Durham E-Theses A critical analysis of Iranian buy-back transactions in the context of international petroleum contractual systems Kakhki, Mohammad Mehdi Hedayati How to cite: Kakhki, Mohammad Mehdi Hedayati (2008) A critical analysis of Iranian buy-back transactions in the context of international petroleum contractual systems, Durham theses, Durham University. Available at Durham E-Theses Online: http://etheses.dur.ac.uk/2931/ Use policy The full-text may be used and/or reproduced, and given to third parties in any format or medium, without prior permission or charge, for personal research or study, educational, or not-for-prot purposes provided that: • a full bibliographic reference is made to the original source • a link is made to the metadata record in Durham E-Theses • the full-text is not changed in any way The full-text must not be sold in any format or medium without the formal permission of the copyright holders. Please consult the full Durham E-Theses policy for further details. Academic Support Oce, Durham University, University Oce, Old Elvet, Durham DH1 3HP e-mail: [email protected] Tel: +44 0191 334 6107 http://etheses.dur.ac.uk 2 A Critical Analysis of Iranian Buy-Back Transactions in the Context of International Petroleum Contractual Systems Mohammad Mehdi Hedayati Kalkhki A thesis submitted. for the degree of Doctor of Philosophy in the Institute for Middle Eastern & Islamic Studies (IMEIS), School of Government and International Affairs, University of Durham. 1 5 MAY 2008 April2008 . i 0' . Table of contents Acknowledgments List of Abbreviations Contents List: Tables & Figures Abstract Part One: Origin and Background of the Iranian Petroleum Contractual System ..................................................................................................................... 13 Introduction Review of Literature Organisation of the Thesis Research Methodology Chapter 1: Formation of the Iranian Oil Industry in the Pre-Nationalisation Period (1908- 1951) ............................................................................................................................................... 51 1.1 Introduction 1.2 Analysis of Pre-1900 Concessions ......................................................................................... 53 1.2.1 The Reuter Concession 1.2.2 Hotz Concession 1.2.3 The Imperial Bank of Persia Concession 1.3 Overview of Pre-Nationalisation Oil Contracts ................................................................... .57 1.3.1 D' Arcy Concession 1.3.2 Impact of D' Arcy Concession on the stance towards foreign involvement 1.3.3 Dispute over the D' Arcy Concession (Armitage-Smith Agreement) 1.3.4 Cancellation ofD'Arcy Concession and the signing ofthe new agreement 1.4 The 1933 Concession ............................................................................................................. 67 1.4.1 Criticism ofD' Arcy Concession's integrity and subsequent reform 1.4.2 The formation ofthe 1933 Concession 1.5 Oil in Iran between the Two World Wars .............................................................................. 73 1.5 .1 The domestic environment in the inter-conflict period 1.5.2 Khoshtaria Concession and other oil transactions between the wars 1.5.3 The effect of new policies on the oil contract (the rise ofReza Shah) 1.6 The Consequences of World War II on the Political Environment.. ..................................... 83 1.6.1 Influence ofthe Soviet Union on oil concessions 1.6.2 The 'Golden Age' of Iranian oil 1.7 Conclusion .............................................................................................................................. 97 Chapter 2: The Effect of Nationalisation on Oil Transactions ....................................... 102 2.1 Introduction 2.2 Contractual Grievances and Failed Renegotiation 2.2.1 Rejection of the compromise agreement 2.3 Consequences ofNationalisation ........................................................................................ 106 2.3. 1 Arbitration and negotiation 2.3.2 International involvement in crisis resolution 2 2.3.3 The 1953 coup d'etat and its effect on foreign investment 2.4 Formation ofthe 1954 Consortium ........................................................................................ 116 2.4.1 NIOC's cooperation with the international consortium 2.5 Legal Basis Reform ofOil Agreements ................................................................................. l21 2.5.1 Commercial implementation ofnew legislation 2.6 Contractual and Commercial Changes between 1960 and 1979 .......................................... .124 2.6.1 Oil transactions as a part of the economic development plans and socioeconomic context 2.6.2 Updated terms ofthe 1965 agreements 2.7 Turmoil Resulting from the Islamic Revolution .................................................................... 129 2.8 Iran-Iraq War's Enhancement oflnternational Involvement 2.9 Conclusion .............................................................................................................................. 133 Part Two: Autopsy of the Iranian Buy-Back Transactions .................................. 135 Introduction Chapter 3: Types and Nature oflnternational Petroleum Agreements .......................... .137 3.1 Introduction 3.2 Concessionary System in Oil Contracts ................................................................................. 140 3 .2.1 Typical concession agreements made before the 1950s 3.2.2 Typical concession agreements made after the 1950s 3.3 Contractual Systems ............................................................................................................... 148 3.3.1 Production Sharing Agreements (PSAs) 3.3.2 Description of the key components of the PSA 3.3.3 The role of the state in a PSA 3.3.4 Work Clbligations in Production Sharing Agreements 3.3.5 Production Sharing Agreements in Iran 3.4 Revenue Sharing Contracts .................................................................................................... 159 3.5 Joint Venture Agreements 3.6 Service Contracts .................................................................................................................... 162 3.6.1 Pure Service Contracts 3.6.2 Risk Service Contracts 3. 7 Buy-back Contracts ................................................................................................................ 163 3.7.1 The structure and functioning of international buy-back contracts 3.8 Conclusion ............................................................................................................................. l67 Chapter 4: Nature and Legal Basis of the Iranian Buy-Back Agreements ....................... 170 4.1 Introduction 4.2 Definition of the Terms and Conditions ................................................................................. l72 4.2.1 Buy-back agreements, as defined by the Council of Ministers 4.2.2 Resolution of issues arising under the Decree 4.3 The Relevant Iranian Laws With Regard to Buy-Back Transactions .................................... l80 4.3.1 Iranian Constitution 4.3.2 Iranian Petroleum Law 4.3.3 Legal basis for buy-back as outlined in the Five Year Development Plans 4.3.4 The new Foreign Investment Law (FIPPA) and its implications for buy-back contracts 4.4 Shortcomings ofthe New Foreign Investment Law ............................................................. 193 3 4.4.1 Shortcomings of Article 2 ofFIPPA 4.4.2 Shortcomings of Article 3 of FIPP A 4.5 The Contract's Governing Law ............................................................................................. l99 4.5.1 Laws regarding the registration and operation of foreign companies in Iran 4.5.2 Legislation related to the taxation of foreign enterprises 4.6 Significant Elements oflranian buy-back Contracts ............................................................ .204 4.6.1 Procedure for formulating a buy-back transaction 4.7 Conclusion ............................................................................................................................. 211 Chapter 5: Critical Analysis oflranian Buy-Back Contracts........................................... .213 5.1 Introduction 5.2 Risks of Buy-Back Contracts as Seen by IOCs ................................................................... .214 5 .2.1 Risks created through the structure of buy-backs 5.2.2 Foreign oil companies' stance on buy-back 5.2.3 Issues of legal and fiscal certainty in buy-back contracts 5.2.4 Issues with contract negotiation and bureaucracy 5.2.5 Domestic authorities' control over IOC activities and ramification of contract termination 5.3 Risks and Disadvantages ofBuy-Back Contracts from the Perspective of the NIOC 5.3.1 Lack of financial incentives for improvement of efficiency and long term development 5.3.2 Problems with comparing competing project bids and inaccurate project demands 5.3.3 Drawbacks of the present contractual structure 5.4 Conclusion ............................................................................................................................ 225 Chapter 6: Case Study on the Iranian Buy-Back Transactions ....................................... 231 6.1 Introduction 6.2 A Summary ofthe Contracts ................................................................................................. 232 6.3 The Most Commercially Influential Oil Projects of Iranian Buy-Back. ............................... 238 6.3.1 The Bangestan oil field project