New York Times: West Adds to Strains on Iran’s Lifeline

By JAD MOUAWAD
Published: February 13, 2007

EXTRACT: Shell and Repsol announced last month a preliminary deal for South Pars, the world’s largest natural gas field. But the project, estimated at $10 billion, has been delayed for more than a year. A final investment decision is not due until at least the end of 2007. Asked about the project at a news conference this month, Jeroen van der Veer, the chief executive of Shell, expressed some embarrassment, saying, “We have a dilemma.” Iran’s oil and gas reserves are too big to ignore, he said, but “we have all the short-term political concerns, as you can see.”

THE ARTICLE

Western political and economic pressure on Iran over its nuclear program has chilled foreign investment to the extent that it is now squeezing the country’s long-fragile energy industry, adding strains to a government that is burdened by sanctions and wary of unrest at home.

The world’s fourth-largest oil exporter, Iran sits on the second-largest oil and gas reserves. But it has struggled in recent years to keep its oil production, currently running at about four million barrels a day, from falling.

Some analysts say that if this acute imbalance between stagnant production and rising demand at home continues unchecked, Iran will have no oil left over to export within a decade. Its oil exports, totaling $47 billion last year, account for half the government’s revenue.

“They have a perfect storm of problems feeding into each other,” said Robert Murphy, an analyst at PFC Energy, a consulting firm in Washington. He estimated that Iran might have no more oil to export by around 2015 if it did not rein in runaway consumption and reverse the long-term decline in its oil production.

“The domestic energy situation is as big as the international issue, and feeds into it in a very significant way,” he said.

To curb demand, which has been driven in part by subsidies that keep the domestic pump price at a mere 35 cents a gallon, the government plans to begin rationing gasoline in March, a measure so unpopular, and potentially explosive, that rationing plans have been put off several times in the past.

Iran’s energy problem is in many ways at the heart of the nuclear controversy as well. Iran’s leadership says it wants to develop nuclear power generation to free its petroleum resources for domestic use or for exports. The United States and other Western countries say Iran is using the program as a front for building weapons. At a time of relatively high prices, oil is clearly providing Iran’s government with enormous strength — but also with an Achilles’ heel.

In December, the United Nations Security Council voted unanimously to impose limited economic sanctions on Iran until it halts its nuclear program. So far, American and European officials say they are not seeking to cut off Iran’s oil exports, because that would disrupt global markets and raise prices for Western consumers.

Still, the pressure on Western energy companies not to deal with Iran may ultimately speed that outcome. Iran currently exports about 2.5 million barrels a day.

In recent weeks, senior American officials warned several European oil companies that if they invested in new energy projects, they risked financial sanctions in the United States, according to a European energy executive who spoke on the condition that he not be identified because of the delicate nature of his company’s relations with Iran.

Foreign investors, who have helped promote Iran’s oil development, have been scarce since the 1979 revolution, and the country’s oil industry has now suffered decades of economic, political and technical problems. Iran has signed no firm oil or gas contracts with foreign investors since June 2005, when Mahmoud Ahmadinejad was elected president and began flaunting the country’s nuclear ambitions and renewing tensions with the West.

At home, meanwhile, Iran has had to appease a population historically prone to unrest. It spends about $20 billion each year, or 15 percent of its economic output, to keep consumer prices low for gasoline, natural gas, electricity and other energy products, according to estimates from the International Monetary Fund and others. Those subsidies have prompted double-digit growth in consumption in this country of 70 million people.

Iran holds 11 percent of global oil reserves, second only to Saudi Arabia. But each year, Iran has to find ways to make up for natural declines in production from existing wells, which in past years has dipped by 200,000 to 500,000 barrels a day.

It has managed to hold its own, but just barely. Moreover, Iran’s refining capacity lags far behind its domestic needs, so the country is forced to import 40 percent of its gasoline.

Because of delays in developing new fields, like Yadavaran, Azadegan and others, Iran has scaled back its targets; it now plans to increase oil production to 4.5 million barrels by 2010, down from 5 million barrels. But even that might prove challenging, according to analysts who cite the figures.

Iranian production is now about 3.9 million barrels. It peaked at more than 6 million barrels a day in the mid-1970s, but plummeted to 1.5 million barrels just after the 1979 revolution. During the eight-year war against Iraq that followed, Iran’s oil infrastructure lining the Persian Gulf was a frequent target.

Iran currently uses 1.5 million barrels of oil a day, triple its consumption in 1980, and must import about 170,000 barrels a day of gasoline, which last year cost the government more than $4 billion.

Some Iranian fields are in dire need of foreign technical expertise to help reverse their natural decline rates, estimated at 8 to 10 percent a year. Modern methods of enhanced oil recovery, which involve reinjecting natural gas to flush out more oil from the fields, can greatly increase production rates but are both costly and difficult to perform without foreign assistance.

“Iran needs to invest more than it does,” said Manouchehr Takin, an Iranian energy analyst at the Center for Global Energy Studies in London. “It needs foreign companies to bring expertise, capital and technology.”

But oil companies complain that the rewards are limited. Under Iran’s stringent buyback contracts, oil companies basically operate as contractors for the government for a limited time. They are not allowed to book the reserves as their own and gain little in extra profits when energy prices go up.

Iran’s energy officials have already indicated they would sweeten buyback contracts. At a meeting held at a Hilton hotel in Vienna this month, they unveiled a new licensing round for 17 onshore and offshore exploration blocks. The conference was attended by dozens of European, Chinese and Russian oil executives.

For Gholam Hossein Nozari, the managing director of Iran’s national oil company, continued interest from Europe and Asia is “a sure sign companies do not cower to U.S. pressure,” according to Iran’s official news agency, IRNA.

Fereidun Fesharaki, an energy adviser to the Iranian government before the revolution, said, “For all its faults, the Islamic Republic is very flexible.”

Not all countries or international companies have bowed to American pressure. India has rebuffed Washington’s efforts to cut off gasoline exports to Iran. New Delhi has also rejected American requests to cancel a planned pipeline project that would take Iranian natural gas through Pakistan to India.

But recent conversations with European energy executives and consultants, who spoke anonymously to protect their relations with Iran, suggest there is a new wave of concern about starting projects in the country. Even Chinese companies, which Iran is trying to lure with big oil and gas deals, seem to be acting with caution.

Oil companies, including Royal Dutch Shell, Total of France, Eni of Italy and Repsol YPF of Spain, are playing for time in the hope that the political situation may somehow improve, energy analysts said.

Shell and Repsol announced last month a preliminary deal for South Pars, the world’s largest natural gas field. But the project, estimated at $10 billion, has been delayed for more than a year. A final investment decision is not due until at least the end of 2007.

Asked about the project at a news conference this month, Jeroen van der Veer, the chief executive of Shell, expressed some embarrassment, saying, “We have a dilemma.” Iran’s oil and gas reserves are too big to ignore, he said, but “we have all the short-term political concerns, as you can see.”

Last year, Inpex, a Japanese oil company, agreed to sharply cut its stake in a $2 billion project to develop the Azadegan field, in the southwestern province of Khuzestan, near Iraq. Inpex cut its stake to 10 percent from 75 percent after problems with land mines left over from the Iran-Iraq war delayed development. But some analysts said the decision reflected Japan’s displeasure at Iran’s nuclear stance. Japan accounts for 20 percent of all Iranian oil exports.

“Oil companies are simply assessing risk, including what some see as the real risk of a military strike against Iran,” said Cliff Kupchan, an analyst at the Eurasia Group, a political risk consulting firm, and a former senior State Department official. “Some are deciding it’s not worth it.”

The United States is pressing Europeans to trim their government-backed loan guarantees, which amounted to $18 billion in 2005. European countries have recently said they would not issue guarantees for companies that the United Nations lists as tied to Iran’s nuclear or missile programs. But Washington is calling on Europe to make sure it is not dealing with front companies, possibly in the energy field.

Since opening up their energy sector to foreigners in the 1990s, Iran’s clerical leaders have sought to turn their energy riches into political alliances. In the mid-1990s, they tried to persuade an American company, Conoco (now ConocoPhillips), to develop an oil field in a strategic bid to thaw relations with the United States; when that failed, after President Bill Clinton banned American investments in Iran, Iran turned to Europe and Japan. More recently, Iranian leaders have set their sights on China and Russia.

But while China’s three main state-owned oil companies have been eager to sign preliminary agreements with Iran in recent years, drawing criticism from the United States, analysts say few projects have actually gotten off the ground.

Steven R. Weisman contributed reporting from Washington and Nazila Fathi from Tehran.

This website and sisters royaldutchshellgroup.com, shellnazihistory.com, royaldutchshell.website, johndonovan.website, and shellnews.net, are owned by John Donovan. There is also a Wikipedia segment.