Introducing An Optimizing Model for Iran's Buy Back Contracts

Iran’s oil and gas industry requires investments of US$ 15 billion in the short-term and over US$ 50 billion in the medium term. Iran tries to interest international oil companies (IOC) in investing in Iran’s oil and gas business by offering buyback contracts. Under a buyback contract an IOC invests and when production starts the field is handed over to the National Iranian Oil Company (NIOC) or one of its representatives. The IOC gets its costs and an agreed upon profit paid out of the oil and/or gas gross profits, assuming the field produces as agreed upon and the international energy prices are high enough. According to the Iranian government the buyback contract contains sufficient incentives for an IOC to invest in Iran. The IOCs, however, disagree. They claim that they solely bare the risks in a buyback contract, whereas the Iranian counterpart receives all windfall profits. Furthermore, the IOCs claim that the utilization of Iran’s oil and gas reserves will be sub-optimal if they are not involved in optimising long-term recovery. This paper formulates the buyback contracts as such one could compare with other contractual framework like production sharing. Also the paper offers optimization solutions for buyback contracts as such Iran could pay the minimum amount to the investor.