Royal Dutch Shell has agreed in principle to help to develop South Pars, an Iranian gasfield, with a view to building a liquefied natural gas plant, the company confirmed yesterday.

The preliminary agreement which also includes Repsol, the Spanish oil company, is a “buyback contract” with the National Iranian Oil Company. Shell said that no investment decision would be made on the upstream gas production until details of the downstream LNG project had been agreed, a decision that Shell said is at least one year away.

Iran does not permit foreign ownership of oil and gas reserves, instead granting foreigners a subcontracting role in oil and gas development. Under a buyback contract, foreign oil companies typically build infrastructure, such as oil wells and pipelines and hand them over to NIOC, in return for a fixed fee, based on cost plus an agreed rate of return.

Shell has been in discussions over the development of South Pars since 2004 and relations between the Tehran Government and Western countries have since deteriorated because of concern over Iran’s nuclear programme.

South Pars forms part of the world’s largest gasfield, a reservoir that straddles the Gulf and is shared between Iran and Qatar where the gasfield is known as North Dome. The total volume of gas estimated in the field is 1,200 trillion cubic feet. A host of LNG and gas-to-liquids (GTL) export projects are under development in Qatar involving several multi-national companies, including ExxonMobil, Chevron, Total and Shell but less progress has been made on the Iranian side, in large part because foreign investors are not attracted to the meagre returns from buyback contracts.

Over the weekend, NIOC said that the deal with Shell and Repsol was worth $10 billion (£5.1 billion).

Separately, Shell has agreed to sell a Californian refinery and a chain of petrol stations to Tesoro Corporation for $1.6 billion. Tesoro will take over the Wilmington refinery, a facility near Los Angeles that processes 100,000 barrels per day. It will also acquire 250 retail sites in the Los Angeles and San Diego area.

Shell is slimming its refining portfolio and recently put three French refinieries up for sale, suggesting that it reckons that the recent strength in the refining market is unlikely to be sustained over the longer term.

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