As Iran opens up its oil and gas industry to International Oil Companies (IOCs), and following the signing of an agreement in November between the National Iranian Oil Company (NIOC) and Shell for the development of the Nowrooz and Soroosh offshore oil fields in the Gulf, Mehdi Hosseini, Deputy Minister for International Affairs at the Ministry of Petroleum of the Islamic Republic of Iran, agrees to an exclusive interview with 'Shell in the Middle East'.

Q. Why is Iran allowing International Oil Companies into Iran after 20 years?

Despite the long history of co-operation between Iran and the IOCs, we have had differing experiences with various companies, and these experiences have, quite naturally, caused us to have a very cautious approach to allowing IOCs back into Iran.

However, we are ready to establish a new era of relationships, and believe that the world is too small not to do so. We need each other. It is necessary for everyone on this planet to work together, especially those people working in the same industry. So, this is true of the oil and gas industry, and if we can help each other it will be good for everyone. It will raise the standard of living and provide comforts and benefits to the population at large.

We in Iran have decided to expand our oil and gas capacities and feel that the IOCs can be of help to us. These new relationships must, of course, be two-way processes and must benefit both Iran and the IOCs.

It is, of course, good for the IOCs to come back to Iran where the oil and gas industry is a relatively low risk, low cost industry and as Iran has such large reserves of both oil and gas.

For Iran the benefits will be to have the financial spending which the IOCs will bring to the country along with the training and transfer of knowledge.

As a result, we have tried to develop new arrangements which will take into account the needs and requirements of both sides, and we hope to expand these relations as we feel the need.

Q. Apart from Shell, have many other IOCs shown an interest in coming into the Iranian oil and gas industry?

Many companies have shown an interest in working in Iran. Last year, when we announced our new plans for the upstream sector, over 90 IOCs declared their interests. At this time, we knew that it would take time to develop different plans to find ways to bring in as many IOCs as we could.

Since then, we have spent many hundreds of hours in negotiations for various projects. Some of our talks are in very advanced stages and I hope we will be able to award several more contracts in the near future.

Q. Are there any restrictions on the use of foreign capital to develop projects in Iran?

We are encouraging foreign companies to participate in all sectors. However, there is one exception, and that is in the upstream oil and gas industry where our Constitution forbids foreign ownership of Iran's natural resources of oil and gas.

This is the main reason why we have restructured a new type of agreement to be in line with these legal requirements.

Q. Shell is coming into Iran to develop the Nowrooz and Soroosh fields under a buy-back agreement. It is widely believed that you were the architect of the buy-back agreement. Could you please elaborate on the origins and development of buy-back agreements?

I was more the initiator of the idea of the buy-back agreement. It was the team who worked with me at the Ministry of Petroleum to develop the buy-back agreement who should be referred to as the architects of the scheme. Credit must also go to the IOCs, particularly Conoco, Total and Japex, with whom we had a chance to 'cook the soup' - in other words, to refine the agreement to be acceptable to both Iran and the IOCs.

We signed the first buy-back agreement with Conoco in March 1995, but due to adverse reactions from the US Government, as Conoco is an American company, the agreement was later nullified.

It then took four months before we signed exactly the same agreement with Total of France and have since then signed other agreements. One of these is for the development of the South Pars gas field with a consortium of European and Asian companies. Following that, agreements have been signed for the Doroud, Balal and, of course, the Nowrooz and Soroosh fields.

The buy-back agreements are service agreements which are a compromise between the expectations of the IOCs and the legal constraints placed upon the Ministry of Petroleum by the Constitution of Iran.

We have tried to find a way to provide enough incentives for the IOCs to develop oil and gas projects in Iran, and to share their knowledge and training with us. At the same time, we have had to structure the agreements to be in line with our rules and regulations in order to avoid problems or misinterpretation in the future.

Therefore, the agreement is that the IOCs will provide services to develop an oil or gas field and bring it to the production stage, whilst at the same time undertaking the responsibilities for providing the development costs required.

The IOCs have to provide the technical and development costs and maximise the local content of the project by using local contractors and suppliers where possible. For example, in the case of Shell Iran's agreement for the development of Nowrooz and Soroosh we have stipulated that there must be no less than a 30 per cent local content involved in the project.

In return, the IOCs get full recovery of the costs they have expended, plus an acceptable rate of return for the money they have spent as a suitable form of remuneration.

For the IOCs two of the main issues are, of course, that they get a good rate of return and that they have long-term access to oil.

We have responded to these issues by signing sales and purchase agreements with the IOCs so that they will receive oil in payment. Furthermore, whilst we have planned only to have short-term agreements with the IOCS, they will have the opportunity to negotiate other agreements, such as technical service agreements, to extend and continue their relationships with Iran. The potential in Iran is very high and if we have a good working relationship with an IOC, future agreements will be available.

With the Nowrooz and Soroosh fields, Shell have 45 months to get the fields up to full production. After that, Shell and the NIOC will work together before the NIOC takes over full operation of the fields on its own. From the very beginning, the operator is the NIOC with Shell working under the NIOC's direction, and ownership and title of all the plant and equipment belongs to the NIOC.

Q. How much is Shell going to spend in terms of development costs for the Nowrooz and Soroosh project?

Shell is going to spend around US $800 million as capital expenditure. There will, of course, be other costs to pay for such things as bank charges and so on, which will take the total cost of developing the two fields to around US $1.1 billion.

Q. The original idea was for the IOCs to bid for the development of the Nowrooz and Soroosh fields on a field-by-field basis. Shell bid for the two fields both separately and as a joint bid. To what extent did Shell's combined approach influence your decision to sign the Nowrooz/Soroosh agreement with Shell?

It was indeed Shell who raised the idea of a joint bid for the two fields as an integrated project. When compared to the cost of developing the two fields separately, the savings to be made were so substantial - in the region of US $250 million - that we were convinced that this was the route to take.

We then went back to the other companies involved in the tender process and asked them to put forward their own proposals for a joint bid.

In the end, there were three main contenders and the bidding was close, but Shell produced the best offer so we chose Shell.

Q. What do you think Shell can bring to this agreement which other companies cannot bring?

I think our view of Shell is like everyone else's view of the company. Shell is one of the best companies in the global oil and gas industry from both a technical point of view and due to the fact that Shell has the requisite financial capacity to develop such projects as Nowrooz and Soroosh and, of course, other major projects without the need to form a consortium.

I expect that during the development of the Nowrooz and Soroosh fields, Iran will have the best and most advanced technology available in the world today, supplied by Shell, and that we will benefit from an optimum transfer of both knowledge and training to our people. This, in fact, has been one of the main reasons why we have chosen Shell over other companies.

The performance of Shell throughout the world has been very impressive. We have good reports concerning Shell's performance in the transfer of knowledge and training to third parties from other countries in the Middle East with whom Shell has joint venture or service agreements. So, we hope that we will see the same results here in Iran and that Shell's future performance will confirm what we have heard.

Q. Iran is currently producing some 3.57 million bpd. Does Iran plan to increase its production?

We have tried our best to support the OPEC decrees and resolutions and this is why the market is so stable. Today our production level is less than our quota.

Our exports are down from 2.4 million bpd to 2 million bpd, and with our growth in domestic demand we expect exports to drop further. However, in the long term we hope that global demand will rise and that at that time our production quotas will also be increased.

Q. Iran has the world's second largest gas reserves. Do you intend to commercialise Iran's reserves?

We have big plans to expand and develop our gas reserves and to take our appropriate position in the world of gas as the world's second largest gas reserve holder.

We have plans to expand and develop our upstream activities and we intend to construct pipelines to our neighbouring countries where there are huge markets for gas, such as Pakistan, India and Turkey.

Our pipeline to Turkey is almost complete and we are just waiting for Turkey to complete its own network on its side of the border before we start exporting.

We are also looking at the possibility of producing Liquefied Natural Gas for export to the Far East.

Gas will be used more and more and the commercialisation of gas forms the basis of one of Iran's important strategic policies. We have constructed one of the largest natural gas distribution networks anywhere in the world and most people in the country can now have access to natural gas for both commercial and domestic use.

Q. There is some opposition in Iran to the presence of IOCs in the oil and gas industry. Would you please comment on this fact?

My country is a free and open country. We are actually experiencing democracy and the freedom of speech in our Press over the issue of the return to Iran of IOCs. People have the right to talk about what and how they feel and to express their views for or against the re-involvement of IOCs in Iran's oil and gas industry.

The oil industry, and especially the awarding of agreements to foreign companies, has always been a sensitive issue in Iran, especially with the Media. However, I feel that it is good for everyone to express their views as indeed we at the Ministry of Petroleum are trying to do by getting over our views to clarify any points in question.

In the past, Iran has had problems with IOCs. The fact is deeply ingrained in the Iranian culture, and it is hard to change people's views.

I believe that if the IOCs want to stay in Iran, they must review the past and not make the same mistakes again. They can no longer ignore the people of the countries in which they operate. They must recognise the needs and rights of those countries and aim to develop long-term and stable relationships.

Q. What do you feel about Shell?

Shell is a very good and reliable company, both technically and financially, and I look forward to working with them in Iran. What more can I say...?