Team Infidel
Forum Spin Doctor
Los Angeles Times
January 7, 2007
Pg. 1
A campaign to dry up financing for projects poses a threat to Tehran's ability to maintain exports, analysts say.
By Kim Murphy, Times Staff Writer
LONDON — As Washington wages a very public battle against Iran's quest for nuclear power, it is quietly gaining ground on another energy front: the oil fields that are the Islamic Republic's lifeblood.
Iran's oil industry has raked in record amounts of cash during three years of high oil prices. But a new U.S. campaign to dry up financing for oil and natural gas development poses a threat to the republic's ability to continue exporting oil over the next two decades, many analysts say.
The campaign comes at a moment of unique vulnerability for Iran's oil industry, which also faces challenges from rising domestic energy consumption, international isolation, a populist spending spree by President Mahmoud Ahmadinejad and trouble closing contracts with foreign oil companies — a recipe for potential disaster in a nation with one of the world's largest reservoirs of oil.
"If the government does not control the consumption of oil products in Iran … and at the same time, if the projects for increasing the capacity of the oil and protection of the oil wells will not happen, within 10 years, there will not be any oil for export," Mohammed Hadi Nejad-Hosseinian, Iran's deputy oil minister for international affairs, said in a telephone interview.
If Iran were to suddenly stop exporting its 2.6 million barrels of oil a day, such as in the event of a military strike, world oil prices probably would skyrocket. But a gradual decline might be offset by other OPEC members, analysts say, particularly as Iraq increases its oil production and Saudi Arabia carries out plans for significant increases in its production capacity.
The efforts by the United States and its allies over the last few months to persuade international banks and oil companies to pull out of Iran threaten dozens of projects, including development of Iran's two massive new oil fields that could expand output by 800,000 barrels a day over the next four years.
"Many European banks which had accepted financing some oil industries projects have recently canceled them," Nejad-Hosseinian said.
In addition, banks are no longer granting letters of credit for delivery of some supplies, ministry officials say. And as nations such as Japan begin to back out of Iran oil development under U.S. pressure, the government in Tehran is being forced to dig into its own reserve funds to get crucial new projects off the ground.
But Nejad-Hosseinian said Iran had recognized the gravity of the threat and launched steps to head it off, including new "smart" rationing cards, scheduled for distribution in March to check skyrocketing sales of cheap gasoline, and an overhaul of Iran's historically stingy contract terms in an attempt to lure big oil companies into skirting the U.S. roadblocks.
Iran also is hoping to turn to China and Russia for help. But U.S. officials already have warned that they will seek to hold China accountable under Washington's unilateral sanctions laws if it proceeds with a $16-billion project to develop Iran's North Pars gas field. China also has signed a memorandum of understanding under which it may take on development of the Yadavaran field in southwestern Iran, expected to boost production by 300,000 barrels a day.
Domestic problems
Iran's oil and natural-gas dilemma has no direct connection with the sanctions adopted last month by the United Nations Security Council, which are narrowly aimed at assistance to Iran's nuclear program. Although Tehran insists it has strictly peaceful intentions, the U.S. and others believe the program is linked to development of nuclear weapons.
Rather, the looming crisis stems from a series of domestic problems that have converged at a time when Iran is susceptible to U.S. attempts to capitalize on them to coerce Tehran's compliance on the nuclear issue.
First is the condition of Iran's aging oil fields, which have never fully recovered from damage inflicted during the Iran-Iraq war of the 1980s.
To maintain sufficient pressure to keep them pumping, Iran has to divert large amounts of natural gas that might otherwise be sold.
"You need billions of dollars invested in order to stand still — to avoid a decline," said Manouchehr Takin, a former Iranian petroleum geologist who is a senior analyst for the Center for Global Energy Studies in London.
Likewise, increased output from refinery construction is being outpaced by the swelling number of young Iranians with a fondness for gas-guzzling cars. Heavily subsidized gasoline is just 35 cents a gallon, a price that invites smuggling, and talk about raising the price has, until recently, gone nowhere.
Moreover, the country has one of the most extensive residential heating infrastructures in the world, with homes in the most remote villages warmed toastily with cheap natural gas.
Total domestic energy subsidies total $20 billion to $30 billion a year, Takin said.
"These subsidies are now costing the government roughly 15% of Iran's GDP. That should knock you over. That's a mind-boggling number," said Hossein Askari, professor of international business at George Washington University. "And the nub of the problem is that if you were to cut the subsidies, I think there would be riots in the streets."
Iran could be reinvesting in the oil and gas infrastructure, and it is to a degree, but Ahmadinejad also has diverted billions of dollars in oil revenue to social welfare programs, major infrastructure building programs in neighboring countries such as Afghanistan and importation of consumer products — to the consternation of many of those in his government.
Foreign investment
The heavy lifting in recent years has been left to foreign oil companies, which in the 1990s began working in Iran in substantial numbers for the first time since the Islamic Revolution.
U.S. sanctions in place since the seizure of the American Embassy in Tehran in 1979 have prevented U.S.-based oil companies from operating in Iran, but companies such as Royal Dutch Shell, France's Total and Italy's Eni have invested, some heavily, despite on-again, off-again threats by Washington to pursue sanctions against foreign companies under U.S. laws.
To a great degree, though, Iran has created its own woes by dragging out contract negotiations and offering only skimpy paybacks to foreign oil companies interested in building new production, industry analysts say.
"People have said that even with sanctions and all the rest, if Iranians want investment in their oil industry, what they need to do is offer decent terms, and whatever the sanctions, they would have companies flooding in," said one Western oil company official, who spoke on condition of anonymity.
"But the issue for us at this point is both political and commercial. The state of the country is such that it's just not the right time to be there."
That is the message Washington is trying to reinforce. For years, U.S. sanctions prohibited investments of more than $20 million in Iran's oil industry, but in practice, they were applied only to U.S.-based oil companies. But as the nuclear showdown has unfolded, and as it became clear the U.N. sanctions would not impose serious economic penalties on Iran, Bush administration officials decided on a different tack.
Envoys from the Treasury Department have approached international banks and companies, reminding them of Iran's record of financing militant Islamic organizations such as Hamas, in the Palestinian territories, and Hezbollah, in Lebanon, through the banking system and its defiance of U.N. resolutions on nonproliferation, and warning that investing in such a country may not be a good business risk.
January 7, 2007
Pg. 1
A campaign to dry up financing for projects poses a threat to Tehran's ability to maintain exports, analysts say.
By Kim Murphy, Times Staff Writer
LONDON — As Washington wages a very public battle against Iran's quest for nuclear power, it is quietly gaining ground on another energy front: the oil fields that are the Islamic Republic's lifeblood.
Iran's oil industry has raked in record amounts of cash during three years of high oil prices. But a new U.S. campaign to dry up financing for oil and natural gas development poses a threat to the republic's ability to continue exporting oil over the next two decades, many analysts say.
The campaign comes at a moment of unique vulnerability for Iran's oil industry, which also faces challenges from rising domestic energy consumption, international isolation, a populist spending spree by President Mahmoud Ahmadinejad and trouble closing contracts with foreign oil companies — a recipe for potential disaster in a nation with one of the world's largest reservoirs of oil.
"If the government does not control the consumption of oil products in Iran … and at the same time, if the projects for increasing the capacity of the oil and protection of the oil wells will not happen, within 10 years, there will not be any oil for export," Mohammed Hadi Nejad-Hosseinian, Iran's deputy oil minister for international affairs, said in a telephone interview.
If Iran were to suddenly stop exporting its 2.6 million barrels of oil a day, such as in the event of a military strike, world oil prices probably would skyrocket. But a gradual decline might be offset by other OPEC members, analysts say, particularly as Iraq increases its oil production and Saudi Arabia carries out plans for significant increases in its production capacity.
The efforts by the United States and its allies over the last few months to persuade international banks and oil companies to pull out of Iran threaten dozens of projects, including development of Iran's two massive new oil fields that could expand output by 800,000 barrels a day over the next four years.
"Many European banks which had accepted financing some oil industries projects have recently canceled them," Nejad-Hosseinian said.
In addition, banks are no longer granting letters of credit for delivery of some supplies, ministry officials say. And as nations such as Japan begin to back out of Iran oil development under U.S. pressure, the government in Tehran is being forced to dig into its own reserve funds to get crucial new projects off the ground.
But Nejad-Hosseinian said Iran had recognized the gravity of the threat and launched steps to head it off, including new "smart" rationing cards, scheduled for distribution in March to check skyrocketing sales of cheap gasoline, and an overhaul of Iran's historically stingy contract terms in an attempt to lure big oil companies into skirting the U.S. roadblocks.
Iran also is hoping to turn to China and Russia for help. But U.S. officials already have warned that they will seek to hold China accountable under Washington's unilateral sanctions laws if it proceeds with a $16-billion project to develop Iran's North Pars gas field. China also has signed a memorandum of understanding under which it may take on development of the Yadavaran field in southwestern Iran, expected to boost production by 300,000 barrels a day.
Domestic problems
Iran's oil and natural-gas dilemma has no direct connection with the sanctions adopted last month by the United Nations Security Council, which are narrowly aimed at assistance to Iran's nuclear program. Although Tehran insists it has strictly peaceful intentions, the U.S. and others believe the program is linked to development of nuclear weapons.
Rather, the looming crisis stems from a series of domestic problems that have converged at a time when Iran is susceptible to U.S. attempts to capitalize on them to coerce Tehran's compliance on the nuclear issue.
First is the condition of Iran's aging oil fields, which have never fully recovered from damage inflicted during the Iran-Iraq war of the 1980s.
To maintain sufficient pressure to keep them pumping, Iran has to divert large amounts of natural gas that might otherwise be sold.
"You need billions of dollars invested in order to stand still — to avoid a decline," said Manouchehr Takin, a former Iranian petroleum geologist who is a senior analyst for the Center for Global Energy Studies in London.
Likewise, increased output from refinery construction is being outpaced by the swelling number of young Iranians with a fondness for gas-guzzling cars. Heavily subsidized gasoline is just 35 cents a gallon, a price that invites smuggling, and talk about raising the price has, until recently, gone nowhere.
Moreover, the country has one of the most extensive residential heating infrastructures in the world, with homes in the most remote villages warmed toastily with cheap natural gas.
Total domestic energy subsidies total $20 billion to $30 billion a year, Takin said.
"These subsidies are now costing the government roughly 15% of Iran's GDP. That should knock you over. That's a mind-boggling number," said Hossein Askari, professor of international business at George Washington University. "And the nub of the problem is that if you were to cut the subsidies, I think there would be riots in the streets."
Iran could be reinvesting in the oil and gas infrastructure, and it is to a degree, but Ahmadinejad also has diverted billions of dollars in oil revenue to social welfare programs, major infrastructure building programs in neighboring countries such as Afghanistan and importation of consumer products — to the consternation of many of those in his government.
Foreign investment
The heavy lifting in recent years has been left to foreign oil companies, which in the 1990s began working in Iran in substantial numbers for the first time since the Islamic Revolution.
U.S. sanctions in place since the seizure of the American Embassy in Tehran in 1979 have prevented U.S.-based oil companies from operating in Iran, but companies such as Royal Dutch Shell, France's Total and Italy's Eni have invested, some heavily, despite on-again, off-again threats by Washington to pursue sanctions against foreign companies under U.S. laws.
To a great degree, though, Iran has created its own woes by dragging out contract negotiations and offering only skimpy paybacks to foreign oil companies interested in building new production, industry analysts say.
"People have said that even with sanctions and all the rest, if Iranians want investment in their oil industry, what they need to do is offer decent terms, and whatever the sanctions, they would have companies flooding in," said one Western oil company official, who spoke on condition of anonymity.
"But the issue for us at this point is both political and commercial. The state of the country is such that it's just not the right time to be there."
That is the message Washington is trying to reinforce. For years, U.S. sanctions prohibited investments of more than $20 million in Iran's oil industry, but in practice, they were applied only to U.S.-based oil companies. But as the nuclear showdown has unfolded, and as it became clear the U.N. sanctions would not impose serious economic penalties on Iran, Bush administration officials decided on a different tack.
Envoys from the Treasury Department have approached international banks and companies, reminding them of Iran's record of financing militant Islamic organizations such as Hamas, in the Palestinian territories, and Hezbollah, in Lebanon, through the banking system and its defiance of U.N. resolutions on nonproliferation, and warning that investing in such a country may not be a good business risk.