The real problem with Iranian oil

April 22, 2016 12:51 PM

The battle over foreign investment in Iranian oil is now playing out and a power struggle between Iran’s two competing government apparatuses: The democratically elected President, Hassan Rouhani, who wants to attract foreign investment, and the autocratic Supreme Jurisprudent, Ayatollah Ali Khamenei, whose revolutionary ideology diametrically opposes all foreign investment.

Iran’s oil ministry, under the direction of Rouhani, prepared a new type of foreign oil contract designed to entice foreign investment. Previously Iran had only offered “buy back” style contracts to foreign companies and investors.  In the “buy back” system, foreigners could invest in oil exploration and production in Iran, but once production began, the NIOC would take over and buy back the rights for a predetermined price. The new contracts, called Integrated Petroleum Contracts (IPCs) resemble joint ventures or production sharing agreements with 20- to 25-year durations (double that of traditional “buy back” contracts). These IPCs would allow for foreign companies and investors to realize more revenue from their investments over a longer period of time before returning control to Iran.

News of these potentially lucrative deals drew the interest Rouhani was hoping for. Iran planned to unveil these contracts at a November 2015 conference in Tehran, but instead of the information investors needed, attendees were presented with old data about Iran’s oil fields and only brief overviews of the contracts. The key issues investors wanted to discuss, like arbitration, crude lifting, and accountancy rules had not even been worked out by the Iranian government. 

Iran rescheduled the contract unveiling for late January 2016 in London, but canceled. Although the government blamed it on visa trouble, the real problem was revealed in Iran’s parliamentary election in February as the conservative clerical establishment made a public stand against Rouhani’s plans. These clerics openly took issue with the planned foreign oil contacts preferred by Rouhani and his allies, claiming they were too generous towards the foreigners.

Meanwhile, officials in the oil ministry, representing Rouhani’s position, insisted that the only way to rehabilitate the economy is through the oil industry, and the only way to rehabilitate the oil industry is through foreign investment, and the only way to entice foreign investment is with significant financial incentives.

When we in the West consider Iran, we think about nuclear weapons, women’s rights, and terrorism, but this issue of foreign oil investment is central to the political future of the Islamic Republic of Iran. If Iran’s economy fails to recover, the clerics will blame Rouhani. Iran’s constitution severely limits the powers granted to the democratically elected president, but the economy happens to be one area where the president, rather than the autocratic Supreme Jurisprudent, can exercise control. Except Rouhani’s economic control is limited, when his plans contravene the revolution.  If Rouhani succeeds, it could be a harbinger of liberalized economic policy. If Khamenei succeeds, it could mean the continued economic isolation of Iran despite the intentions of the world.

Page 2 of 2
About the Author

Ellen R. Wald, Ph.D. is an energy historian.  She is currently working on a book about Western involvement in the post-war Mid-East energy industry.  She teaches Middle East history at Jacksonville University. She can be reached at ellenrwald@gmail.com. Her website is www.ellenrwald.com