Iran has signed a preliminary agreement with Spain’s Repsol YPF and Royal Dutch Shell to produce liquefied natural gas (LNG) from its South Pars gasfield.

“This contract is the biggest project in terms of investment and the volume of gas converted to LNG,” says the head of National Iranian Oil Company, Gholam Hossein Nozari.

But he adds that the final decision on the investment, which the agency valued at US$10bn, would be made by the end of 2007.

“The upstream work of phases 13 and 14 (of the South Pars field) will be carried out on buyback terms,” Nozari says. He adds that Shell and Repso YPF will each have a 25% share, while Iran maintains a 50% share in the project aimed at producing an annual 16mn tonnes of LNG.

Iran’s buyback system skirts around the constitution which prohibits foreign companies from taking an equity stake in its oil and gas sector. Instead, it enables foreign companies to develop a project for a set time, after which they are paid by the government in oil or gas revenues at market prices.

Iran sits on the world’s second largest reserves of natural gas after Russia but faces investment problems in developing the fields.