Iran Asks Foreign Oil Companies for Views on Contracts

Iran is soliciting views from foreign oil companies on how the country may structure new oil contracts to ease cost-recovery and allow booking of reserves, a senior Iranian oil official said.

Iran is a long way from being able to put the welcome mat out for foreign oil firms. Western oil giants were forced to pull out in 2010 as the European Union banned their participation in the Islamic Republic's oil sector. But an interim nuclear deal between Iran and six world powers, which takes effect Monday, has revived hopes the investment ban could be lifted sometime in the future.

Iranian officials have openly courted Western oil executives, eager to lure their investment and technical know-how. But even before Western sanctions limited foreign participation in recent years, Iran's tough terms for foreign firms working on energy projects have been a big obstacle.

In an interview with The Wall Street Journal over the weekend, Mehdi Hosseini, who heads a committee set up by Iran's oil ministry to revise oil contract terms, said Tehran was consulting with international oil companies and soliciting their views on how to make contracts more attractive, should Western firms be allowed back in.

"We are trying to find a winning formula for both sides," he said. While declining to name the companies Iran is contacting, he said public consultations would be held next month in Tehran on the matter.

In the past, many companies failed to cover their costs under existing contract terms, known as "buybacks." Such contracts allow oil companies to be allocated oil cargoes as a fixed, lump sum for helping develop an oil field. They make it difficult to recoup costs if budgets swell, as they often do for big oil projects.

Mr. Hosseini acknowledged that in the past most companies "had (cost) overruns" and "we couldn't repay" them adequately. He said that Iran is now looking at a "more practical formula to make decisions easier."

Iran is also seeking a way for foreign companies to book Iranian oil reserves. Firms seek to book reserves—a key metric for oil-company investors. But the issue has been sensitive in Iran. Any contract has to be compatible with Iranian law, which restricts foreign ownership of its resources.

If the right changes are implemented, and sanctions are lifted, "Iran (could be) a paradise for U.S. companies," Mr. Hosseini said. He said Iranian oil costs $5 to $6 a barrel to produce, far lower than in many other places in the world.

The Islamic Republic also hopes the changes will help Iran catch up to other Middle Eastern producers—which haven't faced recent oil bans. While many of its neighbors restrict foreign participation, others—most recently Iraq—have allowed more participation by global companies. "We want to make sure our contracts are more competitive than our neighbors," he said.