European Oil Companies Flock To Iran, Lured by Attractive
Terms
By BHUSHAN BAHREE
Staff Reporter of
THE WALL STREET JOURNAL
March 10, 1999
OFF SIRRI ISLAND, Iran -- European oil companies are flocking back
to Iran, lured by attractive deals from the Islamic government. But U.S.
firms, barred by American sanctions on Iran, remain largely sidelined for
now.
With petroleum prices at their lowest level in real terms since the
Great Depression, some big oil companies bet they can make big money in
Iran, which Western petroleum majors left after the Islamic revolution
of 1979.
Long the bogeyman of the oil business, Iran has suddenly become a hot
property by offering oil deals that some petroleum executives find hard
to refuse. "This is where you are going to make big bucks," says
Patrick de Genevraye, vice president of the Mideast operations of Total
SA of France, standing on an oil rig in the Persian Gulf. Mr. de Genevraye
and other Total executives have spearheaded an unlikely but successful
march back into Iran. Ignoring U.S. sanctions, which apply only to American
companies, and gambling that recent gains by moderate Iranian politicians
will make the country a better place to do business, the French are pushing
headlong into Tehran.
Search for Deals
Today, dozens of oil companies are bidding for 43 petroleum projects
that Iran is opening to foreigners. Iran values the investment needed for
these projects at some $8 billion, though Western executives say the investment
could be four times as great. Parliament has authorized the National Iranian
Oil Co. to sign $5.4 billion of projects with foreign companies in the
fiscal year ending March 2000. Iran's petrochemicals sector is looking
for an additional $4 billion in foreign investments for the two years through
March 2001.
Last week, Iran signed a $1 billion deal with Elf Aquitaine SA and
Eni SpA. Tehran has agreed to sign a $270 million deal with Britain's Premier
Oil PLC and Canada's Bow Valley Energy Ltd., though that hasn't been completed
yet.
It's a twist for a country whose leaders once labeled Western oil executives
"exploiters" and worse. But desperate times call for desperate
measures.
Iran sits atop the world's fifth-largest pool of known oil reserves,
but years of political isolation, war and sanctions have starved its oil
business of capital and modern technology. Iran is the second-largest oil
producer, after Saudi Arabia, in the Organization of Petroleum Exporting
Countries, but its output has dropped by more than a third, to about 3.6
million barrels a day from a peak of over six million barrels a day in
1974.
The contracts on offer won't yield a bonanza. They aren't for exploration,
where a gusher can change a company's fortunes. Nor do they provide for
production sharing, which can allow a company to ramp up output and walk
away with a large share. Even so, Iran is offering Western oil companies
attractive deals at a time when their profit margins have been cut to the
bone. The contracts guarantee relatively risk-free returns of between 15%
and 20% on investments through buyback deals.
Here's how it works: Western oil companies invest in and develop oil
and gas fields, then turn them over to Iran, which repays with petroleum
output from the field. The price risk is borne by Iran: If oil prices drop,
Iran is obliged to supply more oil or gas in repayment to meet a money
figure. If prices rise, Iran supplies less.
In the Business of Risk
But some oil companies complain the buyback deals turn the oil companies
into no more than contractors. Oil companies are in the business of taking
on risk, and for that they are rewarded by being able to claim the oil
reserves as assets. The Iranian buyback deals allow companies only to book
a fraction of the reserves by European accounting rules and maybe none
by U.S. standards. The companies complain there is no upside if oil prices
recover.
Still, the oil companies are willing to play by the rules in hopes
that one day Iran will sell equity stakes. That's because other low-cost
oil fields are in places like Saudi Arabia and Kuwait, which are closed
to foreign oil companies.
This, Iranian officials argue, gives U.S. oil majors a compelling reason
for discussing Iranian deals, even if they can't sign contracts until U.S.
sanctions are lifted. At least two U.S. oil companies -- Mobil Corp. and
Atlantic Richfield Co. -- have officially notified Tehran that they are
interested in developing oil and gas reserves and have paid small sums
to receive oil-field data. Both companies say their actions are in line
with U.S. law regarding trade with Iran and say they have kept the U.S.
State Department informed. Iranian officials say they have also negotiated
with Conoco Inc. and Unocal Corp. A Conoco spokesman confirmed the company
was in touch with Iran, but said calling such contacts negotiations was
going too far. A Unocal spokesman said he could neither confirm nor deny
any contacts with Iran.
Arco is even considering setting up an office in Tehran. "We're
going right to the edge, but we're not crossing the line," says Arco's
executive vice president, Don Voelte.
Iran would love to do deals with U.S. companies, which could push to
lift sanctions. For Iran, it would be more than just thumbing its nose
at Washington: U.S. capital and technology would heighten competition and
reduce costs.
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