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U.s. Puts The Squeeze On Iran's Oil Fields

A campaign to dry up development funds poses a threat to the nation's exports.

Banks Cancel Financing

January 07, 2007|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.

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