[ANN]Unstable energy equation

The Straits Times / Asia News Network
The world's energy equation may have to be recast should growing international concern over Iran's nuclear program lead to stronger economic sanctions against the Middle Eastern state.

News last week that Teheran has resumed limited uranium enrichment research, thereby opening up the possibility of building nuclear weapons, has triggered diplomatic pressure from Europe and the United States for the U.N. watchdog, the International Atomic Energy Agency, to refer the issue to the U.N. Security Council.

While Iran says its program is for peaceful purposes, there are fears that it could support military goals. While any initial action by the U.N. Security Council is likely to be confined to calls for Iran to abide by IAEA rules and be open to inspections, the question of sanctions - more comprehensive than those now levied by the United States - being put in place further down the line, either U.N.-endorsed or promoted outside the United Nations by the United States, is now being raised.

Should the nuclear issue indeed lead to wider and stronger sanctions, then Iran's large petroleum sector, a key element in meeting both European and Asian energy demand now and in the future, would likely be a casualty.

Of course, policy towards Iran is not just about energy. Multilateral policy and the foreign-policy decisions of individual countries should not be hostage to a single interest. Iran's nuclear brinkmanship, and how the United States, the EU, and Russia respond - as well as major Asian countries and groups such as Japan, South Korea, China, India, and ASEAN) - have huge ramifications. But there can be no doubt that should the present stand-off escalate, then there will be a cost in terms of reduced oil and gas supply that Asia - as well as Europe and the United States - will have to bear.

Iran, holding 10 percent of the world's proven oil reserves, exports 2.7 million barrels a day and is one of the world's major oil suppliers. Major customers are Japan, China, South Korea, Taiwan and Europe.

Iran has long been one of world's great oil exporters. It could also become of one of world's largest gas exporters, through both shipped liquefied natural gas (LNG) and possibly pipeline. Iran holds the world's second largest proven natural gas reserves after Russia, totaling 26.6 trillion cubic meters. While gas is very important for domestic power generation and other uses - and such enormous reserves makes one wonder about Teheran's imperative to have expensive nuclear power generation as well - the export potential of gas is yet to be tapped.

With Asia's LNG demand forecast to grow dramatically, Iran would seem well placed. UK-based consultants Wood MacKenzie estimate a doubling of demand in the Asia Pacific region from 93 million tons to 196 million tons by 2015. At current prices - one ton of LNG costs $300 - that works out to an industry potentially worth $58.8 billion in the Asia Pacific alone.

Apart from Australia, with abundant uncommitted gas reserves off its north-west and northern coasts, there are simply not many other countries able to meet such large new demand east of Suez.

In Iran, three large-scale LNG plants are under development. Also proposed is a gas pipeline to Pakistan and India. All would be supplied from the vast offshore South Pars field.

The U.S. economic sanctions, which in fact date back 25 years, were escalated by the Clinton administration in 1995 and 1996. But they have not prevented growth of Iran's petroleum sector, although they have slowed its pace as a result of the absence of major U.S. companies and their investment and technology.

In their place, an array of major foreign oil companies has been pursuing oil and gas development. The list includes Anglo Dutch Shell, France's Total, Norway's Norsk Hydro and Statoil, Spain's Repsol, Italy's ENI, UK's British Gas, Austria's OMV, Russia's Lukoil and Gazprom, Canada's Bow Valley, Japan's Inpex, Malaysia's Petronas and Australia's BHP. And most recently, India's state-owned oil company ONGC and China's Sinopec have both signed agreements to enter Iran's upstream oil sector while undertaking purchase of LNG.

These companies have not been deterred by the threat of U.S. sanctions on non-U.S. companies, which invest more than $20 million annually in the Iranian petroleum sector.

Mind you, there is often a lot more talk and hope than substance in the Iranian petroleum sector. Apart from the issue of sanctions, advancing projects in Iran is very difficult for foreign companies, not simply because of political pressures and uncertainties, but also because of the tough commercial terms imposed by the Iranians.

Nevertheless, the scale of Iran's oil and gas resources, combined with Asian as well as European demand, has still made the country an attractive prize.

And to date, certainly, U.S. sanctions against non-U.S. companies have proven to be a paper tiger.

Under the 1996 Iran-Libya Sanctions Act, the U.S. president has been able to waive sanctions on the basis that they would either not be in the greater national interest of the United States or because the offending company's country had agreed to undertake certain measures towards Iran.

Only BP - which has historical ties with Iran - has said it has no interest in returning to Iran. It has a sizeable position in the United States. But now, should the present nuclear crisis not be defused, the other foreign companies may face sterner restrictions, at least from the United States, and be forced to reconsider their positions.


Andrew Symon is a visiting research fellow at the Institute of South-east Asian Studies. - Ed.


By Andrew Symon