
State sovereignty and ownership over natural is a must
•
Limited methods to conclude contracts: Only Buy-back is authorized
•
Buy-back may not be attractive enough for the companies who are expected to
explore & develop the reserves located in deepwater
•
Tax system is an obstacle to attract foreign investment
Title: Investment Challenges in Iranian Oil & Gas Sectors–A Legal Approach
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Challenges & Opportunities for Foreign Investment
•
The balance and place that the budget for Buyback arrangements are
determined by the Islamic Consultative Assembly (ICA) at the time that
country annual budget is ratified. Therefore, the government is obligated to
arrange such contracts according to the legislation approved in Islamic
Consultative Assembly.
•
Political issues may be considered as some of those challenges that Iran is able
cope with it by some fundamental policies and active diplomacy to change the
minds.
•
But this should be noted that: As per UNCTAD statistic the most
significant incentives for the investors is the level of resources in Oil and Gas
countries. Iran has major hydrocarbon reserves, of varying size and
complexity in need of development; she only needs to arrange her strategies
efficiently with regard to the present world situations and special attention to
the current world economic crisis.
Title: Investment Challenges in Iranian Oil & Gas Sectors–A Legal Approach
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Challenges & Opportunities for Foreign Investment
OPEC
100 Years
Membership
Experience
Located In
Persian Gulf
Reserves close
Gas reserves:
To seaways to
2nd in the world
Access to
1st in the Middle East
world market
High Pressure
Low Price
Reserves
Workforce
Possibility of
Natural Production
Low Cost
Production
Title: Investment Challenges in Iranian Oil & Gas Sectors–A Legal Approach
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Challenges & Opportunities for Foreign Investment
 Level of Reserves
 Geographical Position
Gas Industry
Not in the right Place
 Regional Weight

Decision making structure for gas industry is imprecise

NIOC: Coordinate all hydrocarbon matters with others

NIGC: Responsible for distribution & marketing the gas

NIORPDC: Refineries

NPC: Petrochemicals

NIGEC: A new body responsible for gas exports
Reform the structure and
change all the companies to
a National Gas Company
Responsible for all aspects
Title: Investment Challenges in Iranian Oil & Gas Sectors–A Legal Approach
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Concluding Remarks
• As to the arguments about application of Buy-back, that is a fact that in recent years
especially in governmental sectors and huge industrial projects such as oil and gas industries,
this method of investment has been widely used. According to statistical report which is
annually published by the Central Bank of Iran, during 1997-2003 the amount of 46 billion
dollars has been totally invested in oil and gas sectors from this 41% invested through
Buyback contracts which is enough to be more explained.
• As to the Political issues, Iran will be able to cope with this situation through some
fundamental policies and active diplomacy. Although political and economic international
limitations such as boycotting oil and gas sectors usually are effective and is an obstacle for
entering American companies in to Iran, however many of European countries and
companies affiliated to them, have declined such limitations and have invested in Iran.
Title: Investment Challenges in Iranian Oil & Gas Sectors–A Legal Approach
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Concluding Remarks
• The Laws and Regulations related to oil and gas sectors look to be proper in comparison
with other countries in the region except as to the specific cases. In fact, we may say that
such regulations do not totally need to be changed instead minds need some changes.
• Considering the mentioned ambiguities about gas industries, if Iran intends to find its right
place in the world gas industry, she should solve part of the problems through reforming the
structure of National Companies related to Gas and change them to a National Gas
Company responsible for all aspects of gas issues. She must urgently create an appropriate
structure to achieve the intended aims, and because of the importance of gas resources, the
formation of a Gas Ministry parallel to the Oil Ministry might be justified. Alternatively a
ministry of energy with separate divisions for oil, gas and other energy matters is suggested.
Title: Investment Challenges in Iranian Oil & Gas Sectors–A Legal Approach
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 References
-
The Constitution of the Islamic Republic of Iran.
Iranian Petroleum Acts adopted on 1957, 1974 and 1987.
The Forth Iranian five-years of Economic, Social & Cultural Development Plan (13841388), Adopted in 11/06/1383 Iranian Calendar.
The 1386 Iranian Budget Code.
Foreign Investment Promotion and Protection Act (FIPPA) approved by the Islamic
Consultative Assembly on 09 March, 2002 and adopted by the State Expediency council
(SEC) on 25 May, 2002.
Executive regulation of the FIPPA, as per Article 25 of the FIPPA, approved by the
Council of Ministers on 15 Sept, 2002.
Iranian Labor Law.
The Law of Direct Taxations, adopted by Islamic Consultative Assembly on 1987.
The Law of Registration Companies, adopted on 1931.
Title: Investment Challenges in Iranian Oil & Gas Sectors–A Legal Approach
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 References
-
The Law of the Free Trade – Industrial Zone.
The General Policies of Article 44 of the Constitution of the Islamic Republic of Iran.
The order of government to Ministries and Governmental Organizations concerning
Suggesting referral of settlement of disputes to Iranian ICC Center of Arbitration, Letter
No. 36/8487, dated 22/06/1386 Iranian Chamber of Commerce.
NIOC, Petroleum and Development 5, (1376-1382).
The Act of Perspective for I.R.I. Petroleum Industry in the light of 1404 Iranian calendar
year, planning deputy of Petroleum Ministry, spring 1385.
BP Statistical Review of World Energy, June 2008.
OPEC, World Oil Outlook, 2008.
OPEC, Annual Statistical Bulletin, 2007.
Title: Investment Challenges in Iranian Oil & Gas Sectors–A Legal Approach
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Thank you
for your attention
Title: Investment Challenges in Iranian Oil & Gas Sectors–A Legal Approach
L.ZABBAH@IIES.NET ; L_ZABBAH@YAHOO.COM