Enterprise Looking to Salvage Iran Bid

Enterprise Oil is in last minute negotiations with Petropars to revise the buyback contract for phases six through eight of Iran's massive South Pars gas project, worth an estimated $2.65 billion. Having agreed to invest $15 million in gas appraisal work to learn more about the project, the company is now hesitant to expand enter into the development phase of the project.

Enterprise has not exercised its option to take a 20% stake in the development consortium as cash-poor Petropars, the field's operator, has underestimated the cost of bringing the gas on stream.

The project is going to cost more than Petropars bid, which is a significant hurdle. Enterprise is doing its best to persuade Petropars, but without movement on this, Enterprise can't invest further. Unless Petropars can re-negotiate the buyback contract, Enterprise will bind itself into a loss-making enterprise.

This is another example of Iran's difficulty in attracting and holding on to foreign companies through its buyback financing formula. Although Iran has attracted $12 billion in foreign investment through the buyback, the last buyback was signed with ENI SpA in June 2001.

Compania Espanola De Petroleos SA is delaying signing a deal for the Cheshmeh Khosh natural gas field in western Iran because of a penalty clause punishing foreign firms for failure to meet production targets. The buyback formula skirts around a constitutional bar against foreign companies taking an equity stake in oil and gas projects by allowing the investors to recoup investment costs and turn a profit through oil revenues over a limited timeframe, usually five years.

Buybacks are fixed-price contracts. You can't enter at the wrong price, you've got to get the contract right at the beginning. Iran reclaims any budget overrun from the foreign investor's revenue. This is the sort of deal that, if not done right, could break a company. The next five or six weeks are crucial in mapping out Enterprise's future in the Islamic republic. Enterprise hopes that Petropars will renegotiate its $2.65 billion contract with Pars Oil and Gas Co, a subsidiary of the National Iranian Oil Co.

Petropars's $2.65 billion contract for phases six to eight falls short of the project's realistic cost. Phases six to eight, the biggest tranche of the offshore South Pars field, are expected to produce three billion cubic feet a day of gas and 120,000 barrels a day of condensates. To put it in perspective, Petropars's development of phases four and five with ENI has an estimated cost of around $2 billion. Phases six to eight are one third larger than that. Petropars should actually have scaled up the cost.

Enterprise's CEO, Sam Laidlaw, on Feb. 5 outlined these concerns, and said the company needs movement on the Iran deal within two months.

At least one other foreign oil company, Statoil, is waiting in the wings, holding talks with Petropars over a role in developing the field. The project's estimated cost, fixed two years ago, didn't reflect market conditions today, a Statoil official said, posing a "problem" of which Statoil is "aware." The official refused to comment further. Petropars's stake in the development consortium is under negotiation. Petropars's wobbly finances, though, complicate the project further. The energy services company, jointly owned by a state pension fund and industrial development body, needs to finance its end of the bargain.

But international banks have rejected Petropars's recent attempts to shore up its finances through short-term loans, Iranian sources say. The banks wouldn't confirm or deny any requests from Petropars. Petropars is involved in so many phases (of South Pars) that banks worry about loan security.

Enterprise and other companies aren't happy because their Iranian counterpart (Petropars) hasn't got the financing.

The Iranian companies such as Petropars, which won lead roles in buyback contracts, thought they could get away with providing less finance. Now, foreign investors are insisting that Petropars come up with the funds. Petropars won the contract two years ago by underbidding its foreign and Iranian competitors for the project. Petropars got the job, but it can't complete it at that price. Enterprise's Dubai-based drilling team is nearing the completion of its test wells, with the work on three exploratory wells expected to be finished by mid-2002. The drilling, company sources say, has gone better than anticipated. Enterprise got the geological facts before having to commit fully to the project. Nevertheless, Enterprise will walk unless it can persuade its shareholders that the contract makes sense.