Articles
Washington Report on Middle East Affairs, October/November 2000, pages 78-79
Trade and Finance
As the U.S. and Iran Slowly Warm to Each Other, What Will Happen to Trade?
By Colin MacKinnon
“The U.S. legislation is a joke. The only thing it has succeeded in doing is preventing American companies investing in Iran.” So said Vittorio Mincato, head of the giant Italian oil company ENI, to the Financial Times at the end of July, following his announcement of a giant $3.8 billion contract to develop Iran’s South Pars gas field. Mincato was talking about ILSA, the Iran Libya Sanctions Act, passed in 1996, which threatens non-U.S. firms with a range of penalties if they invest significantly in the Iranian oil industry.
And Mincato has a point. To date, no foreign company has been punished under the bill and none is likely to be. Sanctioning a foreign company, especially a major EU firm, has proved to be much too confrontational a move for a U.S. administration. ENI’s contract is just one more blow to ILSA.
Still, it stands to reason that the sanctions have inhibited development of the Iranian oil industry, at least to some extent. But that’s mostly because it’s U.S. firms, still the world leaders in petroleum technology, that have been kept out of Iran by presidential order. U.S. off-the-shelf equipment and technology, moreover, if laundered through a third country, thereby becomes a bit more expensive.
But with Iran evolving and with U.S. companies eager to deal with Iran, how long will these sanctions go on? There have been some signs of warming between the two countries.
”¢ At the end of August two officials from the Department of State and one from AID were in Tehran attending a conference organized by the U.N.’s Food and Agriculture Organization. These were the first American diplomats to visit Iran officially since the embassy seizure in 1979 (unless, of course, we count Robert McFarlane, who visited the country covertly in 1986 trying to arrange release of American hostages in Beirut). Earlier this year, the Interior Department sent officials from its Fish and Wildlife Service to participate in international meetings held in the Iranian capital.
Ӣ In the week preceding the September meeting of heads of state at the U.N., a number of American legislators met with their Iranian counterparts in New York at a session of the Interparliamentary Union. The meeting had the blessing of authorities in Tehran, including Ayatollah Ali Khamanei, the Leader of the Revolution and a vociferous critic of the U.S. Earlier, in March and April, 20 congressmen wrote to the Iranian ambassador to the U.N. proposing just such a meeting.
”¢ Secretary of State Madeleine Albright attended President Khatami’s Sept. 5 address to the U.N., applauding politely when he took the podium and at the end of his speech. Khatami, in turn, attended President Bill Clinton’s address to the General Assembly.
”¢ Last spring President Clinton relaxed slightly the American embargo on imports from Iran—pistachios, rugs and caviar are now being imported legally from Iran. Although not much of a move economically, Clinton’s order did have symbolic significance.
These small steps come at a time when Iran’s economic heft is increasing.
New Hydrocarbons Discoveries
An astonishing run of new oil and gas discoveries in Iran—if they prove out—will increase Iran’s oil reserves by one-third. Within less than a year Iran will have gone from being the fifth largest member of OPEC to second, just after Saudi Arabia.
The discovery of probably one billion new barrels last year at the Azadegan field, near the Iraqi border, and a large discovery more recently at Changuleh in the south, have increased recoverable Iranian reserves from 93 billion barrels to 130 billion. According to the National Iranian Oil Company (NIOC), new technology and capital would increase those reserves even further, to 180 billion. Total Iranian reserves, those that are recoverable and those that are not, are probably around 520 billion barrels.
There have been major gas discoveries, too. Particularly important are new reserves of “sweet gas”—gas that requires no refining before use. Two new fields, Homa and Zireh, were announced in August. These follow new discoveries at Tabnak, the country’s largest sweet gas field.
Homa and Zireh are located just north of a small Gulf port called Assaluyeh—which is not likely to be small for long. Major petrochemical and gas-processing facilities are planned there by foreign firms operating in South Pars.
New hydrocarbons discoveries are not the only good economic news for Iran. With oil prices near record highs—$32.50 at the end of August—Iran’s exports figures are way up. From March 1999 to March of this year, Iran exported close to $20 billion worth of goods. And imports fell last year, to $13.5 billion, which was about a billion dollars under the average for the last three years. As a result, foreign exchange reserves rose $1.8 billion during the period. And Iran’s foreign debt is down, currently around $10 billion.
The Iranians know high oil prices can easily fall, however, so the government, which really hasn’t done much to aid the economy, has merely been granted a reprieve. In the end, the country simply needs much more foreign investment than it is getting.
Why No More Investment?
What’s preventing more investment? Not ILSA. The real culprit here has been the Iranian polity and the roadblocks Tehran throws in the way of foreign businesses, particularly in the oil industry.
At this point, the only politically feasible way to finance development in Iran’s oil industry is the so-called “buy-back” contract. Under this arrangement foreign companies themselves pay for development of an oil or gas field. Then, as the project progresses, the facilities are turned over to the Iranians, who sell the production and reimburse the foreign company for its investment, paying an agreed on rate of return. This usually runs from 15 to 17 percent of the contract and is paid for by allocating a share of production equal to the agreed-on rate of return.
Foreign companies basically don’t like these arrangements, which they find cumbersome and rigid. Nor are buy-back schemes all that advantageous to the Iranians. If prices slip, the Iranians still must pay the agreed-on rate of return to the companies, and to do that they have to sell more gas or oil at lower prices.
The Iranian constitution, however, forbids granting petroleum or gas concessions to foreign firms. Since it looks impossible to change that, buy-back is what the outside world gets. It’s a measure of the attractiveness of the Iranian oil sector that some companies, at least those that can afford to, are willing to enter into these contracts.
American firms, by the way, are allowed to buy bid packages and oil field data from the Iranians. Chevron, Arco, Kerr-McGee, Unocal, Conoco and ExxonMobil all are said to be interested. Arco and ExxonMobil have officially told Iran they are interested and have applied to buy packages.
Whether U.S. firms can participate, of course, depends on U.S. law. Right now they cannot. But President Clinton’s executive order banning most U.S. trade with Iran and all U.S. investment in the Iranian oil industry expires, like ILSA, next spring. Will they be renewed?
Colin MacKinnon is a country analyst with the Syracuse, NY-based PRS Group.
