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Los Angeles Times: Iran’s politics deters foreign investment in energy

From the Associated Press
August 13, 2007

CAIRO — The United States is on a concerted campaign to discourage foreign energy companies from doing business in Iran. But analysts say Iran’s investment woes are its own fault — it could dodge international pressure and attract more foreign money by simply offering better deals.

“They are doing the embargoing for us,” said Mikkal Herberg, a former oil executive now with the National Bureau for Asian Research, a think tank partially funded by the U.S. government.

The terms they offer to foreign energy companies for these deals “are very poor, with low rates of return against the geopolitical risk,” he said.

Even Chinese firms, eager to invest in troubled nations such as Sudan, have been slow to follow through on energy deals in Iran.

The situation shows how domestic politics often hamper Tehran’s ability to withstand Western efforts to curb the country’s controversial nuclear program.

Iran is currently flush with oil revenue, but its economy, reliant on oil and gas, lacks the investment needed to reverse falling oil production.

The shortage could seriously weaken the country in the future, leaving it more vulnerable to foreign pressure.

U.S. Secretary of State Condoleezza Rice and Defense Secretary Robert M. Gates continued the push for sanctions against Iran recently, urging allies to support broader financial moves against the country during their Mideast visit.

Iran could do more by sweetening its own foreign deal terms, many oil industry analysts say. But that would run contrary to Iranian President Mahmoud Ahmadinejad’s belief in self-reliance and his goal to channel oil revenue to the country’s poor.

Other conservatives in Iran, such as former President Hashemi Rafsanjani, have pushed for economic reform to attract foreign investment. Leaders like Rafsanjani, who belong to an old guard of conservatives at odds with Ahmadinejad, are thought to hold private control of much of the oil sector.

The basis for Iran’s posture goes back decades. Its constitution prohibits foreign ownership of the country’s energy resources, a reaction to Britain’s near monopoly control of the nation’s oil industry until it was nationalized in the early 1950s.

To attract foreign investment now, Iran offers so-called buyback contracts that leave ownership in Iranian hands and pay international energy companies a fixed return to develop oil and gas fields.

But Herberg said the contracts were relatively unattractive because the returns were not equal to the risk of investing in a country with tense international relations.

Tehran was at odds with China’s Sinopec over the development of the Yadavaran oil field because the company wanted a 15% return, and Iran something lower, Gholam Hussein Nozari, managing director of National Iranian Oil Co., told the official IRNA news agency in January.

Consistently high oil prices over the last few years have left Iran awash in petroleum revenue, with close to $50 billion in 2006.

But the economy lacks the investment it needs to reverse falling oil production, mostly because Iran spends close to $60 billion a year on subsidies for fuel and other goods.

Oil production will decline 5% a year unless Iran gets new investment, Akbar Torkan, managing director of Iran’s Pars Oil & Gas Co., was quoted as saying by the semiofficial ISNA news agency in July.

Some experts believe Iran’s oil exports could go to zero within a decade.

All parts of Iran’s energy industry — exploration, development, transportation and marketing — need additional capital, said Narsi Ghorban, an independent energy consultant based in Tehran.

Iran has made some improvements to its buyback contracts over the last few years, extending their duration and allowing a company that discovers a field to develop it.

In December, National Iranian Oil’s director for exploration announced that Tehran would allow production sharing in contracts for the first time, the Economist Intelligence Unit reported.

Although commonly offered by developing countries, such a contract would be a radical departure for Iran, allowing foreign companies a contracted share of production, giving them equity rights without full ownership.

Herberg called it an ingenious way for those in Iran eager for investment to get around the country’s aversion to foreign ownership.

But Alex Forbes, a consultant with Britain-based Gas Strategies, said he was skeptical that Iran would follow through on the plan.

“I doubt it very much,” he said. “They would have to change their constitution to do that.”

Amy Jaffe, an energy expert at Rice University’s James A. Baker III Institute for Public Policy, noted that Iran lagged behind countries such as Nigeria that have used production sharing to increase oil output despite their own high risks — in Nigeria’s case, from pipeline attacks and corruption.,1,6075451.story?coll=la-headlines-business and its sister non-profit websites,,,,,, and are owned by John Donovan. There is also a Wikipedia feature.

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