Iran's buy-back investment programme is coming under wider scrutiny amid a fierce regional race to attract foreign oil companies to finance big projects, according to analysts.

"There is a growing debate in Iran about the wisdom of buy-backs which is going to creep into the open," said director of research at Dresdner Kleinwort Benson Mehdi Varzi. With buy-backs foreign firms receive crude as compensation and profit in return for investing in projects under a formula that denies them a direct equity stake.

The terms satisfy a constitutional ban on foreign ownership of Iranian oil reserves but frustrate some foreign companies which see them as insufficiently attractive to justify multi-million dollar investments. The debate is more complex still inside Iran itself.

Some Iranianexperts support offering more enticing investment terms to lure more foreign firms to a country hungry for cash and Western technology for its ageing oilfields. "A serious debate has started. In course I feel it could well progress towards production sharing. Production sharing is a more equal relationship," the London-based Varzi said.

But to its opponents, production sharing implies foreign ownership of natural resources, a politically explosive issue in Iran, which had a history of struggle against Western control of its oil reserves before the 1979 revolution. Experts say any move to push through new investment schemes, such as production sharing, would face fierce opposition from powerful hardliners in Iran's ruling clerical establishment.

The country's constitution as commonly interpreted also bars production sharing. But backers of production sharing say the schemes do not necessarily imply foreign ownership of resources and could be adopted to give Iran a competitive edge.

"The interpretation ofexisting laws is wrong. Some people think the production sharing is tantamount to sharing reserves. It does not mean that. The only thing we would share is produced oil," Ali Shams Ardakani, a former head of Iran's chamber of commerce, told Reuters.

"We should not confine ourselves to this method (buy-backs). Production sharing is a more flexible agreement," added Ardakani, a member of the council drawing up Iran's third five-year development plan which starts in March 2000.

Ardakani criticised buy-back deals as giving foreign firms too much return on their investment. In this regard, his views resemble those of hardliners opposed to buy-back schemes on the ground that they are selling Iran's most prized resource.

Last year, Iran offered more than 40 buy-back projects worth over $8 billion. But its biggest energy opening since the 1979 Islamic revolution has been bogged down by factors including red tape and resistance to the buy-backs, analysts said.

Western oil firms vying for lucrative deals inIran - one of the last major oil frontiers in the world -- have also expressed reservations about the buy-backs, prefering more flexible investment agreements such as production sharing.

The government, for its part, says buy-backs are the best option and that it will stick to the investment formula. There are no clear signs of a move away from buy-backs and change would likely to come only after prolonged debate. But the sharper focus on the issue has raised some hope of greater government flexibility.

"Now discussions are carried more openly in the press and seminars. Discussions of the pros and cons mean that at least some people are trying to move it in another direction," said Manouchehr Takin of the Centre for Global Energy Studies. Iran, with the world's second largest natural gas reserves and fifth largest oil reserves, is enticing for foreign firms.

Analysts say the country's ability to compete with other oilpowers could be determined by whether it would take a bolder approach to investmentincentives. Regional oil powers Saudi Arabia and Kuwait are also opening their doors at a time when uncertain oil prices mean that internatonal oil firms must prioritise their investments.

There is also fierce competition on the horizon in other parts of the Gulf. The world's biggest oil companies are already lined up to flock to Iraq once trade sanctions are lifted. "Some parliamentarians are realising that the buy-backs may not be the best option. But whatever is going to happen will take a long time," said an Iranian analyst.