Iran paves the way towards finalising the IPC by approving the IPC by-law



On 3 August 2016, the Council of Ministers of Iran approved a document described as the by-law governing the IPCs (the “By-law”). It should be noted that the By-law approved is not the Iran Petroleum Contract (the “IPC”). The IPC is still being finalised by the National Iranian Oil Company (the “NIOC”).

The By-law was initially passed by one of Iran’s top economic advisory bodies, namely, “the Resistive Economy Headquarters”, whose main function is to implement the policies approved by the Supreme Leader of Iran aimed at increasing Iran’s economic independence and resilience.

According to media reports, Iran is planning to announce the first round of IPC tender by the end of this year for 10 to 15 oil and gas upstream projects (of around 52 projects announced in November 2015). It is expected that the actual terms of the IPC will be agreed through bilateral negotiations.

Generally, the By-law reflects the same principles that were announced by the Iranian government at the Tehran Summit in November 2015. Some of the key points of the By-law are as follows:

  • the Contractor will be responsible for providing all of the financing required for the project;
  • no sovereign guarantee to be issued by Iranian government or the Central Bank of Iran;
  • the title to the reservoirs will be held by the Ministry of Petroleum (the “MoP”) on behalf of the nation;
  • no reference to bonus or royalty payments;
  • all taxes and custom duties are to be paid by the Contractor and are reimbursable as Indirect Costs;
  • the term of the IPC will be for 20 years commencing at the start of “the development operations” with a possible extension of further 5 years; and
  • the governing law of the contract will be the laws of Iran.


The By-law provides certain definitions that will be critical to the IPC including:
  • the NIOC and its subsidiaries will be considered as the employer/client in any agreement signed (the “First Party”);
  • qualified oil and gas companies will be considered as the second party to the agreement (the “Contractor”);
  • “Direct Capital Expenditure” is broadly defined as all capital expenditure required at different stages of the project; and
  • “Indirect Expenditure” is defined to include taxes, custom duties, and social security
    insurances payable by the Contractor.

Under Article 2, the By-law is applicable to three categories of contracts:

  • exploration, development and production contracts;
  • development contracts for existing fields or discovered reserves; and
  • contracts for improving recovery rates for existing fields.

In line with the Constitution of Iran, under all categories noted above, the ownership of the wells and produced resources will stay with the MoP, which holds the title on the hydrocarbons on behalf of the nation. Further, all wells and production facilities are owned by the First Party from the first day of the contract.

The By-law states that all contractual operations carried out by the Contractor will be in the name of and on behalf of the First Party. However, this should not lead to the conclusion that the relationship between the two parties is a “principal – agent” relationship. For the purpose of this article, it suffices to say that under Iranian law, the acts of the agent binds the principal whereas it is clear from the By-law that the First Party assumes no liability vis-a-vis the acts of the Contractor (for instance, with respect to financing arrangements). It seems that the purpose of this By-law is to stress that the Iranian government will retain control over all operations and the role of the Contractor does not go beyond that of a contractor and the undertaking of operations by the Contractor does not create any rights for the latter over the project assets. This is similar to what was provided under the previous model contract i.e. the buy-back agreement.


The Contractor will be responsible for all of the financing of the project. The Contractor will also be expected to assume the following investment risks:

  • failure to make any discovery or commercially viable fields; and
  • failure to achieve the agreed production targets or production below a certain volume that may not be sufficient to enable the amortisation of the cost of finance.

Similar to the standard Production Sharing Agreements, the By-law provides that if the allocated production rate is insufficient for the repayment of the Contractor’s approved entitlements, such unpaid entitlements will be payable during an extended period from the same reservoirs. In other words, the Contractor’s costs are fully recoverable through revenues derived from the production area and, where the allocated production rate does not yield sufficient revenues to permit full cost recovery over the agreed production period, the Contractor will have the right to continue production after the expiry of the term of the contract until the Contractor’s costs are recovered in full. However, the Contractor’s entitlement to the revenues will be capped at fifty percent (50%) and seventy five percent (75%) of revenues generated from oil and gas fields respectively. This could provide a significant incentive to oil and gas companies although in a low oil price environment, and with the possibility of cost overruns, foreign investors could be waiting a long time for a return on investment and full recovery of their costs.

The By-law makes it clear that joint fields and increasing rate of recovery from existing fields are to be given priority. The Contractor investing in the joint oil and gas fields or in projects that are considered to be “high risk” are likely to secure more favourable terms. In addition, the Contractor is expected to provide the best available expertise and technology. Article 3(E) of the By-law provides that the amount of remuneration will be dependent on the following factors:

  • project-specific circumstances and the risk taking appetite of the Contractor; and
  • employing optimal, modern and advanced technologies in exploration, development and production.


The By-law requires the international oil and gas companies to enter into a joint venture with Iranian Exploration and Production companies (the “Local E&P Companies”) whose eligibility has been approved by the NIOC. Based on the previous announcements made by the MoP, such joint ventures will be a mandatory requirement in the production phase but only optional during the exploration phase of the project.

In June 2016, the MoP made a provisional announcement of the eligible Local E&P Companies. The list includes Petroiran Development Company, Petropars Company, MAPNA Group, Dana Energy Company, Industrial Projects Management of Iran, Persia Oil and Gas Development Company, Khatam-al Anbiya Construction Headquarters (a sanctioned entity at the time of this article) and Industrial Projects Management of Iran. The media reports indicate that 9 other local companies have been given an extra two months to take the steps required by the MoP to be considered in the shortlist of the approved Local E&P Companies.

The current list is dominated by state or semi state owned companies that have previous engineering and services experience. The companies shortlisted have indicated that they want to be active partners in the projects to enable them to grow in size and capacity.

It is assumed that the roles and responsibilities of Local E&P Companies and their foreign partners and the details of the joint venture will be negotiated separately and approved by the MoP. The By-law has made it clear that the intention of partnering with the Local E&P Company is for the Contractor to transfer technology and know-how to them to enable them to manage future projects in Iran and other international markets. The By-law makes it clear that international companies are required, as part of their annual financial-operational plans to submit plans for the transfer of technology and know-how.

Furthermore, foreign companies should note that at present the NIOC requires that any foreign company wishing to invest in Iran’s oil and gas sector enters into partnership with the NIOC or its subsidiaries.


The By-law states that the Contractor will be entitled to the following remuneration:

  • Direct and Indirect costs;
  • Finance costs; and
  • Development costs.

As set out in the By-law, the remunerations will be in a foreign currency approved by Iran’s Central Bank or will be based on oil and gas produced. The NIOC has the discretion to choose the method of remuneration. The remuneration is based on a number of factors discussed above, including project risk. According to the By-law the fees proposed by the Contractor is one of the main factors in evaluating and awarding the contracts.

These payments will be made through one of the following methods:

  • allocation of a portion of the additional oil and gas produced from the fields (i.e. production above the agreed level); or
  • revenues generated under the contract as a result of the sale of the product at market price.

The By-law sets out that Iranian government or Central Bank of Iran will not be issuing any sovereign guarantee for remunerations owed to the Contractor.


The By-law states that the Contractor is “obligated to maximise” the use of products and services in Iran in accordance with the requirements of the Maximisation of Production and Service Capability in Satisfying the Country’s Needs and Strengthening its Capabilities for Exportation (2012) (the “Maximisation Law”). The said law requires that at least fifty one percent (51%) of the value of the project contract, excluding the value of any immovable property, must be allocated to the work performed inside Iran. It is important to point out that the Maximisation Law divides the companies into four categories:

  • “Iranian Company”, which is a company registered in Iran with Iranian nationals holding one hundred percent (100%) of the shares;
  • “Foreign Company”, which is a reference to foreign company registered in Iran;
  • “Foreign-Iranian Company”, which is a company registered in Iran with over fifty one percent (51%) of its shares being held by non-Iranian nationals; and
  • “Iranian-Foreign Company”, which is a company that is registered in Iran and more than fifty one percent (51%) of its share are held by Iranian nationals.

As a general rule, pursuant to Article 5 the Maximisation Law, Iranian Companies are given priority over other types of companies in public projects. In other words, public contracts must be awarded to Iranian Companies unless there is no competent Iranian Company, in which case the contract is open to be awarded to companies in the other three categories. The ultimate goal for the Iranian government is to develop, improve, and localise the skills and the knowledge of the local workforce and to support local production.


The By-law sets out that the Iranian law as the governing law for interpreting all terms and definitions. But the By-law does not provide any details on the dispute settlement mechanism, leaving the possibility that the parties can negotiation various available options which still has to be in line with the Iranian law.

In relation to the dispute settlement mechanisms in Iran, it should be noted that Article 139 of Iran’s Constitution imposes restriction whereby, the Council of Ministers and/or the Parliament must approve an arbitration clause in any contract that concerns public or government assets. This offers another layer of approval that must be obtained and negotiated by the Contractor.


It should be further noted that the By-law:

  • leaves open the possibility of reintroducing buy-back agreements for certain projects;
  • states that the project term will be 20 years commencing from the start of “the development operations” date and with the possibility of extension for another 5 years;
  • requires the establishment of a “joint committee” for managing the projects, where parties to the project will have equal voting rights and the decisions for the project are to be made unanimously. This will provide protection for the minority shareholders in the project and restrict the First Party from dictating every aspects of the project; and
  • provides that an event of force majeure can only occur during the development and exploitation phases in which case the Contractor can suspend performance. No definition of the force majeure event has been provided. It is expected that the IPC will provide more detailed force majeure provisions.

In addition, compared to its predecessor (i.e. the buy-back model); the IPC is expected to be more consistent with current international standards. However, there are a number of issues that remain to be addressed which might be covered in the final IPC. These issues include:

  • the lack of clarity on integration and transition of the agreement from exploration phase into development phase. International parties looking to bid for projects would need to make an assessment to whether they will be bidding for exploration phase only or are expected to bid for the development phase in the same bidding round as well. There is no indication as to whether the winner of the exploration phase of a project will have to also compete for the development phase, or whether each phase is tendered separately. Ideally the development phase of a field should be tendered at the same time (e.g. to maximize NIOC’s interest) otherwise the awards of exploration phase alone (without the automatic award of the development phase) will not justify the risks;
  • further clarification is needed in relation to reimbursement, as the By-law sets out that if the reimbursement period is insufficient, a longer period will be stipulated without providing any details on that period. The By-law clearly states that termination or expiry of the contract does not preclude the Contractor from being able to recover its costs subject to the term of the contract and subject to the fifty percent (50%) and seventy five percent (75%) caps for cost oil and cost gas respectively.
  • under Article 3(J) of the By-law, any production rate cut due to non-technical reasons will have a direct impact on the cost recovery and expected profit in line with the approved business plan for the field. Further clarifications are needed to ensure how the cost recovery and remuneration of the IOCs will be managed should the NIOC decide to cut production rates unilaterally;
  • further information is required to understand the NIOC’s expectation of placing Iranian nationals into managerial positions (e.g. what position, at what level, etc.);
  • the By-law does not provide a well-defined structure for the joint managing committee. The market expectation is that the composition of the joint managing committee and the voting power of its members will follow the equity structure;
  • there is no clear indication as to how and why the reservoir engineering studies are treated differently than other service contracts; and
  • further clarification is needed as to the expectations of the NIOC for the transfer of technology and maximizing the use of local content.