Legal Strategies in Upstream Oil and Gas Contracts to Attract Foreign Investment: Iran's Case

138 Pages Posted: 13 May 2011 Last revised: 5 Feb 2012

Date Written: January 22, 2008


Since oil and gas industry - as an Iran economic back bone - has a vital importance, financing in this sector has attracted huge amount of attention among economists and even owing to its inherent political character, politicians have involved in this crucial discussion. Historically the main source of financing in Iranian oil and gas industry has been foreign investment, entered in to the country through upstream oil and gas contracts from the early oil and gas concessions i.e. Darcy concessions of 1901 until the more recent buy back contracts.

Considering the significant role of foreign investment and especially foreign direct investment in the development and blooming of an industry and in our case oil and gas as a vital industry for Iran, the question of ability to attract foreign investment in a competitive capital market, could be regarded as a profession sometimes beyond the host state abilities.

There are a lot of economic, political and legal strategies to optimize the grounds for encouraging foreigners to inject their investment and capital in Iranian oil and gas industry. Although each of these strategies help the other to operate in the better way, so they are closely depended on each other, we will only consider the legal strategies and though legal strategies are variedly from constitutional changes and judiciary system amendments to strict contractual improvements, we will mainly focus on contractual clauses and their significant role in the substance of contracts and the outstanding effects of these clauses to attract foreigners to stream their capital in Iranian oil and gas industry.

Iranian Constitution in Article 43 enjoins foreign economic domination over the country's commercial life whilst paragraph 2 of Article 44 declares that the state sector is to include all large scale and "mother" industries including major minerals and Article 45 vests the disposition of public wealth and property, such as mineral deposits, in the Islamic state. Moreover according to Petroleum Act (1974), only service contracts are permitted. This has confirmed by the Petroleum Act of 1987 that permit the establishment of contracts between the Ministry of Petroleum, the state companies and "local and foreign natural persons and legal entities.” In fact the bar on foreign ownership of minerals in the Islamic Republic has been interpreted to mean a bar on the foreign control of reserves, an interpretation which necessarily dictates that any foreign oil company may only act as Contractor to National Iranian Oil Company (NIOC) not as Principal or Proprietor.

In addition, Article (3) of “Code on Encouragement and Protection of Foreign Investment” and its section (B) states that BOT, Buyback and Civil Partnership contracts could enjoy the legal facilities and protection granted according to this code. The mentioned “Civil Partnership” in this code generally interprets to include Joint Venture contracts that are in fact a kind of partnership contract.

In fact as the Code shows there is a creeping trend in new generation of Iranian economic regulation to open the Iranian market to foreigners and absorb their capital to Iran even trough the legislations that have conflict with the Iranian governors’ slogans at the first decade of revolution.

The very recent leader’s governmental order about principal 44 of constitution for privatization of a long list of industries in Iran excluding upstream oil and gas industry is obviously a positive movement with more than 20 years delay.

In this regard, some questions have stroked my mind in initial steps; -What are the main upstream oil and gas contracts in Iran and other parts of the world? -Why Iran has different upstream oil and gas contract i.e. Buyback contracts? -What are the main clauses of upstream oil and gas contracts including buyback? -What is wrong with the current upstream oil and gas contracts generally and buyback particularly? -And finally, what can we do to solve the problems and find some mutual beneficial clauses?

To answer the mentioned questions based on the mentioned presumptions, this research follows a Library, descriptive, analytical and case study methodology and its completion has faced with a lot of problems ranging from lack of enough resources even academic articles at domestic levels to confidentiality contracts at issue.

History of oil industry all over the world and especially in Middle East has shown that IOC's prefer their long-term interests than their temporary interests which could be secure through contractual clauses that guarantee a stable long-term contractual relationship of parties

However the contractual clauses of a contract especially when there are a lot of legal bans to be competitive with other oil exporter countries, seems to be the last shoot that National Iranian Oil Company (NIOC) lawyers con account on.

Author assumes that there must be some other better clauses then we have used and we can enjoy the other countries experiences. The other assumption that the author has in mind is that even with problematic legislation we could amend our oil and gas contractual clauses in such a way to be more attractive for foreigners to invest in.

In this research leaving aside any economic discussion concerning necessity of foreign investment in the Iranian oil and gas industry, I have attempted to find out what are the main differences between the three important upstream oil and gas contracts bearing in mind the desire of international oil companies to enter into one of these contracts and the elements that bring about differences. Moreover what changes should be applied to Iran’s contractual clauses to attract foreign investment through upstream oil and gas contracts and why those amendments will be attractive for foreigners are also examined in details.

To achieve the mentioned goals, this dissertation has been divided to three separate parts, each one includes several chapters. In Part One, I have attempted to describe main elements of this dissertation i.e. two most important upstream oil and gas contracts which are buyback contracts and production sharing contracts and joint venture contracts. In Part Two, we have an overview on some contractual clauses that could have direct effects on foreign investors’ decision making process on an oil and gas project and foreign investment attraction capacity of host country as a result. The last Part of this dissertation, based on aforesaid situation in upstream oil and gas contracts, will suggest some amendments in contractual clauses to be more attractive for foreigners to invest their capital in Iran investment and make Iran able to absorb required investment for developing Iran oil and gas fields to highest possible level.

Keywords: oil and gas, contract, petroleum, Iran, islamic law, law, strategy, foreign investment, FDI, agreement, China, upstream

Suggested Citation

Mabadi, Amir Hossein, Legal Strategies in Upstream Oil and Gas Contracts to Attract Foreign Investment: Iran's Case (January 22, 2008). Available at SSRN: or

Amir Hossein Mabadi (Contact Author)

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