1. Introduction
This study examines the legal implications of a major legislative development in Iran’s upstream oil and gas sector introduced by Article 44(a) of the Seventh Five-Year Development Plan Act. Historically, following the Second Petroleum Law, Iran relied on service-type contracts for field development. After the Islamic Revolution and a prolonged halt in upstream activities, buy-back contracts were adopted in 1995 as a specific form of service contracts. Despite their widespread use, buy-back contracts faced serious limitations, including the separation of exploration and development, absence of investor participation in production, rigid cost ceilings and repayment limits, inability to adapt work programs to actual reservoir behavior, restriction to discovered fields, lengthy decision-making, and lack of flexibility toward global market conditions.
To address these shortcomings, a reform committee was established in 2013, leading to the adoption of the Iran Petroleum Contract (IPC). However, after nearly nine years and the conclusion of eleven contracts, IPCs failed to achieve the objectives emphasized by policymakers, particularly in developing joint oil and gas fields. Consequently, the Seventh Five-Year Development Plan Act explicitly authorized, for the first time, the use of Production Sharing Contracts (PSCs) in joint fields.
This authorization, issued without detailed implementing provisions, has generated fundamental legal ambiguities regarding the legal nature of PSCs, legislative intent, restriction to joint fields, compatibility with Articles 77 and 139 of the Constitution, the meaning of the clause “without transfer of ownership,” and the framework for drafting contractual terms. This research aims to analyze this authorization from a legal perspective and clarify these ambiguities.
2. Literature Review
Recent domestic studies identify joint field development as a strategic priority for Iran’s economic growth and energy security. Policy documents, including the Seventh Five-Year Development Plan, stress the need to increase production and adopt production sharing arrangements. Scholars argue that contractual models must be adaptable to changing economic and political conditions and that precise contract design and effective supervision are essential to protect economic interests and mitigate financial and operational risks.
Domestic legal and economic research emphasizes contractual flexibility as a means of reducing conflicts of interest and enhancing efficiency. Comparative analyses generally conclude that PSCs outperform buy-back contracts in terms of risk allocation, economic returns, and compatibility with Iran’s legal system. These studies highlight that PSCs enable a more balanced distribution of risks and incentives between the host state and investors.
International literature recognizes PSCs as one of the most effective frameworks for upstream development. Studies underline the importance of strong legal regimes, contractual transparency, and periodic revision. Empirical research shows that the performance of PSCs depends on institutional, economic, and technical factors, with flexibility and technology transfer playing key roles. Despite political and institutional risks, PSCs remain attractive to international oil companies. The experience of the Kurdistan Region of Iraq is frequently cited as evidence of the effectiveness of PSCs in attracting investment, increasing production, and maintaining state ownership, particularly in joint fields.
Overall, prior research has focused mainly on demonstrating the advantages of PSCs. With the recent explicit authorization in Iran, the research gap has shifted from justifying PSCs to clarifying their legal nature and constitutional implications. This study addresses this gap.
3. Methodology
This research adopts a mixed, two-stage approach combining doctrinal legal analysis with an empirical Delphi method.
In the first stage, qualitative legal content analysis was conducted on Article 44(a) of the Seventh Development Plan Act and related legal sources, including constitutional provisions, statutes, by-laws, and high-level policy instruments. The analysis focused on identifying and interpreting the key elements of the authorization: the concept of PSCs, legislative objectives, applicable constitutional constraints, the meaning of “without transfer of ownership,” and the rationale for limiting the authorization to joint fields. This stage provided the theoretical framework of the study.
In the second stage, given the novelty of the authorization and the absence of established practice, the Delphi method was employed to identify and prioritize implementation challenges. Semi-structured interviews were conducted with twelve purposively selected experts with experience in upstream contract drafting and regulatory design. The data were analyzed thematically to extract legal, institutional, and structural challenges. These challenges were then converted into a structured questionnaire and reassessed by the same panel using a five-point Likert scale. The results were statistically analyzed to rank the challenges.
4. Results and Discussion
The legal analysis shows that the PSC envisaged in Article 44(a) has an obligational and contractual nature based on an obligation to achieve a result rather than a transfer of property rights. The investor’s share of production constitutes a contractual entitlement arising after extraction and does not imply ownership over hydrocarbons in situ. This interpretation is consistent with the clause “without transfer of ownership” and with the principles governing natural resources in Iran’s legal system.
Regarding constitutional constraints, the findings indicate that PSCs concluded by the National Iranian Oil Company within commercial relations do not, in principle, fall under Article 77 of the Constitution, which requires parliamentary approval for international treaties and agreements. Instead, they are treated as commercial contracts of a state-owned enterprise. Article 139 becomes relevant mainly in relation to dispute settlement, particularly the inclusion of arbitration clauses involving public and state property.
The Delphi findings reveal that although domestic and international legal challenges are significant, institutional and structural challenges exert the greatest impact on implementation. These include weaknesses in governance, fragmented decision-making, lack of supplementary regulations, and limited administrative capacity. The analysis also indicates divergent priorities between the contracting parties: the host state emphasizes domestic legal certainty and sovereignty-related risks, whereas investors stress implementation constraints, contractual flexibility, and protection under international investment law.
These results suggest that legal authorization alone is insufficient. Effective implementation of PSCs requires parallel improvements in institutional capacity, regulatory clarity, and adaptive contractual mechanisms to balance long-term field productivity with risk management for both parties.
5. Conclusion
I This study concludes that the authorization of PSCs in joint oil and gas fields under Article 44(a) of the Seventh Five-Year Development Plan Act marks a pivotal shift in Iran’s upstream contractual regime. Contrary to common assumptions, this authorization does not inherently conflict with Iran’s constitutional and statutory framework and can, if properly interpreted, address the inefficiencies of prior service-type contracts in joint field development.
The main challenges lie not in the legality of PSCs as such, but in contract drafting, interpretation of statutory clauses, design of dispute resolution mechanisms, and the absence of coherent supplementary regulations. Moreover, the predominance of institutional and structural challenges highlights the need for reforms in governance and policy implementation alongside legal clarification.
Despite limitations arising from the novelty of the authorization and lack of practical experience, this research provides a foundational legal analysis to guide policymakers and contract designers in developing a localized PSC model aligned with Iran’s legal system and strategic objectives.