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European Oil Companies Flock To Iran, Lured by Attractive Terms

Staff Reporter of
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.


Copyright © 1997 Abadan Publishing Co. All Rights Reserved. May not be duplicated or distributed in any form

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