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Iran Regulation on IPC

Regulation with regard to General Conditions, Structure and Sample of Upstream Oil and Gas Contracts

Ministry of Petroleum- Department of Commercial and Treasury Affairs

Pursuant to the proposal of Ministry of Petroleum No. 2/20_302819 dated 9/20/2015 and with reference to Part (3) Section (Dت) of Article (3) and Article (7) of Law of Ministry of Petroleum Responsibilities and Discretion, ratified in 2012, The Cabinet, on its meeting dated 9/30/2015, ratified the General Conditions, Structure and Sample of Upstream Oil and Gas Contracts, as follows:

Act with regard to General Conditions, Structure and Sample of Upstream Oil and Gas Contracts

Article 1_In this Act, the following words and expressions shall have the meaning assigned to them, also other expressions that have not been defined, shall be subject to meanings assigned to them under Oil Law, ratified in 1997, and Law of Amending Oil Law, ratified in 2011, and in other instances, definitions are subject to Iran laws and regulations and in cases where there is no definition under laws and regulations, they are subject to good international petroleum industry practices.

A- General Conditions: Principles and General Conditions and structure governing upstream contracts.

B- Petroleum: hydrocarbons existing in their natural condition as crude oil, condensate, natural gas, natural bitumen, oil shale rock and oil sand or produced through upstream operations.

C- Oil or gas field: Any subsurface or surface resource or reservoir in the territorial administrative districts, inland waters, coastal, continental shelf and international waters adjacent to country’s borderline and international high sea in which existence of oil is likely and technical specifications and geographic coordinates would be determined by Ministry of Petroleum.

D- Commercial oilfield or reservoir: An oilfield or reservoir which can cover all the predicted direct and indirect costs and financing costs for exploration, development, operation, as well as second party’s fee and profit and other additional charges related to the terms of contract and expected and reasonable rate of return of investment for each party, while considering Maximize Efficient Rate and with regard to the prices of oil and other oil products of that oilfield or reservoir. Contractor bears the burden of proof for commerciality of field or reservoir. Routine and automatic indicators and standards are recognized for determination of commerciality of field or reservoir by Ministry of Petroleum and in tender documents applicants are informed of these indicators and these indicators are inserted into the relevant contract.

E- Green Field: Oil or gas field explored and ready to enter the development stage by the National Iranian Oil Company or by other companies for National Iranian Oil Company.

F- Brown Field: A field that has already commenced operation and production.

G- Reservoir: Any anticline or stratigraphic traps or structural traps containing hydrocarbon or any combination of them which has rock, fluid or independent pressure characteristics.

H- Brown Reservoir: A reservoir that has a history of commercial production of hydrocarbon.

I- Green Reservoir: An explored reservoir in which commercial production of hydrocarbon has never happened.

J- The first party to the contract: National Iranian Oil Company or its subsidiaries on behalf of the company, which are also called “Client” under this act.

K- The second party to the contract: Company or partnership of competent oil companies which are selected and sign the contract through legal process in order to invest and perform any or all exploration, delineation, development, production and operation activities and to implement enhanced and/or increased oil recovery, which are also called “contractor” under this act.

L- Exploration block or area: the geographical area defined by the National Iranian Oil Company which was approved by Ministry of Petroleum and which is selected for the oil exploration activities, which is the area of the contract with the second party in order to explore commercial oilfield or reservoir.

13. Minimum Exploration Obligation: Minimum exploration activities including different types of necessary activities such as geological, gravity, seismic, drilling, reservoir appraisal studies with purpose of exploring commercial oil field or reservoir as well as minimum necessary investment for the activities within the period stipulated in the contract which is undertaken by the second party to the contract.

14. Development Plan: Oil field or reservoir development plan which is approved by both parties at the commencement of development stage covers green oilfield or reservoir, implementation of IOR/EOR activities on brown field or reservoir. This DP can be reviewed according to new studies and their result during development stage, also considering actual recovery of oil field or reservoir in production stage.

15. First Production: Defined production amount in oil field or reservoir Development Plan which is achieved during the development activities of phase 1 or IOR/EOR activities, based on DP.

16. DCC: All necessary capital costs in order to develop, enhance or increase rate of oil recovery in reservoir, including all costs related to engineering, drilling and commissioning of necessary surface and subsurface facilities for operation of reservoir or oilfield such as processing, transferring and injection facilities, as well as peripheral facilities and commissioning of all units, expenses incurred in exploration stage in case of commerciality of oil field , as well as in necessary repair, reconstruction and rebuilding of brown oil fields and reservoirs.

17. IDC: All expenses paid to the government, ministries and public organizations such as municipalities, including but not limited to different types of tax, customs duty and SSO.

18. Cost of Money (CoM): All finance expenses of second party under the terms and conditions, rates and prices of the contract.

19. Operating Costs (Opex): All the amounts that second party pays under the contract, so that operating activities be carried out according to terms and conditions of contract and accounting standards.

20. Fee: the amount that is determined depending on each barrel of additional production of crude oil from oil field or reservoir or each thousand cubic feet of additional production of gas from independent gas fields or reservoirs and in some cases each barrel of incremental gas condensates, resulting from activities of second party.

21. Joint Operating Company or Joint Operating Agreement: Company or any legal participation which is registered or concluded by second party under I.R. of Iran laws in Iran (with partnership of competent Iranian companies) assumes responsibility of carrying out all development and operation activities of facilities that are commissioned by virtue of contract in order to produce oil and gas and other by-products, under supervision and complete technical and financial support of second party. Constitution of this company and assignment of implementation of this contract to that company, does not neglect any of second party’s liabilities.

22. Depletion Base Line: in the production plan and diagram of each oil or gas field or reservoir (Production Profile) which is designed based on reservoir conditions, field or reservoir depletion process line after the period of ultimate production passes until complete depletion of field or reservoir in case of not implementing EOR and IOR that are approved by first and second parties to the contract would be defined as Depletion Base Line under the contract.

23. Incremental Oil, Gas, Condensate: the amount of oil or gas production from reservoir or field for each accounting period from green fields or reservoirs or the amount of oil, gas, or gas condensates produced above depletion base line from brown field or reservoir of oil, gas or incremental gas condensates.

Note- In cases such as gas brown fields or reservoirs and for EOR/IOR activity or in some cases incremental gas condensates based on depletion base line can be the basis for calculation.

24. Improved Oil Recovery: A set of activities that lead to maintaining production at same level or to enhancement of oil recovery or to acceleration of operation, and can be carried out in all production stages during lifetime of oil field or reservoir (including carrying out supplementary geological studies, petroleum and reservoir engineering, implementing projects of geophysics and 3-D and 4-D seismic studies as required, designing and implementing projects such as new infill Drilling, utilizing advance drilling technologies such as utilizing multi-hole and smart drilling, Gas Lift and water injection to oilfield or reservoir, fracturing, utilizing in-well pumps, enhancement of drilling methods and maximum utilization of horizontal drilling and alike.

25. Enhanced Oil Recovery: utilizing different types of up-to-date technologies including studies and designs of improved reservoir engineering and operation, utilizing different types of injections as required for the oilfield or reservoir such as gas injection, chemicals such as polymers, CO2 injection and alike, utilizing supplementary technologies in each stage as required and alike that leads to increased recovery of oil, gas or gas condensates within oilfield or reservoir lifetime.

26. Contract Area: geographic area with defined geographic coordinates which is delineated in the contract in order to carry out activities subject to the contract.

27. Open Capex: flexibility of capital costs amount according to actual oil recovery and specifications of the field, actual changes in market within framework of the approved annual work program and budget and also need for further necessary investments in order to improve efficiency and recovery of the oilfield.

28. Annual Work Program and Budget: A plan that within the framework of necessary action plans, amendments and reviews resulting from project specifications and actual oilfield recovery has been prepared by second party and approved by first party. Approval of this program by the first party is final and would be announced to the second party.

Article 2- Contracts subject to this act are categorized into 3 categories:

A- First Category: Exploration Contracts and in case commercial oilfield or reservoir are explored, development of oilfield or reservoir and subsequently, its operation would be in order and within term of contract. In this category assignment of development and operation activities is permitted simultaneously and continuously along with exploration activities if commercial oilfield or reservoir is explored by the second party, while taking into account plans for maximum efficient rate of oil and gas reservoirs. In this category of contracts the minimum obligation of bidder companies for activities and investment in the related exploration area would be clearly determined and undertaken by the second party.

B- Second category: Contracts of green oilfields or reservoirs development and subsequently their operation would be in order and within term of contract.

C- Third category: contracts for carrying out EOR/IOR activities in brown fields or reservoirs based on reservoir engineering and subsequently, their operation would be in order and within term of contract.

Article 3- All contracts concluded based on this act are subject to the following principles:

A- Protecting sovereignty and effectuating ownership rights of I.R. of Iran government over natural oil and gas resources and reservoirs of the country through Ministry of Petroleum.

B- [Complete or partial] performance of undertaken commitments under the contract would not be guaranteed by either the government, Central Bank and governmental banks of I.R. of Iran.

C- Reimbursement of all direct or indirect expenses, financing expenses and payment of fee and operating costs according to the contract through allocating part of oilfield products (maximum 50 %) or revenue resulting from contract performance based on the price of sale day.

D- If no commercial oilfield or reservoir has been explored or none of objectives under contract has been achieved or the oilfield or reservoir products has not been sufficient in order to fulfill financial obligations made, second party would bear all risks and expenses, but if the amount of production allocated for reimbursement of expenses paid by the contractor within term of contract has not been sufficient, due expenses [not reimbursed] would be reimbursed in longer period defined under the contract.

E- Accepting Fee according to circumstances and additional production resulting from each project with the objective of motivating second party in utilizing advanced methods and modern technologies in exploration, development and operation.

F- Commitment of second party to take into consideration Maximum Efficient Rate of recovery from oil and gas reservoirs during term of contract while utilizing modern and advance technologies and sufficient investment including implementing EOR/IOR projects customized for field or reservoir specifications.

G- All activities of the contractor from the commencement date of the contract would be carried out under the name of the client and on its behalf and all properties including buildings, goods, equipments, wells and surface and subsurface facilities belong to the client starting from that date.

H- Carrying out Environmental Impact Assessments and respecting HSE regulations and standards in implementation of projects.

I- If force majeure conditions exist in each stage of development or production, which may lead to release from contractual obligations, suspension or termination of contract, settlement of expenses paid by the contractor, for which it deserve reimbursement, would be suspended until elimination of force majeure conditions and after elimination of force majeure conditions, expenses incurred would be settled within the contract framework.

J- If the Ministry of Petroleum decides to decrease production level or stop production for any reason except for technical reasons related to the field or reservoir, priority in application of this decrease would be given to fields or reservoirs which does not have the obligation to reimburse, and if this decision is made with regard to a field or reservoir subject to the contract, it shall not affect reimbursement of expenses and fee which belong to the contractor.

Article 4- In order to achieve technology transfer as well as development of national technology in field of upstream oil operations, implementing large projects, empowering Iranian Companies to implement large national projects as well as strengthening its presence in regional and international markets, Contracts subject to this Act shall be applied as per following procedures:

A.        In each contract, taking into account the specific conditions thereof, competent Iranian companies, approved by Client, shall attend as a partner of either NIOC or of credible foreign oil companies and their presence would facilitate technology transfer and development of their know-how, management and reservoir engineering skills. The second party shall, as part of the annual work program and budget, provide a plan for technology transfer and development.

Note- The second party is bound by ‘technology transfer and development’ provisions of the main contract in contracts concluded with its sub-contractors.

B.        The second party is bound by maximum utilization of Iranian technical, engineering, manufacturing, industrial and executive capabilities [content] as prescribed by ‘the Law on Maximum Utilization of Iranian Technical, Engineering, Manufacturing, industrial and Executive Capability [content]  for Implementation of Projects and Provision of Facilities Required for Export of Services’, ‘the Amendment Act to Art. 104 of Direct Taxes’ (1391) and all pertinent by-laws and regulations.

C.        The second party undertakes maximum utilization of local human resources in implementing the contract, provision of master training plan for promoting their performance quality, effectuating required investment, in form of Direct Capital Costs, in order to carry out training and research programs including developing and updating current research centers as well as developing new joint research centers or carrying out pertinent joint research projects. Such programs shall be in accordance with operations (exploration, appraisal, first development, further development including IOR/EOR) in each stage of reservoir lifetime, as per each contract schedule.

D.        In the Joint Operating Company, management positions shall be on a rotational basis as per case and in accordance with the agreed conditions of the contact. In the management hierarchy of the aforementioned Company, administrative management positions shall be gradually transferred to the Iranian party in order to achieve transfer of technology and managerial skills to the Iranian party.

 

Article 5- Contracts subject to this Act shall be concluded between NIOC and other party/parties in full compliance with all governing laws and regulations applicable to NIOC contracts, after all necessary permissions are obtained from competent authorities.

Article 6- Contracts subject to this Act are implemented as follows:

A- In order to carry out exploration activities in a contract area and its subsequent development activities (first category of contracts), NIOC defines its desired minimum exploration obligations and, in compliance with relevant laws and regulations, invites credible and competent oil companies to offer proposal. In order to carry out development activities of a green oilfield or reservoir or investment to enhance or increase oil recovery rate in a brown field or reservoir (second and third category of contracts) NIOC provides a development model after carrying out reservoir engineering studies and invites credible and competent oil companies to offer their proposal. In both contract categories, such models are used as a guide for the bidders and do not stop NIOC from receiving and reviewing new upcoming proposals sent by oil companies.

Note 1- Development activities on field or reservoir or EOR/IOR within Development Plan framework would be carried out in different phases and for each phase based on actual reservoir recovery in the previous phases.

Note 2- NIOC would assess technical and financial qualifications of domestic and foreign companies.

B- Production level of oilfield or reservoir or, with respect to EOR/IOR projects, additional production of oilfield, is the basis for calculation of fee, in one of the currencies approved by Central Bank of I.R. of Iran as suggested by Ministry of Petroleum, for each oil barrel in oil fields or reservoirs and for each thousand cubic feet gas or each barrel of gas condensates in gas fields or reservoirs. This fee is floating calculated with objective of motivating and supporting utilization of advance methods in exploration, development, production and operation customized to circumstances and specifications of each project, depending upon criteria such as potential production output of each oilfield or reservoir and respecting risk rate in exploration areas; and this fee is calculated proportional to international prices of oil and gas condensates as well as regional and contractual prices of gas in cash or in kind and would be paid based on the day price from commencement date of early production until end of term of contract. This fee is the main basis for selecting the successful bidder.

Note 1- All of the following are determined by Ministry of Petroleum and announced in tender documents: risk rate in exploration areas including land or sea areas, oilfield or reservoir size, deep or shallow waters and generally areas with low, medium and high risk along with specific risk rate of EOR/IOR from reservoir.

Note 2- With respect to the fact that all risks in exploration contracts (first category) are borne by the second party and in case of failure in exploring commercial oilfield or reservoir, expenses are not reimbursed. Assignment of another exploration block to the second party under the same terms and conditions can be stipulated in the contract in case of failure in exploring commercial oilfield or reservoir.

C- Fee for production of each oil barrel from oilfield or reservoir or each thousand cubic meter of gas or each barrel of gas condensates from gas reservoirs and reimbursement of direct, indirect and operating costs as well as related financing costs would be paid from maximum 50% of field products resulting from contract including crude oil, natural gas, gas condensates and other products and its revenue based on price on product sale date after achieving early production according to the contract. End of term of contract does not affect [stop] reimbursement of costs due, under terms and conditions stipulated in the contract.

Note- In case products of natural gas field are consumed in domestic market or they cannot be exported, NIOC may reimburse costs and fee from oilfield products and revenue, in order to reimburse costs and fee.

Article 7- In contracts subject to this act, Ministry of Petroleum may consider term of contract (contract duration) according to time required for implementation of projects and maximum for  20 years from commencement date of development activities. In case of implementing IOR/EOR, this duration can be extended up to 5 years according to operational and financial requirements of the projects. With regard to continuous exploration, development and operation projects, exploration stage period would be added to the term of contract.

Article 8- Payment method in order to achieve contract objectives is as follows:

A. Cost of exploration or appraisal activities would be defined and determined by invoking to principle of minimum exploration or appraisal obligation through the selection process of second party.

B- Cost and scope of exploration or appraisal, development and operation activities would be determined and agreed upon by both parties based on the approved annual work program and budget in order to achieve final objectives of the project according to reservoir conditions and its actual recovery.

C- In each contract, second party carries out its activities within the framework of procedures attached to the contract.

D- In each contract, a joint management committee is established that reviews all project activities and it makes final technical, financial and legal decisions within the contract framework, as well as decisions regarding assignment of subcontracts and also annual work program and budget. Second party to the contract has the responsibility of carrying out activities within the framework of the approved work program and budget. This committee is constituted of equal number of representatives from first and second party to the contract holding equal voting rights. Decisions of this committee are made unanimously and in case consensus is not reached, senior managers decide.

E- All executive activities of second party with respect to implementation of the project within the framework of general project proposal and approved annual work program and budget, would be carried out, second party bearing all the responsibility and risks. Implementation of these activities, within the framework of execution procedures attached to the contract, would be assigned to competent companies after approval of joint management committee. This type of contract in terms of its nature has no fixed cost ceiling at the signature date of the contract and this is an open capex contract and the amount initially noted is solely to estimate and predict the costs, actual costs are calculated in the project account according to work programs and budget which are approved based on reservoir actual recovery and market circumstances.

F- Implementation of all activities stipulated in the contract (except for management of whole contract and carrying out reservoir engineering studies) are assigned to competent contractors and manufacturers. Selection of these subcontractors would be made by contractor and approved by joint management committee according to the procedure attached.

Note- Reservoir engineering studies and costs resulting therefrom incurred by the second party would be acceptable and shall be calculated as direct costs in a manner that would be agreed under the contract.

9- All the direct costs, indirect costs, and related financing costs subject to the contract (per case) and operating costs including geology studies, exploration, development, IOR/EOR are provided  and paid by contractor in a timely manner.

10- The method of reimbursement of the costs is as follow:

  1. From the time of achieving first or additional production by field or reservoir, according to the agreements with regard to Green fields/reservoir and Brown fields/reservoirs, the direct capital cost, indirect cost and contractual cost of money( per case) will be calculated, scheduled and repaid in installments based on periods defined in contract.
  2. Operating costs and indirect costs of production from first production will be calculated and paid on current basis. Besides, the payment of contractor’s fee will start from that time (first production) according to the provisions of contract.
  3. All the above mentioned payments in sections (a) and (b) of this article, will be paid to contractor from the maximum 50% of reservoir or field’s products or revenues in daily price or in cash on due dates.

11- Operation activities of the contracts subject to this act shall be as follows:

  1. From the beginning of operation with respect to new projects or additional production resulting from contractor’s performance in IOR or EOR, production and operation, in addition to development -as agreed in the contract- , will be done by an Iranian joint Operating company or another Iranian company established by this company while the obligations of second party will remain the same.

Note:  with regard to Brown field/reservoir, if the first party deemed necessary implementation of activities with participation of one of its affiliates, and the Ministry of oil approves it, a joint operating agreement will be signed between the parties. These activities will be done jointly while responsibility of second party remains the same for technical, financial, legal and professional support and supervision, as well as providing equipment, tools and consumables.  The affiliated company shall in utilizing the facilities obey and implement all technical manuals and procedures of second party; otherwise the willful violation will be assumed as violation of contractual obligations by the first party.

  1. Operating costs will be calculated according to annual work program and budget and will be paid from the revenues generated from production of oil, gas, gas condensates and other products.
  2. During the operation, Contractor is responsible for fulfillment of his obligations under the development, IOR or EOR contract. It is also responsible, to propose modification plans-based on the experiences earned during its presence at the field- for maintaining the production capacity at the same level, improve or enhance oil recovery from field or reservoir. If the client approve these plans, the same methods, procedures and provisions of the main contract apply and while some modifications in cost calculation, contract schedule, the related fee are made, as well as, calculating the related costs stipulated in the annual work program and budget.
  3. During the operation, all and any investment and implementation of new plans at the contract area shall be approved by client and the operator shall operate all facilities handed over for operation, according to the provisions of this article utilizing the best international petroleum practices recognized by Ministry of oil.
  4. Oil, gas or gas condensate and any product produced as a result of production, entirely belongs to the Client.
  5. If any major repair or a re-entrance into the wells and their repair (work over) or any activity for maintenance of equipments and facilities is required, the activity would be carried out upon client’s approval and it would be reimbursed from the revenues generated from the incremental oil produced from the field or reservoir in addition to the financing costs in the amount agreed in the contract.