Legal Requirement for International participation in Iran’s petroleum industry

Reza Pakdaman

International contracts expert

Being an international industry is one of the main characteristics of world’s petroleum industry. Although other industries need to have international connections, but petroleum industry’s nature is international cooperation at all levels. Even in developed country’s petroleum industry with a robust science and financial support, there exist lots of companies from other countries.

For example in United State, besides 57 American company, foreign companies exist. In the previous edition of Drilling Magazine, I presented some examples of petroleum contracts signed in recent month in neighboring countries and I mentioned the importance of attending to this progress for our country.

Unfortunately, our country has not used the international cooperation cycle and its benefits for developing national petroleum industry in recent three-decade because of many parameters.

From the viewpoint of a company there exist three basic risks that could be investigated for participating in a project:

1. Technical risk
2. Financial risk
3. Political and legal risk

Comparing with fields that exist in deep waters and have high production costs, Iranian oil and gas fields have a very good situation and they have minimum technical and financial risk. From the legal point of view, simplifying rules is a general strategy in Iran for encouraging international companies to participate in projects.

In the beginning of the revolution based on Article 77 of the constitution, some groups believed that contracting between governmental and international companies must have parliamentary approval. This issue practically stopped all types of international trades, especially industrial projects. In 1981 and 1984 Guardian Council explicitly stated that international contracts don’t need parliamentary approval.

In recent 25 years, Iran’s government and parliament have tried to facilitate and encourage foreign investment in Iran by different legislation and regulations. Here we mention some of them:

• About foreign fundraising and governmental support, “Foreign investment encourage and support law “ has been approved in 2002.
• The council of ministers approved its executive regulations in 2003 and different sectors of the economy that are under this facilities is determined.

In this regulation crude oil and natural gas (Exploration, drilling, and transmission) is under this facilities.

• The council of ministers approved “Foreign investment regulations, Civic participation, and buyback contracts general rules “ in 2004
• Investment rules in Iran’s free trade and industry areas were approved in 2005 based on management of Iran’s free trade and industry areas law framework. In this law, more advantages are predicted for foreign companies. Since Kish and Gheshm free areas are near onshore and offshore petroleum operations, this area could have a proper support for petroleum related activities.
• Directive of State Tax Organization implementing regulations about taxes of foreign companies branches in Iran and determining the income coefficient of legal persons and foreign institutes made the tax status of foreign companies somewhat clear.
• Resolving disputes is an important part of a foreign investment. With the approval of the International Commercial Arbitration Law in 1997 and Iran’s accession to recognition and execution of foreign arbitration convention Law in 2001, an appropriate legal framework is been established in our country. But beside this law, some professional branches in our courts should be created in order to investigate and execute arbitration decisions.
• By approving resistive economy policies in 2015 and articles 13, 14 and 15 which is in the energy sector, an important step for developing international activities in petroleum and energy industry was taken.

In paragraph 13 of resistive economy policies, seven enforcement measures have been predicted for resisting against being vulnerable to oil and gas export incomes. Most of this articles are general and for operationalizing these policies, the necessary regulations for our purposes should be approved and approving other contrary policies should be prevented :

• First step: Having strategic customers for our oil and gas products (By identifying reputable companies and having long term contracts with them).
• Second step: Making different methods for selling products (By choosing different methods consistent with the requirements on the market).
• Third step: Sharing private sector in sailing products (consisting sales of local and international oil, gas and petrochemical products by private sector companies).
• Fourth to seventh steps: Increasing oil, gas and petrochemical products export

14th article: Increasing the strategic oil and gas reserves for affecting the market and focusing on oil and gas capacities development, especially in shared fields.

15th article: Increasing Added value by completion of oil and gas industry chain, developing of efficient products (based on their energy consuming index), Increasing electricity, petrochemical, and oil products with an emphasis on preservative production from the reserves.

 

Summary

In the Iranian legal system, there are sufficient rules for international partnership in Iran’ petroleum industry. According to the resistive economy policies and insisting on having “flexible” and “leading and extroverted “ economic rules, it seems there isn’t serious legal issue. In spite of Iran’s petroleum industry capacities and international oil company’s enthusiasm, in past decades, international cooperation in Iran’s petroleum industry have reached to the worst situation.

Fortunately, Iran’s government has succeeded to lift the sanctions against its economy and petroleum industry in the recent month. But for the effectiveness of post sanction situation, personal and partisan policies in employer companies should be amended immediately. This subject is challenging for the government like nuclear negotiations. For example using incentives provided for foreign investment support have a complex process, and it may cause some problems for attracting foreign investors.  Administrative procedures and governmental companies and organizations approach to industry activists and foreign companies are not consistent with international and even regional norms.

Many organizations related to petroleum industry like Employment of Foreigners Department, State Tax Organization, Municipalities and local organizations should avoid their boring bro cratic process and their  domestic approach.

Decision-making progress should be aligned and in a reasonable timeframe.

1. After approving a plan in its relevant section, all other related organizations in different levels should participate in the plan implementation progress.
2. Time is a key parameter in the success of any plan. Considering slow progress for more than a decade, all the decisions should be made in a reasonable period of time.