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Financial Times: Lure of Iran gas puts energy-hungry Asian companies in hot seat

By Carola Hoyos, chief energy correspondent
Published: May 10 2007 03:00 | Last updated: May 10 2007 03:00

This year alone three of Europe’s biggest energy groups have announced they are considering investing billions of dollars in Iran’s giant gas fields.

But a non-binding memorandum of understanding signed late last month by OMV, the Austrian energy group, and similar recent accords with Anglo-Dutch Royal Dutch Shell and Repsol, of Spain, do not necessarily mean those companies are about to sink large sums into Iran and incur the wrath of Washington, which is trying to isolate Tehran over its nuclear ambitions. Instead, these are ways companies are trying to keep their options open until the international diplomatic situation improves or Iran forces them to stop procrastinating.

Frank Harris, analyst at Wood Mackenzie, the consulting group, said: “Access to gas around the world is getting tougher and the big players cannot afford to ignore Iran. They need to retain the option to participate in Iran because the political winds may change, which is why we are seeing the non-binding deals.”

No European company has made a large new investment in Iran since Norway’s Statoil invested $2.65bn (€1.9bn, £1.3bn) in 2002, says Kenneth Katzman, a Middle East expert at the Congressional Research Service. While some have made friendly overtures and promised to consider investing, those in more advanced negotiations have delayed decisions that would have forced them to commit large sums of money.

Last month, Gholamhossein Nozari, managing director of Iran’s state-owned oil company and the country’s deputy energy minister, said he had given Total, the French energy group, four more months to decide whether to invest some $2bn-$4bn in the South Pars natural gas project. The deadline had been March 31.

Iran was compelled to give Total the extension because the country needs an experienced company to get its liquefied natural gas (LNG) industry off the ground. Total argued it had to consider the fact that the project’s costs had doubled because of a worldwide industry shortage of labour and equipment.

Even Lukoil, Russia’s second biggest oil company, is cautious. Vagit Alekperov, its chief executive, said recently: “Today Russia is making resolutions with other UN Security Council members aimed at stopping the Iranian nuclear programme. So we are now looking at the risk.”

He said the company was in the early stages of investment in Iran and still had 12-18 months before having to decide on any major expenditures.

But companies may not be able to drag their feet for ever. Iran has already asserted its muscle in negotiations it views as having lasted too long. Late last year it slashed the stake of Japan’s Inpex, which was to develop the giant Azadegan oil field, from 75 per cent to 10 per cent after the group – under pressure from the US – had delayed a final decision several times.

Not only Inpex is feeling the heat from the White House. In March, Nicholas Burns, a senior state department official, told a congressional hearing the US had contacted several governments and companies to warn them they would be in violation of the Iran Sanctions Act if they pursued their planned investments in Iran. Such threats appear to have worked for the Europeans, but not for energy-hungry Asian companies which are calling Washington’s bluff.

Passed in 1996 as the Iran Libya Sanctions Act, the law requires Washington to place sanctions on non-US companies investing more than $20m a year in Iran. But the White House has the right to decline to act if it deems it in the US’s national interest. So far not one company has been sanctioned despite at least 14 violations totalling $100bn since 1999, the Congressional Research Service reported.

How long Total, Shell and others are able to postpone deadlines will depend in part on whether Iran can lure suitors, such as those from China and India. In the past three years, Chinese, Indian and Malaysian companies agreed to invest more than $90bn to purchase Iranian gas, develop oil and gas fields and build pipelines, LNG terminals and other energy infrastructure, Mr Katzman said in a report.

China National Offshore Oil is negotiating a $16bn dollar deal to develop Iran’s North Pars gas field.

However, there is a catch: these new Asian investors are relatively untested and it is far from certain they have the ability to develop vast, complex oil and gas projects, especially without being able to rely on US technology or contractors, which are banned.

But Mr Harris points out: “There is always the possibility the Iranians may attempt to do the first LNG project without IOC help (probably with the Chinese), accepting it may take longer and be less efficient but that it gets them into the game.”

Copyright The Financial Times Limited 2007

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