Oil Ministry authorities believe it is impossible to pri vatize the oil industry specially in the upstream sector

The question raised by many experts and the public is whether to develop thecountry’s oil and gas resources? If the answer to this question is negative, then Iran, the second largest country in terms of gas reserves should see other countries, sharing their reserves with Iran, to exploit these recourses at full capacity. At the same time, Iran has the potential to be the largest exporter of natural gas in the world.
In the oil sector, the same reasoning is applicable: Even if Iran does not increase its oil production quota, in the following six years, it should increase its production by 1 million barrels per day in order to keep its current quota based on the OPEC regulations. The government is for development of the country’s oil and gas reserves and no opposition against this policy is seen in the Parliament.
The Islamic Republic of Iran is seeking foreign resources – and not foreign investments – for its upstream oil industries, while investments are welcomed in the downstream oil industries, because investments in upstream sectors accompanies ownership and management over the capital and this is against the Iranian laws. But in attraction of resources, the recipient country (Iran) is the owner of the product while the other side only receives the profit of its capital and, at a specific time, it would leave the project.
There are three common methods in the world for development of oil and gas reserves by foreign countries: granting benefits, product sharing and cash payment.
Experts in the Oil Ministry have designed a new method -“buy-back scheme”- for the first time in the world. Based on such a contract, when the phases of production are complete, investors would receive their amount as well as the interests of their capitals, while the investor does not own the product. Under the current circumstances, the buy-back contract provides the most logical solution. In addition to absorbing funds, it can also provide access to advanced technology.
In 1989, a finance of $3.5 billion for the development of South Pars Field was approved, but due to some problems it was not exploited. In 1997, under President Khatami’s Administration the contract for development of the field was singed. Five phases of the project would be implemented this year: two phases are related to sweet gas which is for household purposes and three phases are related to sour gas which would be used for injection in the oil fields.
Iranian Expediency Council has submitted the general policies for exploration of oil resources to the Supreme Leader, once these proposal is approved by the Leader, the oil Ministry would enjoy a more stable status in terms of attracting foreign resources for oil and gas development, exploration, transit of crude and by-products, etc.
Moreover, the government has taken an effective measure with setting up of “Oil Saving Fund”. Only part of oil revenues would be spent and the rest would be saved in the Fund, which would transform the country’s economic backbone: Many factories would be built, agriculture would be developed and economic infrastructure would be strengthened.
It is no honor to sit on $3,000 billion worth of gas and oil and not do anything to exploit them. It should not be forgotten that the dependency of Iran’s budget on the oil revenues is the main factor for a weak economy.
There are three groups opposed to buy-back contracts: Those who believe that oil reserves should not be exploited at all; the second are those who advocate joint production and the third believe that contracts should be on a cash-payment basis. Iranian oil officials believe cash contracts are advisable provided that there is enough cash to pay the other side.

Royal Dutch/Shell company has signed a $799 million [capital costs] contract with Iran for the development of South Pars field. Each part of the contract should be tendered and if Iranian companies are eligible they can also win the tender. The total sum which would be paid back over a 10-year period by Iran is $1.4 billion, and 190,000 barrels of oil per day would be produced.
Within a 25-year period, 1050 million barrels of oil would be produced and the cost for production of each barrel is 1.4 dollars. Overall, the total capital would be returned to the investor within 15 months. Both South Pars fields were destroyed during the Iran-Iraq war. Shell, the largest high tech company, bid the lowest price and won the tendered. During the past 20 years, Iran never stopped relations with Shell.
Since other countries, which share their gas and oil resources with Iran, are exploiting these resources at full capacity, Iran is to take concrete measures this year regarding its shared reserves.
From another oil field, Salman, Iran produces 85,000 barrels of oil, which could be increased sharply. South Pars field needs $1.7 billion for its development and based on the current oil prices, its revenues would be $300 million annually with the value of its gas is also standing at $300 million.
Iran, which shares Salman field with the U.A.E., does not exploit its gas reserves at the moment while the other part produces both gas and oil out of field. The potential capacity of gas production of Salman field is 13 million square meters which could be well exploited by Iran. All oil and gas fields in the Persian Gulf have been put on a tender.
The Persian Gulf states who share the same gas and oil reserves with Iran are exploiting them at full capacity. Whereas, Iran is still at the starting point of extracting gas and oil from these reserves.
The Baku-Ceyhan pipeline – built for the transfer of oil and gas from Central Asia to Europe – has economic justification only if the oil prices rise significantly. The cost of producing a barrel of oil from the region, taking into account its transit expense and cost of pipeline construction is $4-5.
Given the relatively high costs of oil production in the Caspian Sea region ($5-$6), the economic rational for construction the pipe line is questionable. Iran’s long-term policy, however, is to build cordial ties with Caspian Sea littoral states in line with its policy of détente and confidence building measures. Oil officials believed the control of buy-back contracts was more comprehensive for Iran than surveillance over the performance of other contracts with foreign oil companies in the past two and half years.
Authorities believe it is impossible to privatize the industry specially in the upstream sectors. Regretfully, despite and 80-year history of Iran’s oil industry, its commercial branch still uses traditional methods. Iran will in the future need market regulators and prompters in international oil exchanges. The Oil Ministry is now training the necessary personnel to assume such posts.