IINTRODUCTION

The Energy Regulation and Markets Review included a chapter on Iran for the first time in 2016, when the conclusion of the Iran deal and the subsequent reopening of the country to foreign investors and companies promised a new period of potential transformations for its energy sector. Following the implementation day and the partial lifting of the sanctions, Iran’s energy sector, having previously lagged behind compared to other countries as a result of decades of isolation, saw moderate progress. The US withdrawal from the multiparty international agreement in 2018 affected the continuation of that progress, insofar as it concerned foreign investment. This chapter aims to be a practical and useful business tool, and therefore focuses and analyses recent changes and developments; looks ahead to expected trends, ; provides an overview of the key entities in the Iranian energy sector; and looks ahead to the likely future developments in the Iranian energy sector. We provide a short summary of key aspects of the Iranian legal system to be aware of, and key considerations for operating or establishing an energy business in Iran.

IIOVERVIEW

Iran’s energy sector has been affected and constrained by US sanctions since the 1979 Iranian Revolution, and UN sanctions since 2006. These have hampered development and progress for a country that was otherwise a key player in the energy sector.2 Economic sanctions affected this sector in another manner as well. They impelled Iran to develop a strong home-grown industry capable of developing and operating assets that were for the most part independent from foreign and global players.

As with other jurisdictions that have sought to transform a state-dominated energy sector into a modern industry capable of attracting significant private capital, Iran has had to deal with issues arising from that transformation, not least of which were the cross-subsidisation and artificially depressed energy prices. However, the prize is large. Both the size of the Iranian energy sector and its influence in the region is expected to grow. Energy prices are significantly lower and energy consumption significantly higher than international and regional averages.

This, together with the relaxation of sanctions against Iran in 2016, opened up opportunities in a potentially significant market for Western power and renewables companies in spite of the lingering effect of sanctions as well as those that were still in force, most notably those prohibiting US companies from engaging in transactions involving Iran. In 2018, the US re-imposed sanctions, including those targeting Iran’s energy sector that had previously been lifted under the JCPOA.

IIISANCTIONS Regime: KEY CONSIDERATIONS

On 14 July 2015, the Guardian Council of the Islamic Republic of Iran approved a multilateral nuclear agreement as consistent with the country’s constitution and Islamic law. Pursuant to the agreement between Iran and the permanent members of the United Nations Security Council (China, France, Russia, the United Kingdom and the United States), plus Germany and the European Union (referred to as the E3+3) the International Atomic Energy Agency (IAEA) confirmed to the UN Security Council on 16 January 2016, formally known as Implementation Day, that Iran had complied with the programme set out in the Joint Comprehensive Plan of Action (JCPOA). In return, the E3+3 lifted the nuclear-related sanctions on the same day.

While the EU and UN nuclear-related economic and financial sanctions were terminated, some sanctions remained in place and were not affected by the nuclear deal, in particular sanctions related to human rights, proliferation and support for terrorism. The major sectors that were affected by this initial phase of sanctions relief included the energy sector.

In May 2018, the Trump administration withdrew from the JCPOA. Following the withdrawal, two wind-down periods were introduced; by the end of each certain sanctions were to be re-imposed in full effect. The 90-day wind-down ended on 6 August 2018 and the 180-day wind-down period ended on 4 November 2018. Consequently, sanctions on Iran’s energy sector were re-imposed on 5 November 2018.

In response and as part of an attempt to ensure that other signatory parties to the JCPOA would be able to implement its terms, the EU updated the Blocking Statute3 (originally adopted in 1996 in response to US sanctions against Cuba), adding the US sanctions against Iran to the regulation’s scope. The statute prohibits EU persons from complying with the extraterritorial sanctions, except where granted permission by the EU Council, while also giving them the right to seek compensation for damages caused by implementation of those sanctions.4

In another attempt aimed at facilitating trade with Iran and protecting European businesses against US sanctions, Germany, France and the UK (E3) established the Instrument in Support of Trade Exchanges (INSTEX). INSTEX is a special purpose vehicle, based in Paris, whose shareholders are the E3 governments and which has therefore a certain level of sovereign immunity. Not yet operational, its initial focus is expected to be on humanitarian trade with Iran (i.e., those activities that are exempted from US sanctions).5 Other EU and non-EU countries have reportedly expressed an interest in joining INSTEX.6

Iran’s local counterpart needed to operate with INSTEX, called the Special Trade and Finance Institute (STFI), was established on 20 March 2019.7

Eight countries were granted waivers exempting them temporarily from sanctions. This is apart from one-off waivers given to some countries on an individual basis such as the United States granting Turkey a 25 per cent exemption from sanctions on Iran, or Iraq receiving a sanction waiver for importing gas and electricity from Iran. To this end, Fuji Oil, jointly with Showa Shell Sekiyu loaded the first Iranian crude oil cargo lifted by Japanese refiners since the sanctions’ re-imposition.

The current US sanctions regime, which includes an ever growing list of sanctioned persons and entities, means it is crucial, particularly for EU companies, to conduct due diligence and assess their exposure to the US sanctions and ensure compliance with the remaining EU sanctions before signing business contracts in or relating to Iran. A further risk for investors in the energy sector is the possibility that Iran violates its undertakings in the JCPOA. In such a case, the EU has reserved the right to reimpose sanctions on Iran – the ‘snapback’ provisions. Entities that have contracted with Iranian companies may, therefore, find themselves bound by contracts that they cannot perform.

It should also be noted that Iran, at 128th,8 ranks low on the World Bank’s Doing Business ranking of economies on their ease of doing business. Key challenges for Western companies, include being alive to the risks of bribery and corruption, as Iran scores high on the Corruption Perceptions Index.9 Inflation, price control and subsidies reduce proper price discovery and therefore reduce the prospect of merchant projects. A long-term lack of investment in infrastructure means that delays can arise from limitations imposed by wider infrastructure development needs.

As with other energy markets that have opened up in recent years, a common strategy for Western companies is to partner with a local (in this case Iranian) entity that can guide them through the domestic landscape (see Section IV on joint ventures with Iranian entities). However, initial experience has been that cultural and other barriers can make the process of effective partnering often difficult and, while it is important to know your counterparty well, reliable information on Iranian companies is not always straightforward to procure.

IVOVERVIEW OF THE OIL AND GAS SECTOR IN IRAN

Iran’s oil and gas industry was looking to attract something close to US$200 billion over five years in investment to capitalise on the opportunities presented by the opening up of the sector following Implementation Day. The timing was perhaps unfortunate, with oil prices languishing without immediate evidence of an imminent recovery. Nevertheless, the costs of production in Iran were estimated to be significantly lower than the international average, and well below the low current oil price. In these circumstances, Iran has been pushing ahead with reforms to further open up its oil and gas sector to foreign investors.

On 1 October 2015, in response to criticisms of the previous buy-back contracts, the Iranian cabinet endorsed a new upstream oil and gas document known as the Iran Petroleum Contract (IPC).10 The purpose of the IPC is to facilitate foreign investment. The document consolidates the previous model agreements into one, and covers the exploration, appraisal and development phases.

The general terms and structure of the contractual framework of Iran’s upstream oil and gas was ratified in September 2016. This ratification finally took place with many amendments after political discussion.11

The nature of the IPC was, from the beginning, a controversial issue. This is because Articles 77 and 125 of the Iranian Constitution require that international agreements have parliament’s approval. However, it has been previously held that contracts in which one side is a government entity or company and the other side is a privately owned foreign company are not international agreements subject to Article 77. The criticisms also seem to rely on Article 45 of the Constitution, which requires state control of major industries and large mines (including oil and gas reservoirs).12 The IPC seeks to navigate the constitutional position by avoiding a production-sharing structure, and does not create ownership rights in reservoirs for foreigners. The contract is more akin to a risk service contract arrangement, with an exploration phase of four to six years, an appraisal phase of two years and a development phase of 20–25 years. The Oil Ministry supervises operations and the government-owned NIOC retains ownership of reservoirs, assets and extracted commodities. As NIOC remains responsible for oil exploration and extraction, and as all operations under the IPC are carried out on behalf of NIOC, all the assets, including equipment, wells, etc., belong to NIOC.

In contrast to the previous buy-back approach, the IPC provides for a joint-venture model, among other things, to allow collaboration and technology transfer, with decisions escalated to a committee comprising representatives of NIOC and the international oil and gas company (IOC). If oil is discovered and economical to extract then NIOC and IOC establish a joint operating company or joint venture to take implementation forward and develop, operate and produce from the field. Decisions would continue to be made through a joint committee. Further Iranian ownership participation in the company is also possible. This is a fundamental opportunity as foreign IOCs have not been able to be involved in oil production in Iran since the Revolution in 1979.

Nevertheless, the IPC sought to attract IOCs from across the world – such as Total, Statoil, BP, Royal Dutch Shell, OMV, Wintershall, Repsol, Sinopec, as well as companies from Asia and the Middle East region – to its sector by providing attractive terms. These include a form of hedge against oil price volatility, with payments where there are significant changes in oil price, and providing some protection on risks relating to the ability to develop a field. This contrasts with the previous buy-back arrangements under which payments were linked to capital costs (typically providing a return of 15–17 per cent) and did not incentivise additional recovery in oil or account for changes in oil price. Among other things, the IPC also moves away from the previous approach under the buy-back arrangements that capped cost recovery and required the IOC to take all delay and cost-overrun risks. While costs will be recoverable under the IPC, costs and annual budgets are to be jointly agreed under a collaborative approach. The IOC would effectively take all exploration risks in the event that exploration and production targets are not met.

Also, notwithstanding ownership remaining with NIOC, the IPC could in some situations allow reserves to be booked, which is important for IOCs in terms of demonstrating their market value. The IOCs would take the risks on the costs of operation. As noted, there is also an emphasis on a collaborative approach in the IPC and a requirement on knowledge transfer into Iran.

Putting aside the single IPC-based agreement concluded with a local company,13 Iran signed a US$4.8 billion deal with a consortium led by French oil company Total in July 2017 to develop the South Pars gas field in cooperation with China National Petroleum Company (CNPC). In March 2018, Russia’s state-owned oil company Zarubezhneft signed a trilateral deal with the National Iranian Oil Company and Dana Energy Company for the development of the Aban and West Paydar oilfields near the Iran-Iraq borders. This is the second major energy deal signed in Iran since the lifting of international sanctions. Once Total failed to obtain a waiver from US sanctions against Iran, it announced that it would withdraw from the project in South Pars gas field. According to the Ministry of Petroleum, CNPC has replaced Total in phase 11 of South Pars.14

Another development in oil industry was the reintroduction of the option to purchase oil and petroleum products in the Iran Energy Exchange (IRENEX) allowing the Ministry of Petroleum to sell crude oil and petroleum products at a competitive price in the international ring of IRENEX. IRENEX was initially established in July 2012 with the licence of the Supreme Council of Securities and Exchange. It works under the supervision of the Securities and Exchange Organization and operates with the aim of organising and supervising the trade of energy carriers, providing non-discriminatory and fair access of trading platforms. From October 2018, in different rounds of the supply, crude oil has been purchased via IRENEX.15

VOVERVIEW OF THE POWER SECTOR IN IRAN

The Iran Electricity Regulatory Board (IERB) was established around the turn of the millennium. Its work is overseen by the Minister of Energy and it often works with external third-party consultants. It comprises an executive, called the Regulatory Board Secretariat, which runs a Logistics Unit, a Judicial Unit, a Market Process Planning and Scheduling Unit, and a Market Monitoring Analysis and Adjustment Unit. The IERB is responsible for monitoring, researching and supporting the electricity market, and suggesting regulations and electricity-related tariffs to the IERB. The IERB also has a role in maintaining an orderly functioning of the industry by managing relationships between industry participants. It is also empowered to manage claims arising between such entities. When making recommendations on regulatory changes and similar matters, the IERB may consult stakeholders and take into account comments and recommendations from industry.

Historically, Iran’s electricity market was a local, private and vertically integrated monopoly in Tehran, starting in 1905. An early Law of Iran Electricity Organisation was passed in January 1963, creating regional electricity companies, and followed by the establishment of the Ministry of Water and Electricity in 1964 (the Ministry of Energy since

1975), generally regulating the electricity sector.16 A year later, legislation was introduced that required all non-governmental electric companies to accept mandatory retail tariffs. As these tariffs proved to be below cost, a subsidy was required to maintain the companies as solvent and the companies in due course became Ministry subsidiaries.

The Generation and Transmission Company of Iran (Tavanir) was established in 1970,17 primarily to implement transmission and generation plans, and operate generation facilities and the transmission network. Today, Tavanir has been restructured to be the holding company responsible for these activities.

Pursuant to the decision of the Iranian High Administrative Council, dated 18 December 2004, ‘all legal missions and activities regarding new energies (renewable) and all affairs regarding policymaking, planning supervision and supporting the relevant activities in the non-public sector shall be concentrated in the Ministry of Energy’.

The Iran Grid Management Company (IGMC) was formed in 2004, following the establishment of a wholesale electricity market for the trading of electricity by the IERB. The IGMC acts as the market and system operator.18

An impediment to private sector participation has traditionally been Article 44 of the Iranian Constitution, which required all large-scale industries and power generation (among others listed) to be fully state-owned. In 2004, this article was amended to require the state to cede at least 20 per cent of control of power companies to private and ‘cooperative’ entities. This has led to a privatisation process in relation to this element of the generation sector (except in relation to ‘must run’ plant) and this privatisation process remains ongoing.

There is a wholesale electricity market in Iran (referred to as the IEM) comprising a day-ahead market for generators and retailers (typically the regional electricity companies) to buy and sell power. A power exchange and bilateral contracts sit alongside the market. Tavanir remains responsible for exporting power to neighbouring countries.19 However, as there is limited competition in the market, it functions as a fairly basic auction mechanism. Bids are submitted to offer power at specified prices. Purchasers of power specify quantities required. The market operator, IGMC, then clears the market. Generators are paid for capacity even if they are not successful in the bids to provide power to incentivise the provision of capacity to the market. The maximum bidding price is capped by regulation.

Private generators can contract to sell power bilaterally to purchasers via the power exchange or through futures contracts for power delivery. These prices are privately set and not subject to regulatory intervention. Power sold in the power exchange is excluded from the day-ahead market. On a longer-term basis, generators and purchasers of power can also contract long-term power purchase agreements at a negotiated price. Trades are then notified to the system operator, IGMC.

Despite considerable hydroelectric and renewables capacity, Iran remains significantly reliant on thermal and gas generation, with thermal power plants’ 15,829MW and gas plants’ 25,919MW accounting for 20.1 per cent and 33.9 per cent of the total installed capacity respectively by the end of the previous Iranian year (21 March 2018).20 The power system and the use of energy in Iran are both notoriously inefficient, principally because of cross-subsidies, ageing infrastructure and lack of investment in advanced technologies. There is a plan to shift away from such implicit subsidies to ones that are targeted to fuel poverty. On technology and capital requirements, the focus remains on attracting foreign direct investment despite the imperfect sanctions position, volatility in the market, political uncertainties and the residual risk of a snapback occurring on sanctions.

In terms of policy, the current Sixth Five-Year Economic, Cultural, and Social Development Plan for 1396-1400 (2016–2021) has established a target of 5 per cent of the country’s total energy generated to come from renewable sources by the end of the Plan, projected to equal 5GW. Owing to the overall effects of partial lifting of sanctions and the new policies in the renewables sector, Iran has become an increasingly attractive market for foreign investment. Mindful of the need to compensate for the hold back of the sanction years, the government has been pursuing a policy shift with a view to systematically incentivise the deployment of renewable energy, to establish a revised and more stable regulatory regime under the Renewable Energy and Energy Efficiency Organisation of Iran (SATBA (formerly SUNA)),21 and to offer feed-in tariffs that are nominally high when compared internationally.

Among the incentives is a purchase scheme for any electricity produced from renewable sources (solar, wind, biomass, geothermal, small hydro power plants, and more recently fuel cells and turbo-expanders) established by the Ministry of Energy for a recently increased period of 20 years.22

The current feed-in-tariffs that have remained in force since 2016 vary between 3,400 to 4,200 rials/KWh in the wind sector, and 3200–4900 Rials/KWh in the solar sector, based on the capacity of the plant-taking into account the adjustment factor, namely inflation. Under this scheme, more than €3 billion are expected to be invested in the renewable sector.23

The success of the new tariff regime, which led to a 70 per cent growth in development of renewable power plants between March 2016 and March 2018, plus another 30 per cent by March 201924 had encouraged a continuance along the same path.

For the time being, the Iranian contractual practice is based on the PPA model, a new and partially revised version of which is to be publicly announced within the coming months. However, an additional tender-based system for large utility-scale RES projects is also under examination.

Key points in the PPA include, among other points:

  1. while the PPA provides for a conditional purchase price, this price may be decreased if the project is delayed in commissioning;
  2. the possibility of an increase in the purchase price if locally made equipment is used;
  3. the seller is responsible for any work concerning the design, construction, testing and commissioning of the grid connection facilities;
  4. the purchaser has no responsibility for connecting the plant to the grid: any expenditure in connection with these rests with the seller;
  5. the seller is responsible for obtaining all applicable permits at its cost. However, the purchaser has an obligation to assist the seller in obtaining the required permits;
  6. the purchaser to provide a revolving letter of credit (LC) from an Iranian bank, with a validity period not less than six months and a value equivalent to the amount to be paid by the purchaser. The expenses associated with the LC shall be shared between the purchaser and the seller;
  7. the PPA is governed by Iranian law, with a dispute settlement mechanism requiring, first, negotiation, then referral of the dispute to an expert and, finally, to a court;
  8. where changes in law provisions require an adjustment to the PPA terms and the changes are a result of new decrees and directives, any additional expenditure shall be borne by the purchaser;
  9. force majeure provisions allowing, upon the request of the seller, the performance to be suspended for a period of six months, without any payment. If not remedied within the period of six months, the purchaser may terminate the contract; and
  10. termination rights in the event of certain circumstances arising, such as insolvency, assignment without consent by the seller, or loss of required permits (subject to cure periods).

A key question for the success of the new tariff regime, in particular in respect of large-scale projects and bankability issues, in general, will be the availability of project finance. Linked to the bankability of the PPA, will be the question of availability of sovereign guarantees or another structure, such as a standing fund, as a backstop for payments over the long term.

The decline of the Iranian currency in the past year imposed an additional challenge on projects that had foreign financing. The adjustment formula used in the PPA is based on the official euro to rial exchange rate. Whereas this official exchange rate was kept unchanged throughout the year, the secondary market rate, which was the only rate available to project owners for converting their income to foreign currencies, fluctuated drastically. The difference between the two had an impact on project owners’ income and their ability to pay back their loans. In response to voiced concerns, officials reviewed proposals to amend the PPA adjustment rate. The amendment was not yet in force as of May 2019.

Another development was the adoption of a resolution of the Ministry of Energy, allowing the export of electricity from renewable energy resources in the Iranian calendar year beginning on 21 March 2019.

Obtaining all required licences, concluding a PPA with the buyer followed by a transit contract with the SATBA are prerequisites for export. Operation of the power plant and the transit contract will be supervised by the SATBA. During the contract term, the plant is obliged to observe all the export regulations and must pay the royalty and transit fee to the SATBA. Before operation activities, the applicant is required to conclude a support contract for transit and export of electricity with IGMC and determine all the conditions and requirements, including the costs and compensations, for a five-year period.25

VILOOKING AHEAD: COMPETITION IN THE IRANIAN POWER AND OIL AND GAS SECTORS

Ultimately, whether competition is introduced into Iran’s energy sector will depend on the outcome of an ongoing debate between conservatives arguing for energy independence and self-sufficiency, and moderates (led by President Hassan Rouhani and his administration since he first took office in 2013) looking at the best way to promote and advance the economy. With the energy industry having been in public hands during the era of sanctions, with significant involvement of the Islamic Revolutionary Guard Corps (IRGC), there are significant vested interests to overcome in the industry, and any opening up of the sector could be viewed with suspicion by the IRGC and Iran’s home-grown energy sector supply chain, particularly as the reforms promise to fundamentally redefine and rescope the role of NIOC and bring in substantial foreign investment and technology.

Introducing competition and tariff reform has a number of potential benefits for the energy sector in Iran. The purpose of such reforms is to ensure that the risks associated with investments in the energy sector are allocated to the entity that can best manage them and also to force better investment decisions. Competition and liberalisation seeks to transfer greater performance risk to the private sector, harness the benefits of competition by introducing new technology and international best practice into the sector, and share financial gains with taxpayers and consumers.

Where the Iranian Ministry of Energy is also the regulator and direct investor in the power sector, the conflicts of interest can be significant. For effective regulation, a separation of key aspects of the state from the sector holds many benefits. However, Iran may wish to take a staged approach to liberalisation of the sector, to ensure that the process does not place undue upward pressure on energy prices (which can be politically difficult) or pressure on existing entities to reduce costs that create financial difficulties and unsettle the sector.

Competition will also require capacity-building in key institutions that will need to manage the capabilities and expertise in managing new market processes, as well as educating the full supply chain on the approach in Iran. Key elements that Iran may need to consider include establishing an independent transmission company and considering which entity should procure new power generation projects (as well as potentially other types of projects in the sector). A key goal is to make electricity a liquid commodity that can be traded in spot markets and wholesale markets. Where Tavanir is restructured, a regulated price control also needs to be established for the network and monopoly businesses, and the process for setting the initial tariffs involves considerations including ensuring adequate revenue, promoting efficiency and driving key policy objectives.

Iran does already have independent power projects and a number of power plants have been privatised or are scheduled to be privatised. For international investment, the sustainable PPA offered by Iran is designed to create a predictable revenue stream to facilitate the raising of finance and protect independent power projects from political risk. Also, perhaps most importantly, there has to be a clear ability for international investors to rely on the legal ‘sanctity’ of contract terms and pursue international arbitration. The existing Iranian PPA needs to be improved to provide a sustainable PPA framework and to be bankable according to international standard if international investments are to materialise. Further, while competitive procurement of new large-scale projects is usually the recommended approach, it is often the case that initial projects are not competitively procured and instead are procured on a negotiated basis.

Policy and sectoral changes in Iran will also create a question on how to deal with power purchase agreements held by existing power projects in Iran, which may not have contemplated significant market changes. As a basic principle, it will be important for Iran to honour existing contract terms and maintain confidence in the pipeline of projects. Any other approach would have an effect on market liquidity and could create above-market costs, as well as deter new entry and inhibit the gains associated with competition and market opening. They could also lead to claims and litigation. While it is worth making an effort to integrate independent power producers (IPPs), the magnitude of IPP contract terms affected can be a factor in the approach taken.

Iran is also looking to develop further its role as a major regional participant in the Middle East power market and this will be enhanced as it takes steps to implement arrangements drawing from international best practice and that are appropriate to the Iranian context.

VIIESTABLISHING AN ENERGY BUSINESS IN IRAN AND DISPUTE RESOLUTION

While it is beyond the scope of this chapter to detail the broader considerations on the appropriate form of investing or establishing a business in Iran, the recent opening up of the Iranian market means that this is a very relevant topic for entities wishing to become involved in the Iranian energy sector.

Investors, developers and supply chain entities looking to operate in the energy sector in Iran post-Implementation Day (see above) will need to decide on the form of their engagement and entry into Iran. Many entities will operate from overseas, some will consider opening up a branch office in Iran and, for more involved operations, an Iranian legal entity may need to be established or dealt with. Branch offices tend to be used typically for activities such as marketing, aftersales and certain service provision activities. However, engagement in direct commercial activities would affect the tax treatment of branch offices. Longer term and deeper operations would tend to be pursuant to the establishment of Iranian companies, such as a private joint-stock company or limited liability company. Alternatively, another route for engagement in Iranian projects is to set up a joint venture with a local entity. The joint venture could then participate in tender rounds, and this can also help on meeting local content requirements.

A foreign investment licence under the Foreign Investment Promotion and Protection Act (2002) permits the foreign investor to incorporate a company without restriction on the level of foreign ownership. It is possible, following changes to regulations that came into effect in 2008, to incorporate a fully foreign-owned entity for specified activities.

A further useful consideration is to establish a business in a free trade zone (FTZ) such as Anzali, Aras, Arvand, Chabahar, Makoo, Kish or Qeshm. Existing and planned FTZs in Iran are subject to the Law on the Administration of Free Trade and Industrial Zones 1993. Each FTZ has an authority that manages the activities in the zone and issues permits. While FTZs look to streamline and ease the process of establishing a business in Iran and may impose attractive tariffs and customs duties to act as incentives, as noted above the recent changes following the Foreign Investment Protection and Promotion Act (2002) make it viable for foreign entities to establish wholly owned businesses generally in Iran. Iran’s 29 Special Economic Zones (SEZs) may also be a viable option for some foreign entities looking to establish themselves in Iran, and they provide many of the advantages associated FTZs.26

The FTZs are distinct from the SEZs, the difference is geographic: FTZs are established in border regions while SEZs can be set up anywhere on the mainland.27 In contrast to the FTZ, SEZs are considered as part of the mainland according to Iranian legal terms.

Furthermore, the law and regulations governing the FTZs are different from those applicable to SEZs. For instance, no visa is needed to be obtained beforehand to enter into the FTZs (visas are issued on arrival), but in the SEZs, entrance of foreigners is subject to mainland regulations.28 In addition, in the FTZs, applying for investment is subject to the relevant FTZ regulations, whereas the law of the mainland remains applicable in the SEZs.29

As such, it is important for entities looking to enter the energy sector in Iran to understand the broad array of laws, regulations and industry frameworks currently in effect in Iran. The Constitution of the Islamic Republic of Iran requires all laws and regulations to be based on Islamic criteria. Iran has two coexisting systems of law, namely the law of Islamic lawyers and codified law. It is beyond the scope of this chapter to provide a detailed overview of the Iranian legal system. We set out below some aspects of particular note in conducting transactions in the energy sector.

Iran has promoted foreign participation through the Foreign Investment Promotion and Protection Act (FIPPA), 2002. According to FIPPA, sectors including industry, mining, agriculture and services in greenfield and brownfield projects are open to investment in Iran subject to satisfaction of certain criteria.30 Foreign direct investment (FDI) may be admitted in fields where private sector activity is permitted. However, purely commercial activities are not considered to be foreign investment.

Therefore, foreign investors may choose the investment method in the project as FDI or foreign investment in all sectors within the framework of ‘civil participation’, buy-back and build-operate-transfer schemes.31

A licence for foreign investment under FIPPA is issued by the Organization for Investment Economic and Technical Assistance of Iran (OIETAI).32 The licence provides for foreign investment to be treated on a par with Iranian investments,33 allows for disputes to be resolved outside Iran and also allows for the repatriation of profits. It, generally, facilitates investment and secures against non-commercial risks including currency transfer,34 nationalisation, expropriation,35 government intervention and breach of contract by government.36 As to the major questions of expropriation and nationalisation of foreign investors’ assets, FIPPA recognises the right to receive immediately compensation based on the fair market value of the expropriated assets on the day before expropriation takes place.37 Besides, foreign investors have direct access to and possibility of withdrawal of export proceeds out of escrow accounts established in banks outside Iran.38 Foreign investors may export their goods and services without any commitment to reintroduce export proceeds into the country.39 Also, travel for foreign investors, directors, experts and their immediate family in relation to the investment covered by FIPPA is made easier by the grant of a three-year multi-entry visa, a residence permit, a work permit for each individual with a right of entry and a three-month residence permit on each occasion.40 Furthermore, all bilateral investment treaties concluded with other countries contain a provision whereby they are only applicable to investments for which the FIPPA licence is acquired.

According to statements from the OIETAI officials, foreign investment applications are processed within 15 days, although, in practice, such a process can take up to 30 days to complete.41

The FIPPA licence validity can be extended upon request by the foreign investor (for example, if the foreign investor fails to bring in the investment capital within the determined period and needs an extension). Otherwise, the licence will be considered null and void.42

In the renewable energy sector, applications for foreign investment licences are submitted to the OIETAI, once the necessary permits have been obtained from the SATBA.

In addition to the judiciary (court) system, the settlement of disputes through other methods such as arbitration has been recognised by the Iranian legislator and has developed significantly in recent years. This is aided by the considerable experience derived from the example of the Iran–United States Claims Tribunal and the work performed by different institutions providing specialised services in arbitration matters.

National arbitration in Iranian law is governed by the 2000 Civil Procedure Code (Articles 454–501). For international arbitration, a framework was established by the Iranian Law on International Commercial Arbitration of 1997. To complete the efforts in furthering the position of international arbitration under the Iranian legal system, Iran has ratified the New York Convention on the Recognition and Enforcement of Foreign Arbitral Awards of 1958.

There are two major arbitration bodies in Iran: the Tehran Regional Arbitration Centre, 2004, and the Arbitration Center of Iran Chamber, 2001. As is standard in international arbitration, there is no right of appeal against an award. A party may, however, apply to have an award set aside on certain grounds.

As far as arbitration of disputes relating to public and state property is concerned, particular attention should be given to cases where the subject matter concerns public and governmental property, or if a party is foreign, since the approval of the Consultative Assembly (the parliament) is also required in such cases.43

VIIICONCLUSIONS AND OUTLOOK

The easing of sanctions marked the beginning of a new chapter in the Iranian energy sector, characterised by increased determination for progress and ambitious goals for development on the part of the Iranian government accompanied by higher, if still somewhat cautious, interest from the foreign investors’ side.

The re-election of President Hassan Rouhani in 2017 was a positive sign that the policy path already taken to incentivise foreign investment in the Iran energy sector will be continued over the next two years. Despite the progress made, financial challenges still persisted as valid concerns.

However, the turbulence caused by the current US administration’s policies towards Iran and the aftermath of the withdrawal from JCPOA has taken a toll on the energy sector and the wider economy. It now remains to be seen whether and how the efforts initiated by the current administration aimed towards attracting large-scale foreign investment while also localising know-how in the energy sector will continue in the coming year.

Nevertheless, it is undeniable that Iran, with its vast energy resources and all its potential, remains a significant player in the energy sector.


Footnotes

1 Shaghayegh Smousavi is a partner at CMS Hasche Sigle.

2 Iran holds the world’s fourth-largest proved crude oil reserves (amounting to almost 10 per cent of the world’s reserves) and the world’s second-largest natural gas reserves. The country ranked ninth in total primary energy production and 10th in total primary energy consumption in 2014. The US Energy Information Administration (EIA), Iran country profile, updated 19 June 2015. Retrieved from https:// www.eia.gov/beta/international/analysis_includes/countries_long/Iran/iran.pdf.

3 Council Regulation (EC) No. 2271/96 of 22 November 1996 protecting against the effects of the extraterritorial application of legislation, available at: http://data.europa.eu/eli/reg/1996/2271/2014-02-20.

4 See the Commission’s Guidance Note — Questions and Answers: adoption of update of the Blocking Statute C/2018/5344, available at: https://eur-lex.europa.eu/legal-content/EN/TXT/?uri=uriserv:OJ.CI.2018.277.01.0004.01.ENG.

6 ibid.

8 Country profile by the Doing Business project, retrieved from: http://www.doingbusiness.org/en/rankings?region=middle-east-and-north-africa.

11 ‘Iran’s Cabinet Approves IPC’, NIOC, 6 August 2016.

13 Iran’s Oil Ministry signed a US$2.2 billion worth agreement with Tadbiri Energy group, affiliated with the Execution of Imam Khomeini’s order company(EIKO), which was responsible for increasing the recovery rate of three fields (Yaran, Kupal and Marun).

18 For further information on the power sector, see www.igmc.ir.

19 For further information on the IEM and power exchange and trading arrangements, see further on www. igmc.ir.

20 Hydroelectric accounted for 15.2 per cent of the total installed capacity, while the share of renewables was 0.6 per cent. Annual Comprehensive Statistic Report of the Power Industry, Ministry of Energy, March 2018. Retrieved from: https://amar.tavanir.org.ir/pages/report/stat96/tafsili/tolid/index.htm.

21 An Act passed by the parliament in December 2016 merged SUNA with the Iran Energy Efficiency Organisation (SABA). According to the act, all functions, obligations and authorities of SUNA, as well as its personnel will be transferred to the new organisation, called SATBA.

22 Prior to July 2015, contracts were limited to a five-year period and did not differentiate between technologies.

23 Statement by the president of the SATBA: https://www.isna.ir/news/97081407155/.

24 Statement by the Minister of Energy: www.isna.ir/news/96020904936.

27 ibid.

28 ibid.

29 ibid.

30 Article 2 FIPPA.

31 Article 3 of Implementation Regulation of FIPPA.

32 Article 15 of Implementation Regulation of FIPPA.

33 Article 8 FIPPA.

34 Article 4 of the Implementation Regulation of FIPPA.

35 Article 9 FIPPA.

36 Article 17 of the Implementation Regulation of FIPPA.

37 Article 9 FIPPA.

38 Articles 13–18 FIPPA.

39 Articles 13–18 FIPPA.

40 Article 20 FIPPA and Article 35 of the Implementation Regulation of FIPPA.

41 Article 6 FIPPA.

42 Article 32 of the Implementation Regulation of FIPPA.

43 Article 139 of the Iranian Constitution provides that:

  • The settlement, of claims relating to public and state property or the referral thereof to arbitration is in every case dependent on the approval of the Council of Ministers, and the Assembly must be informed of these matters.
  • In cases where one party to the dispute is a foreigner, as well as in important cases that are purely domestic, the approval of the Assembly must also be obtained. Law will specify the important cases intended here.