Iran General NewsIran's energy riches lure European firms

Iran’s energy riches lure European firms

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Wall Street Journal: When Austria-based energy company OMV AG saw a chance to develop a lucrative Iranian gas field in April, it jumped at the $18 billion deal despite strong opposition from the U.S. The Wall Street Journal

U.S. Sanction Threats
Make Little Headway;
‘Huge Amount of Gas’

By RACHEL BAYEFSKY
July 12, 2007

BRUSSELS — When Austria-based energy company OMV AG saw a chance to develop a lucrative Iranian gas field in April, it jumped at the $18 billion deal despite strong opposition from the U.S.

OMV isn’t an energy giant — its revenue was €18.97 billion ($26.05 billion) last year, compared with €153.8 billion at France’s Total SA. But OMV’s investment in Iran, if finalized, would be one of the largest joint European-Iranian projects ever conducted.

The Austrian company’s decision shows how the U.S.’s increasingly strident threats to enforce sanctions against companies doing business with Iran are having limited success.

Smaller European companies, in particular, are emerging as impediments to the U.S. drive to cut off Iran economically. The activities of these companies could backfire if stricter sanctions are imposed by the U.S. or multinational bodies. But for now, the chance to reap large profits is enough incentive for them to ignore U.S. threats of punishment.

“Any company with U.S. exposure is going to be beat over the head to shut these operations down,” says Cliff Kupchan, an analyst with the Eurasia Group, whose clients include multinational oil and natural-gas businesses. But smaller European energy companies, such as OMV, have less exposure to the U.S. market than big oil producers such as BP PLC. As a result, they “may be doing a different cost-benefit analysis,” he says.

The U.S. push to target foreign companies involved in Iran’s energy sector has accelerated in recent weeks. The U.S. is now trying to draft even tougher United Nations sanctions against Iran, because the country has failed to heed repeated warnings from the U.N. Security Council to stop enriching uranium. Iran insists its enrichment program is for generating nuclear power, but the U.S. and its allies believe the program is aimed at creating nuclear weapons.

In response to the OMV investment, the U.S. State Department warned the company and Austrian officials that the Iran Sanctions Act might soon be enforced. Punitive measures under the law, passed in 1996, include allowing the U.S. president to ban imports from and restrict bank loans to companies investing more than $20 million a year in Iran’s energy industry.

When the law was enacted, the European Union pushed back by forbidding European companies from complying with U.S. sanctions. The Clinton administration chose not to punish Total or its minority partners, OAO Gazprom of Russia and Petroliam Nasional Bhd. of Malaysia, when they signed a $2 billion contract to develop a phase of the South Pars gas field in 1997. Similarly, the Bush administration has avoided sanctions on European companies doing business with Iran.

But now the U.S. is threatening to enforce the sanctions more vigorously, and legislation is moving through Congress that would remove President George W. Bush’s ability to waive sanctions.

U.S. lawmakers are also taking up a bill that would encourage American states to sell their shares in such companies, and 14 states are considering stricter rules. In addition, the U.S. Securities and Exchange Commission recently added to its Web site a blacklist of companies and banks that continue their involvement in Iran and other countries considered by the U.S. to sponsor terrorism. The list is designed to “inform investors” and, presumably, discourage Americans from buying shares in such companies.

OMV spokesman Thomas Huemer says Iran, which has the second-largest gas reserves in the world, after Russia, is an interesting opportunity for OMV and its peers. “Other companies have the intention to explore and produce gas there, and ship it and sell it,” he says.

“We are a European company working within the framework of all European and international laws,” Mr. Huemer says regarding the U.S. threat of penalties.

The Austrian government, which owns 31.5% of OMV, says Austrian companies aren’t bound by U.S. legislation. Austrian foreign-ministry spokeswoman Astrid Harz says possible investments in Iran were a “further step towards diversifying energy sources, a goal that is shared within the EU.”

The U.S. also can’t expect opposition to the OMV deal from the EU. “In principle, we have no problem,” says Ferran Tarradellas Espuny, spokesman for the EU’s top energy official, Commissioner Andris Piebalgs.

Cristina Gallach, spokeswoman for EU foreign-policy chief Javier Solana, said U.N. and EU rules allow investments with no direct connection to Iran’s nuclear program.

Beyond OMV, a number of other European businesses have proved resistant to the pressure and are maintaining or strengthening their connections to Iran.

Norway’s Norsk Hydro ASA in September won a $107 million exploration-and-development contract for the Khorramabad oil block in Iran. Under the deal, Norsk Hydro will drill a minimum of three wells and acquire hundreds of kilometers of seismic data on the site within four years. And the Norwegian group is now trying to deepen its investment in the Azar oil field, part of the 3,500-square-kilometer Anaran block. Norsk Hydro has already carried out “extensive operations” to prepare for exploratory drilling, according to the company’s Web site.

The U.S. is “not happy that we’re there,” Norsk Hydro spokeswoman Kama Holte Strand says, adding that her company is talking to the U.S. SEC about Iran dealings. But staying in Iran is profitable, she says.

Direct development of Iran’s oil and gas fields isn’t the only area in which European companies are pushing ahead.

The Ansaldo Energia SpA unit of Italy’s Finmeccanica SpA has contracts to supply 44 gas turbines to Iran, which will provide more than 20% of Iran’s total energy production, according to the power-engineering company’s Web site. The number of gas-turbine units supplied has grown from an initial 32 in 1999.

Switzerland’s EGL Inc., an energy-trading company, signed an agreement in June to buy 5.5 billion cubic meters of Iranian natural gas a year for 25 years. The gas will reach Western Europe through a pipeline EGL is building between Greece and Italy. EGL says its gas purchases don’t constitute an investment.

“This is not an appropriate time to have business as usual with the government of Iran,” says Deputy Undersecretary of the Treasury Stuart Levey, a leader of the U.S. drive to cut off Iran financially.

Joachim Conrad, who heads EGL’s gas division, says importing Iranian gas as a step to diversify gas supply to Europe is supported by European officials. He cites a German foreign-ministry official’s recent comment that “Iran must not be pushed into a corner or isolated.”

By the Europeans’ calculation, Iran has too much potential to ignore. In the “long-term view,” says Frank Harris, head of the natural-gas division at the Scotland-based Wood Mackenzie consulting group, “there is a huge amount of gas in Iran.”

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