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Money Oil Companies Continue to Take Risks Despite Objections

By Jason Simpkins
31 July 2007

A group of U.S. pension funds, including the California Public Employees’ Retirement System (Calpers), the New York State Common Retirement Funds, and New York City Pension Funds, have leveled pointed criticisms at several oil and gas companies for their involvement in Iran’s energy sector.  The letter went out to such prominent global energy giants as Royal Dutch Shell Plc. (NYSE: RDS.A), Total (NYSE: TOT), Eni (NYSE: ENI), Repsol (NYSE: REP), and Gazprom (NYSE: GAZP).

The letter, sent out last week, said the pension funds are “deeply concerned” that the companies’ involvement in Iran poses “significant risks” to the companies, their reputations and their shareholders according to the Financial Times.

The funds reportedly said that growing tensions between the United States and Iran could lead to “tightening economic sanctions” and “will negatively impact companies doing business there.” The letter asks the companies to outline “the policies and safeguards you have in place” to offset the risks of operating in Iran.

Reforms vs. Reality

The letter comes at a serious juncture in global development, and pits social-reform efforts against the very serious realities of rising prices for both oil and gasoline, diminishing crude supplies, and a very clear strategy by China – largely ignored by the mainstream American media – to ignore these reform efforts in favor of lining up as many captive suppliers of petroleum as possible.

U.S. President George W. Bush renewed sanctions first imposed in 1995 by President Bill Clinton, prohibiting U.S. companies and their foreign subsidiaries from conducting business with Iran, and banning the financing of development of Iranian energy resources.

Additionally, the 1996 Iran-Libya Sanctions Act (ILSA) imposes sanctions on non-U.S. companies investing more than $20 million annually in the Iranian oil and natural gas sectors. The 2006 Iran Freedom Act (IFSA) extended ILSA until December 2011.

Still, foreign companies that oppose economic sanctions and view the ILSA as an inappropriate application of U.S. policy outside of its borders, do a tremendous amount of business in Iran. According to the American Enterprise Institute (AEI), since 2000, foreign European and Asian companies have struck $135 billion in deals with Iran.

Royal Dutch Shell and Repsol have signed a $10 billion deal for the development of South Pars, the world’s largest natural gas field. The China National Petroleum Corporation and the China National Offshore Oil Corporation have also announced plans to develop major liquefied natural gas projects in South and North Pars.

Sinopec, another major Chinese oil company, is in the process of developing the Yadavaran oil field, which is expected to produce 300,000 barrels a day by 2010.

The pension groups responsible for the letters of criticism are no doubt eager to break the backbone of Iran’s economy and neutralize agitation as well as a potential nuclear threat. However, it seems almost unreasonable to ask that foreign companies not seek out profit, considering Iran’s massive resource potential.  The country owns 11% of the world’s conventional oil reserves and 16% of the world’s gas reserves.

And cases like this also raise the question of how the United States can best prepare itself for a future in which energy sources are going to be in an increasingly shorter supply.

The price of oil has been skyrocketing along with demand, and there doesn’t appear to be any end in sight. While investment in Iran may be risky, energy companies the world over are proving more and more willing to take such risks – regardless of the consequences. 

The China Syndrome

China National Offshore Oil Corp. (CNOOC) and its partner, China International Oil and Gas, have just signed a production-sharing deal with the transitional government of Somalia. Several western oil majors made forays into Somalia during the 1980s, but fled in 1991 after the overthrow of dictator Siad Barre.

The country has experienced a horrific amount of civil unrest since, and the country devolved into a civil war as recently as 2006.

Still China, hungry for resources to fuel its surging growth, is willing to roll the dice. That may be because global demand for oil is soaring. According to the Energy Information Agency, the world demand for oil is expected to increase 54% by 2025. And this month, the IEA issued a report that said, “given [China’s] booming economy, oil product demand is projected to increase by 5.6% per year on average to almost 10 million barrels per day by 2012, consolidating its position as the second largest oil consumer after the U.S.”

This latest move by China is evidence of the country’s strong desire, and a willingness to go out on a limb in an effort to secure as large a portion of the world’s resources it possibly can .  Should global energy giants engage in a policy of fastidious selection when it comes to expanding their oil and gas operations, more aggressive and less selective nations such as China could eventually monopolize the industry.  

Royal Dutch Shell knows full well the risks and rewards of operating in dangerous and unstable regions of the world.  Thursday it reported a 17% drop in production related to ongoing security problems in Nigeria. There facilities have been repeatedly attacked and workers kidnapped by armed guerilla soldiers continue to make their presence felt.

Despite the dip in production, however, refining earnings jumped to $3.93 billion from $3.02 billion and net profit rose 18%.  Conoco Phillips (NYSE: COP) wasn’t so lucky. After being forced out of Venezuela, its second quarter profit fell to $301 million, down from a robust $5.19 billion last year.

With the demand for and price of oil escalating worldwide, the top oil companies that can afford the risk are already operating in dangerous and unfriendly nations. And China’s move into Somalia, of all places, is precisely the kind of action companies with a realistic and forward-looking strategy may increasingly be willing to take.

Iran has 132.5 billion barrels of proven oil reserves and 970 trillion cubic feet of natural gas, second only to Russia. Oil exports generate $45 billion a year for Iran, amounting to half of the country’s budget. There’s simply too much money at stake for these companies to pull up stakes and move out.  Especially at a time when energy companies, and their investors, could be looking at record-breaking profits.

Calpers and other pension funds voicing protest might wish to be careful what they wish for: Should the likes of Royal Dutch Shell and Russia’s Gazprom forfeit their operations in Iran, it would only create an opportunity for China to secure another channel for its expansion, and gain influence in a region of the world that is already home to a significant amount of Anti-American sentiment.

Managing Editor William Patalon III contributed to this report.

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