Treatment of Oil in Iran's 1979 Constitution
Iran's 1979 constitution alludes to the issue of natural resources briefly, but with a serious impact on Iran's oil sector. The Mashrouteh Constitution of 1906 contained no regulation of natural resources except for the requirement of Parliamentary validation of all types of concessions. Partially as a result of poor management of resources prior to Iran's 1979 revolution, the Islamic Constitution of 1979 made specific reference to natural resources and concessions, with particular emphasis on the need to minimise corruption, mismanagement and foreign control. However, the articles of the constitution concerning natural resources were left relatively vague and in many cases required further parliamentary legislation to be fully implemented.
Articles concerning natural resources
Three articles of the constitution contain provisions that deal with Iran's natural resources, and by extension, its oil, gas and mineral reserves: articles 44, 45 and 81.
Article 44 of the constitution states:
The state sector is to include all large-scale and mother industries, foreign trade, major minerals, banking, ... shipping, roads, railroads and the like; all these will be publicly owned and administered by the State.
Because it uses the words 'owned and administered by the State', according to Nima Shahri of The China and Eurasia Forum Quarterly, Article 44 not only forbids any form of private ownership but also prohibits private investment, foreign or domestic. Article 44 indicates the nationalisation of all major industries, with private ownership in these areas disallowed after the Islamic Revolution. Privatisation of Iranian industry became legally feasible later on with through various pieces of legislation, but the petroleum industry remains a notable exception to this rule.
Article 45 of the constitution states:
Public wealth and property, such as uncultivated or abandoned land, mineral deposits, seas, lakes, rivers and other public water- ways, mountains, valleys, forests, marshlands, natural forests, unenclosed pastureland, legacies without heirs, property of undetermined ownership, and public property recovered from usurpers, shall be at the disposal of the Islamic government for it to utilize in accordance with the public interest. Law will specify detailed procedures for the utilization of each of the foregoing items.
This article regards natural resources as Anfal, an Islamic concept mentioned in the Quran meaning public wealth and property. According to the Quran, Anfal belongs to God and the Prophet; Article 45 leaves Anfal to the government, which is to use it in the best interest of the public. Based on Shia Islamic teachings, Anfal cannot be sold or transferred to anyone; Article 45 thus serves as a serious impediment to any private entity, foreign or domestic, gaining ownership of any kind of Iran's oil, gas and mineral wealth.
Article 81 of the constitution forbids the concessionary system, in which the government grants investors ownership of the oil for a specific period and in return receives royalties and taxes set by law. Article 81 states:
The granting of concessions to foreigners for the formation of companies or institutions dealing with commerce, industry, agriculture, services or mineral extraction, is absolutely forbidden.
In the context of the 1979 constitution, the phrase "absolutely forbidden" means concessions cannot be legitimised even if approved by Parliament. The government is the only authority that can legitimately deal with natural resources. Article 81 is commonly cited as a reason why Joint Operating Agreements (JOAs) or joint ventures are not legal in Iran.
Based on these three articles in Iran's 1979 constitution, concessions as well as Production Sharing Agreements (PSAs) and joint ventures or any other contractual regime involving foreign participation and control (Article 44), ownership (Article 45), or establishment of foreign companies (Article 81) is strictly prohibited.
Iran's 1979 Constitution (in English): www.alaviandassociates.com/documents/constitution.pdf
- "Constitution of the Islamic Republic of Iran" Alavi and Associates, Retrieved 18 January 2012.
- "The Petroleum Legal Framework of Iran: History, Trends and the Way Forward" by Nima Nasrollahi Shahri, The China and Eurasia Forum Quarterly Vol 8, No 1 (2010), pp. 111-126.
- "Production Sharing or Concessions?" Clyde & Co, Retrieved 19 January 2012.