The Islamic Republic of Iran has some of the largest oil and gas reserves in the world. Current estimates place Iran’s oil reserves at 150 billion barrels and gas reserves at more than 1,192 trillion cubic feet. Despite these abundant reserves, Iran’s production sharply declined after the Iranian Revolution in 1979, and production today is approximately half of the rate of production during the mid-1970s.

The primary reason for Iran’s low production is the lack of private sector investment in its upstream oil and gas sector. After the Iranian Revolution, Iran sought to exclude any foreign involvement from its upstream oil and gas sector, going so far as to prohibit foreign concessions over natural resources in the provisions of the revolutionary constitution.

In the 1990s, Iran’s Ministry of Oil sought to create an arrangement by which foreign investment could be brought into the upstream sector without violating the constitution through “Buyback Contracts,” a type of risk-based service contract. An outline of the Buyback Contracts is explained below. However, the high risk and low return offered by the Buyback Contracts, combined with increasingly severe international sanctions resulting from Iran’s nuclear program, prevented sustained foreign investment into Iran’s oil and gas sector.

Both of these two problems may soon be resolved. Subject to a final political agreement that has a deadline of June 2015, a preliminary agreement between the P5+1 countries (the United States, the United Kingdom, China, France, Russia, and Germany) and Iran has been reached, and there may soon be a political agreement and the lifting of sanctions. With sanctions lifted, Iran will be able to invite foreign investment and the latest technology to its oil development, and IOCs may finally have to access some of the world’s largest oil and gas reserves. Furthermore, the Buyback Contract regime is reported to be replaced with a new Iran Petroleum Contract (IPC). Combined, these two developments create potentially the biggest opportunity for the oil and gas industry and may even be greater than the opening of Iraq’s oil and gas sector to foreign investment in 2009.

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