Oil Cos, Seeking Reserves, See Iran as Long-Term Bet

LONDON Mar 02, 2007 (Dow Jones Newswires)

Oil majors are laying the foundations for potentially lucrative energy deals in Iran, despite the risks, as they face tougher investment prospects in some of the world's other top energy producing countries.

In a signal to Washington that they won't bow to U.S. pressure to isolate the Islamic republic, many energy giants desperate to boost their flagging energy reserves are eyeing multibillion dollar Iranian projects that could give them access to some of the world's largest oil and gas fields.

"Iran is one of the few countries which is today inviting companies to come and invest in its oil sector," says Bijan Khajepour, chairman and strategic consultant at Tehran-based Atieh Bahar Consulting, an independent business think-tank specializing on Iranian affairs.

Iran has the world's third-largest oil reserves and second-largest gas reserves. But the country's standoff with the U.S. and its allies over its nuclear program, along with anti-western rhetoric from Iranian President Mahmoud Ahmadinejad, have intensified nervousness among foreign firms about investing there.

But a number of non-U.S. oil majors chose to ignore these pressures when they gathered in one of Vienna's top hotels last month to meet with senior Iranian oil officials.

"You tell me a country where there aren't any problems when it comes to investing," said a senior Indian oil executive at the Austrian event. Iran is simply "a different nature of...problem," he said.

Companies including China Petroleum & Chemical Corp. (SNP), or Sinopec, Norway's Statoil ASA (STO), Royal Dutch Shell PLC (RDSA), Italy's Eni SpA (E), Total SA (TOT), Russia's Lukoil (LKOH.RS) and Austria's OMV AG (OMV.VI) listened intently as Iranian oil officials offered, in a polished and professional presentation, 17 oil blocks for development.

Foreign oil executives there were quick to defend their right to do business with Iran. OMV struck a defiant tone when asked by Dow Jones Newswires whether it might refrain from pushing forward with its operations in Iran to avoid possible sanctions by the U.S.

"We are obeying all Austrian laws and European Union laws, (with Austria) being an E.U. member," said OMV head of exploration and production, Helmut Langanger.

Russia's Lukoil also made clear its intentions to do business in the Islamic Republic.

"Lukoil is very serious about oil and gas projects in Iran and collaborating with the National Iranian Oil Company," said Lukoil Vice-President Andrey Kuzyaev.

Notable by its absence in Vienna was U.K. energy giant BP PLC (BP). With major oil and gas assets in the U.S., BP is all too aware of the kind of damage it could cause itself if it were to do business with Iran.

Iran has made no secret that it urgently needs to raise foreign capital if the country is to maintain its position as the Organization of Petroleum Exporting Countries' second-largest producer.

Iran has the capacity to pump just 4.3 million barrels a day, down from6 million b/d in the late 1970s, while Saudi Arabia, OPEC's biggest producer, has capacity close to 11.5 million b/d. Many of Iran's oil fields are old, and output could decline more without foreign cash and technology.

Keen to quell foreign concerns that they are no longer welcome in Iran under President Ahmedinejad, urbane Iranian oil officials at the Vienna presentation announced that Iran's energy investment contracts, known as buybacks, have been revised so that companies can be involved in an energy project for 20 years, up from 6 or 7 years previously.

The buybacks, which skirt around a constitutional ban on foreign oil firms taking an equity stake in Iranian energy projects, allow oil majors to recoup their investments through oil and gas sales. Companies repeatedly complained in the past that the contract-term was too short.

One senior Iranian oil source said he realistically expects "two or maybe three serious bids" regardless of the political tensions. Tensions between Iran and the U.S. have escalated in recent months. Tehran's refusal to suspend its nuclear program has led to speculation that the U.S. could use force against to prevent Iran from obtaining nuclear weapons. Iran already faces limited international sanctions agreed by the U.N. Security Council in late 2006 because of its nuclear ambitions, that it claims are for peaceful purposes.

The U.S. also accuses Iran of supporting Shiite insurgency in neighboring Iraq. In a show of force, a second U.S. Navy aircraft carrier arrived in the Gulf region in recent days, where it hasn't had two carriers since the early days of the U.S.-led invasion of Iraq in 2003.

Yasser Elguindi, Senior Managing Director at Medley Global Advisors, a leading policy intelligence advisor to investment banks, asset managers and hedge funds, says foreign oil companies are choosing to ignore geopolitical tension because they need access to new oil and gas reserves for the longer term.

"Iran isn't a good environment" politically, and the interest from foreign companies is indicative of how bad things are elsewhere, Elguindi says.

Oil majors are finding it increasingly hard to secure exploration deals globally. Investment terms are already restrictive in many countries that hold significant energy reserves. Venezuela and Russia are tightening their grip on national reserves and forcing foreign oil companies to surrender stakes in drilling ventures.

Forced to seek out new exploration possibilities, earlier this year, Shell chose to ignore geopolitics when it made the first step towards a multibillion dollar deal with Iran to help develop the country's huge South Pars gas field. Together with Spanish oil company Repsol YPF SA (REP), Shell in January signed a preliminary $10 billion agreement with the Iranian government to develop two phases of the field.

Industry sources say the project fits with the company's attempts to build reserves. U.S. authorities have already threatened to probe the deal that Shell officials say is at the feasibility stage.

How far Shell is willing to go in defying the U.S. is unclear. Shell chief executive officer Jeroen van der Veer said to reporters in early February that a final decision poses "quite a dilemma." He said at the time that Iran has some of the biggest hydrocarbon reserves in the world, but acknowledged that politics will play a part in whether the deal proceeds. Yet van der Veer has said privately that the company needs such deals to grow its reserves, a person in contact with van der Veer told Dow Jones.

Shell couldn't be reached for comment on its reserves requirements.

Thierry Desmarest, Chairman of Total, also told reporters this week in Paris, that his company will continue talking with Iran on developing a gas project in the Persian Gulf unless there is an international ban on doing business with the country.

Desmarest, referring to a drilling project at another part of South Pars, said, "We've made progress, but we haven't found all the solutions. Once we have, we'll evaluate the state of the relations between Iran and the international community."

The U.S. prohibits all international oil companies with interests in the U.S. from investing more than $20 million a year in Iran but so far has taken no action against firms that are in breach.

Industry sources say Iran will undoubtedly be able to secure concrete bids from major energy consumers such as China and India and western companies will wait in the wings, preparing, until the politics have calmed.

Copyright (c) 2007 Dow Jones & Company, Inc.

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