Iran Puts Foreign Oil Deals on Hold

Iranian Oil Minister Bijan Zanganeh has suspended the award of any major new oil contracts to foreign companies for one year in an attempt to ease mounting pressure from hardliners. The move is a setback for the liberalization trend of the past seven years, during which Iran opened its vast petroleum reserves to the outside world for the first time since the 1979 Islamic revolution. Zanganeh cited declining world interest in energy investment as one of the reasons for the delay. "The delay in signing buy-back deals is not due to any problem we might face. The only reason for this policy is that, given the fall in demand, we have seen it more desirable to delay signing deals," he said. "Besides, we do not need to produce beyond our output capacity and can always use these resources," the minister added, without saying when the decision had been taken.

Tehran has signed deals worth $10 billion in an investment in so-called buy-back contracts, under which foreign investors recoup their costs from sales for a fixed number of years. But the Middle Eastern country has seen its OPEC oil output quota fall by 20 percent in the past two years to 3.2 million barrels per day. Zanganeh said only last week that a new buy-back deal with foreign investors for two phases of the offshore South Pars gas field would be announced shortly. Iran had been negotiating with potential partners, including TotalFinaElf, BP, Shell, and ENI, for huge onshore oil developments in the Bangestan and Azadegan oilfields. Talks had become bogged down in any case because of bitter political in-fighting in Iran, tough terms demanded by Tehran, and political uncertainty after the United States included Iran on an "axis of evil" with Iraq and North Korea.

The buy-back contract circumvented a constitutional ban on foreign ownership of oil. Iran's oil wealth is a highly sensitive political issue as it is tied to its colonial past. "There are two groups of people against the buy-back. The first are those who are opposed to developing the oil sector due to perceptions that it may increase our reliance on oil. The second are those who believe foreigners should be sidelined and we should use our domestic potentials," Zanganeh said. "It is not right to cut ties with foreigners. We need closer ties so as to bring Iran out of isolation and pave the way for economic prosperity," he said. Zanganeh backed buy-back deals as the best way to bring technology, jobs and better management to the country while Iran was legally prohibited from signing production-sharing deals. "Up to now, we have ruled out production-sharing deals because they are contrary to our laws and entail political ambiguities," he said. He said three members of parliament, three deputy ministers and a special envoy of President Mohammad Khatami will be members of a new supervision committee on foreign deals.