As energy prices surge, the world is wondering where it will all end.

As energy prices surge, the world is wondering where it will all end. Where will supplies come from in the future? Iran, sitting on the world’s second largest reserves of gas – in addition to huge quantities of oil – is tomorrow’s apparent answer.

Iran should in theory be a magnet for international oil companies, which are cash-rich and searching for ways to replenish their diminishing reserves. But the geopolitical environment, in which Iran is being marginalised because of a refusal to suspend work on its nuclear programme, means this is not the case.

South Pars, the world’s largest gas field, is shared between Iran and Qatar but development from the Iranian side has ground almost to a halt, thanks to the US-led crackdown on business links with Iran. This week the European Union ratcheted up the pressure, agreeing tougher financial measures against Tehran.

These sanctions have presented Iran with a dilemma. Tehran wants to show Washington and other western capitals that no foreign power can prevent it extracting as much of its own gas as it needs, but at the same time it must grapple with the fact that sanctions are having an impact.

American companies are prohibited from any involvement in Iran’s energy sector. Those non-US international groups that have invested in Iran are for now going slow. They are trying to avoid pressing ahead with investments that would anger Washington, while also trying to avoid pulling out, which would annoy Tehran.

This delicate balancing act is exemplified by the decision of Royal Dutch Shell and Repsollast month to withdraw from the development of what is known as phase 13 of South Pars. The lack of new investment from the oil majors means Iran is left to deal with relatively inexperienced minnows that are desperate for the business – companies from the likes of Austria, Croatia and Poland.

With the development of South Pars thus proceeding at a snail’s pace. Iran is at pains to present this as a loss to the world. “The gas is under the ground, so we will use it later. Our share of the loss is 10 per cent, the world’s loss is 90 per cent,” says Kamal Daneshyar, head of the Iranian parliament’s energy committee. “The US’s policies mean that the world is losing [gas] equivalent to 4.1m barrels of oil a day. This is the main reason behind the increase in oil prices – the reason why supply has gone down.”

But, for all its bluster, Iran is anxious to develop the field to provide gas for domestic use – for home heating, power stations, the petrochemical industry and other projects. As it is, there is certainly no excess supply.

During its four-month winter, Iran uses three times as much gas as it consumes in the other eight months of the year. The 450m cubic metres of gas it produces each year are just enough for domestic consumption under normal circumstances. Last winter, when severe snow coincided with a dispute with Turkmenistan over gas import pricing, factories and government offices closed and dozens died. That focused many politicians’ minds on the need to harness Iran’s energy resources for domestic consumption. “It is important that we use our gas for domestic and commercial consumption,” says Mr Daneshyar.

For Europe, the lack of supply from Iran leaves it more reliant on Russia, which has been using energy supplies as a political tool. Those brave enough to do deals with Iran – such as EGL of Switzerland, which signed a 25-year gas supply agreement in March worth up to €27bn ($42bn, £21bn) – incur Washington’s wrath. A few of South Pars’ early phases, designated for domestic supply, are in production but even they are years behind schedule. Most other international energy companies are sitting by.

Because Iran presents such a huge unexploited energy opportunity, they cannot easily walk away from their early-stage investments and give up an advantage, despite the sanctions. “We have to be here now,” says one energy executive, declining to be named because of the political sensitivity of doing business in Iran. “If these American companies come here in five years, they won’t be able to benefit . . . because they won’t be firmly rooted.” The oil majors are therefore responding by trying to buy time. When Shell and Repsol pulled out of phase 13, both were at pains to couch it as a “substitution” rather than a withdrawal, implying that they aimed to work on later phases instead.

Iran is confident that the big oil groups will one day beat a path to its door. “Is it possible to ignore Iran, a country which has a unique position with oil and gas?” asks Hojtollah Ghanimi Fard, head of international affairs at the National Iranian Oil Company. “I think all those who are involved in the international oil industry, upstream and downstream, know that Iran cannot be ignored.”

Tehran has had to change its long-held strategy of not investing Iranian money into the South Pars field, which was based on the assumption that foreign companies keen for access to its reserves would pay for most of the infrastructure. The government has this year allocated 3 per cent of oil revenues – about $5bn – for a one-off investment in South Pars. Analysts describe this as a good start but say billions of dollars more will be needed for the field to reach its potential.

The biggest hindrance to development is financing. The US-led crackdown has made big international banks shy away from doing business in Iran, for fear of damaging their American units. This means that almost everyone is having difficulty funding projects. “The business reactions are the real sanctions,” says one European diplomat in Tehran.

Those with contracts, afraid of repercussions from the US, are taking their time about putting them into action. When SKS of Malaysia signed a $16bn deal with Iran last year, it seemed to point to all that the western companies were missing out on. But even SKS appears to be dragging its heels.

“Over the last few years we haven’t seen foreign companies investing,” says Hatef Haeri, chief executive of the ICG energy consultancy in Tehran. “There is no financing available, so it takes much longer and is much more complicated to run a project than it was four or five years ago.” Even banks in China, which have good trading relations with Iran, will no longer finance deals within the country.

“There are always plenty of reasons why projects won’t go ahead, but it is the [inadequate] availability of banking services, the lack of financing, that is extremely difficult in the current environment,” says a representative of one international oil group. “We much prefer third-party financing because it brings a lot of discipline to projects.”

The lack of funding comes at a time when costs are rising exponentially. Before they pulled out of phase 13, the cost of the Shell-Repsol liquefied natural gas project had rocketed to as much as $16bn, leading to delays and disputes with Iranian authorities. Total, the French energy group, estimates that the cost of its project has more than doubled to $11bn. Mr Haeri says of Total: “They need to find a way to wait until the situation clears. The worst thing would be for them to spend billions of dollars and then face sanctions.”

Iran’s oil ministry has set a deadline for Total to sign contracts for phases 11 and 13 of South Pars by the end of this month. That came with a warning appended that contracts could instead be awarded to competitors from other countries. It was similar deadlines that prompted the withdrawal of Shell and Repsol.

Hesitation on the part of the majors has indeed led to new opportunities for companies such as China’s Sinopec, OMV of Austria and the Indian national oil company. “These companies would not be here if it were not for the sanctions,” says another European diplomat in Tehran. OMV, which closed its US businesses so that it could operate in Iran, is in the running for phase 12 contracts at South Pars and hopes to be involved in anLNG project.

But doubts hang over the ability of these companies to provide the right technology. Iran needs contractors with experience in liquefaction and compression. Upstream work – extracting the gas from the field – is technically not so challenging. It is the downstream activities that are thought likely to pose problems for smaller players such as OMV.

Insiders accept that OMV does not have the experience to undertake such projects on its own. Likewise, the Chinese say Sinopeclacks the requisite familiarity with offshore gas development. “It’s CNOOCthat has the offshore gas experience,” says a Chinese oil industry executive, “but CNOOC is already tied up with North Pars [a coastal Iranian field].” The oil majors are not dismissive of these arrivals, however. “I’ve learnt never to underestimate the competitors; all those companies will grow,” says one executive at a big company. “Look at what China is doing now.”

Smaller players meanwhile admit that they are benefiting from the giants’ reluctance to invest. Even though they stand to win, they hope the biggest forces in the industry do not pull out completely. “That would just add to the frenzy and that’s not good for anybody. They are our competitors but the gas business here is big enough for everybody,” says one executive from a smaller energy company.

Companies such as Sinopec and OMV, even though they have never done work on the scale of South Pars before, can buy licences to use the technology necessary to extract gas, compress and decompress it. But that itself may be difficult. US companies such as Chevron own about 80 per cent of all licences for oil and gas technology but sanctions mean they cannot themselves be active in Iran. Many of the contractors with the technological know-how are also American.

Shell also holds licences but does not want to transfer this kind of technology to Iran right now. Similarly, approval would not be given for Institut Français de Petrol, owned by the French state, to sell its licences.

There are, however, still possibilities such as Linde, the German company whose French subsidiary, Cryostar, has already been using licensed technology. OMV is understood to also be interested in it. This creates the chance that Iran will be able to cobble together enough expertise to circumvent sanctions and develop its gas fields.

Countries putting pressure on Tehran are acutely conscious that the demand for energy is working against their efforts to hamper Iran’s economy. “We think that Iran is dangerous; we think we should show Iran that we can have an effect on them,” says a European diplomat. “But we know that with oil at $140 a barrel, our timing could not be worse.”