Voltzman

Thursday, January 19, 2006

China, Russia would fight Iran oil sanctions: experts - Yahoo! News

By Chris Baltimore Wed Jan 18, 10:16 AM ET

WASHINGTON (Reuters) - U.N. Security Council heavyweights China and Russia have too much riding on Iran's energy sector to let the West slap sanctions on Tehran to punish its nuclear ambitions, experts say

Fears of supply disruption from the world's fourth largest crude exporter, along with rising tensions in fellow

OPEC member Nigeria, sent U.S. crude oil futures to a three-month high near $67 per barrel this week.

The United States and three

European Union nations are pressing the 15-member U.N. Security Council to take up the Iranian nuclear issue, which could open the door to potential oil sanctions.

But two key U.N. Security Council members that carry veto powers -- China and Russia -- have multibillion-dollar oil and natural gas projects hanging in the balance, and China depends on Iran's imports to quench its oil thirst.

"I have a hard time seeing how oil investments could be targeted given the interests of Russia and China," said Julia Nanay, a senior director at PFC Energy in Washington.

Iran wants to sign a major oilfield deal to give China's Sinopec a stake in the giant Yadavaran oilfield in southern Iran, which could require investment of at least $2 billion.

And Russia's LUKOIL holds a minority stake in the Anaran field in western Iran near the Iraqi border.

Iran raised the stakes in its row with the West this month by removing U.N. seals on equipment that purifies uranium, which can be used for power, or if highly enriched, in bombs.

The United States and the European Union's three biggest powers said talks with Iran on the issue were at a dead end, and moved to refer the matter to the Security Council.

Tehran denies accusations it is seeking nuclear weapons and says it needs nuclear technology to generate electricity.

China has blocked Security Council efforts to sanction countries like Sudan, where China has a huge oil deal. Sudan's Darfur region is beset by widespread violence between fractious rebel groups, government forces and a government-backed militia.

China's thirst for oil has made it cordial with nations that have raised U.S. diplomatic hackles -- including Iran, Sudan and OPEC member Venezuela.

"I think sanctions that impact oil flows from Iran are very unlikely," said Jamal Qureshi, also with PFC Energy. "The Chinese are major importers of Iranian crude and they would not be too happy to see that." China imported about 300,000 barrels per day of Iranian crude in 2005.

China's oil demand is expected to grow about 14 percent by 2007 to hit 7.9 million bpd, according to the U.S. Energy Information Administration, versus U.S. demand growth of about 3 percent.

Other major buyers of Iranian crude oil include Japan,

South Korea, Taiwan and Europe, according to the EIA, the statistical arm of the Department of Energy.

If Iran halted exports of around 2.4 million bpd, the rest of the world's spare capacity would not be able to make up the shortfall, making $100 per barrel crude oil prices highly likely in the short term, experts said.

Iran has warned that oil prices would rise "beyond levels the West expects" if its opponents pursued punitive sanctions, and says it could repatriate an unknown amount of oil earnings it holds in foreign accounts.

ACHILLES HEEL

Instead of oil sanctions, experts expect a step-by-step application of sanctions that could restrict travel visas, air flights, spare parts, arms sales or gasoline to Iran.

"Iran's vulnerability is its gasoline imports," said James Placke, senior associate with Cambridge Energy Research Associates and a former U.S. diplomat.

According to the EIA, Iran in 2005 imported about 170,000 bpd, or about a third of its gasoline supplies.

Some warn that Iran could retaliate against international pressure and unilaterally rein back its crude oil exports.

"Oil is now going to be their weapon of choice," said Fadel Gheit, an oil analyst at Oppenheimer & Co.

"If the Security Council ultimately passes a sanctions resolution that has some teeth in it, the Iranians will respond in some way," Placke said. "You can count on it."

Others disagree.

"Iran is not going to shut the spigots -- they need the money," PFC Energy's Nanay said. "But if there's a U.N. referral, I can see the markets getting jittery."

The U.S. Congress could beat the U.N. to the punch.

The Iran Freedom and Support Act of 2005, which is making its way through Congress, would expand sanctions for doing business with Tehran.

The Bush administration has pressed to stall the bill while it pursues a diplomatic solution.