Dow Jones Newswires

Simeon Kerr, Dubai
February 25, 2002

Enterprise Looking To Salvage Iran Bid

Enterprise Oil PLC (ENT) is in eleventh-hour negotiations with Iran's quasi state-owned energy services company Petropars to rework the buyback contract for phases six to eight of Iran's massive South Pars gas project, worth an estimated $2.65 billion, industry sources say.

Having agreed to invest $15 million in gas appraisal work to learn more about the project, the U.K. independent is now hesitating over expanding its investment into the development phase.

It won't yet sign up for its option to take a 20% stake in the development consortium as cash-strapped Petropars, the field's operator, has underestimated the cost of bringing the gas on stream, one industry source said.

"The project is going to cost more than Petropars bid, which is a significant hurdle," the source said. "Enterprise is doing its best to persuade Petropars, but without movement on this, Enterprise can't invest further."

Unless Petropars can rejig the buyback contract, Enterprise will bind itself into a loss-making enterprise, the source says.

This is another example of Iran's difficulty in attracting and holding on to foreign companies through its buyback financing formula. Although Iran has attracted $12 billion in foreign investment through the buyback, the last buyback was signed with Italy's ENI SpA (E) in June 2001.

Spain's Compania Espanola De Petroleos SA (E.CES) is delaying signing a deal for the Cheshmeh Khosh natural gas field in western Iran because of a penalty clause punishing foreign firms for failure to meet production targets, Iranian sources say.

The buyback formula skirts around a constitutional bar against foreign companies taking an equity stake in oil and gas projects by allowing the investors to recoup investment costs and turn a profit through oil revenues over a limited timeframe, usually five years.

"Buybacks are fixed-price contracts. You can't enter at the wrong price, you've got to get the contract right at the beginning," the industry source said. Iran reclaims any budget overrun from the foreign investor's revenue. "This is the sort of deal that - if not done right - could break a company," he said.

The next five or six weeks, he added, are crucial in mapping out Enterprise's future in the Islamic republic.

Enterprise hopes that Petropars - in an embarrassing about-face – will renegotiate its $2.65 billion contract with Pars Oil and Gas Co, a subsidiary of the National Iranian Oil Co (C.NIO).

"This is something Petropars is very reluctant to do," the source added. Nor is it legal, Pars Oil and Gas sources say.

"The contract is the contract. I'd advise Enterprise to renegotiate with Petropars to find a way through this," a vice-president at Pars Oil and Gas Co., an arm of NIOC said.

The source, however, sees some room for maneuver - but NIOC or the oil ministry would still have to authorize any change to the contract. Petropars's $2.65 billion contract for phases six to eight falls short of the project's realistic cost, the source says.

Phases six to eight - the biggest tranche of the offshore South Pars field - are expected to produce three billion cubic feet a day of gas and 120,000 barrels a day of condensates.

To put it in perspective, Petropars's development of phases four and five with ENI has an estimated cost of around $2 billion. "But phases six to eight are one third larger than that – Petropars should actually have scaled up the cost," the source said. "It doesn't realize the sheer scale of the job," he added.

Enterprise's CEO, Sam Laidlaw, on Feb. 5 outlined these concerns, and said the company needs movement on the Iran deal within two months. The oil independent, wary of a lingering takeover threat from Italy's ENI, can't bide its time forever, the source said.

At least one other foreign oil company, Norway's Statoil ASA (STO), is waiting in the wings, holding talks with Petropars over a role in developing the field. "It's unclear whether Statoil will replace or complement Enterprise," said Siamak Namazi, of Atieh Bahar, a Tehran-based consultancy.

The project's estimated cost, fixed two years ago, didn't reflect market conditions today, a Statoil official said, posing a "problem" of which Statoil is "aware." The official refused to comment further. Petropars's stake in the development consortium is under negotiation.

Petropars'a wobbly finances, though, complicate the project further. The energy services company, jointly owned by a state pension fund and industrial development body, needs to finance its end of the bargain.

But international banks have rejected Petropars's recent attempts to shore up its finances through short-term loans, Iranian sources say. The banks wouldn't confirm or deny any requests from Petropars.

"Petropars is involved in so many phases (of South Pars) that banks worry about loan security," the source said.

Analysts echo these concerns.

"Enterprise and other companies aren't happy because their Iranian counterpart (Petropars) hasn't got the finance," says Manouchehr Takin of the Center for Global Energy Studies.

The Iranian companies such as Petropars, which won lead roles in buyback contracts, thought they could get away with providing less finance, an Iranian source said. "Now, foreign investors are insisting that Petropars coughs up the dough," he added.

Petropars won the contract two years ago by underbidding its foreign and Iranian competitors for the project. "Petropars got the job, but it can't complete it at that price. This happens all the time in the oil industry," the source said.

Enterprise's Dubai-based drilling team is nearing the completion of its test wells, with the work on three exploratory wells expected to be finished by mid-2002. The drilling, company sources say, has gone better than anticipated.

"Enterprise was clever - they've got the geological facts before having to commit fully to the project," Namazi said.

Nevertheless, Enterprise will walk unless it can persuade its shareholders that the contract makes sense.

"Enterprise has other fish to fry," the source said.

© 2003 All Rights Reserved. Atieh Bahar Consulting.