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Derek Brower: Cutting one’s nose off…

By Derek Brower, journalist Who really loses from the sanctions on Iran? THE DECISION of Shell and Repsol to pull out of phase 13 of the development plans at South Pars, Iran’s section of the biggest gasfield in the world, will no doubt be seen as a victory by the hawks in Washington. The companies haven’t officially said why they have withdrawn from the projects, but the subtext is clear: sanctions on Iran are biting, and the majors are backing off. There is no question that the news is a blow to Iran’s liquefied natural (LNG) gas plans. Gas from phase 13 was to have gone to Persian LNG, one of several export plans on the drawing board in Iran. Shell says it hasn’t yet decided whether to proceed with that $10bn development. But, along with Repsol, it hasn’t ruled out participating in future phases of South Pars and, according to reports, the two companies could still act as technical advisors to Nioc, the Iranian state oil company.

US sanctions against Iran mean that any company investing more than $20m in the country can face repercussions on its business in the US. That excludes almost all form of investment in Iran’s energy sector. And it leaves the four proposed LNG developments based on South Pars, which would bring almost 34m tonnes a year of export capacity on stream if they all went ahead, an increasingly distant Persian dream. As Iran’s own domestic gas demand soars, other smaller proposed LNG projects, like Qeshm LNG, are also under threat, with the gas now probably destined for local markets.The ever-rising costs in the LNG industry – and Tehran’s cack-handed attempts to rush through deals with the majors – are other factors undermining the country’s LNG ambitions. But the Shell and Repsol decision makes clear that sanctions are working. As long as Iran continues to anger the US and UN by pursuing a nuclear programme, the sanctions will remain, and western majors will be increasingly reluctant to commit to the kind of large-scale investments Tehran wants.But who really loses from this? Iran has become accustomed to dealing with sanctions on its energy industry, and in any case the LNG plans have for some time been viewed as unlikely. Petroleum Economist’s LNG Data Unit has long rated the four South Pars-based LNG projects as “speculative”. What Iran most needs to develop its LNG programme is expertise. Shell and Repsol, as well as Total and BP, which are partners in two of the other proposed projects, would all bring the technical know-how to their projects. If Shell and Repsol remain as “technical advisors”, by-passing the sanctions, then Iran will presumably be able to call in some of their expertise.But it also needs capital. If the western majors aren’t going to supply that, then the Russian, Chinese and Indian companies that, according to rumours, are willing to step into the void, will. Gazprom has already indicated that it wants to build up a world-class LNG business. And, with Total and StatoilHydro’s help on Shtokman and Shell’s participation on Sakhalin, it will eventually have experience of bringing LNG projects onstream, too.So the impact of the sanctions on Iran may hurt the country less than its opponents in Washington and New York hope. Indeed, it is also possible that the sabre-rattling from the White House and the sanctions from the UN give Mahmoud Ahmadinejad more, rather than less, support at home. He will have to run for election again next year, and will hope to translate the perception of more bullying by the Great Satan into domestic support at home. Meanwhile, the sanctions do nothing to stop consumers from Maine to Mumbai buying oil products refined from crude sold onto the international markets by Iran. At $120 a barrel, Iran’s 2.3m barrels a day of exports provides a healthy subsidy to its otherwise faltering economy.And is it really in the interests of the West to watch Iran’s gas sector increasingly become a zone of influence for Gazprom? Indeed, the EU’s stance on Iran’s energy sector seems a clear example of disjointed thinking. The energy commissioner, Andris Piebalgs, has spoken of the country becoming a crucial supplier to the EU. The Commission also wants more LNG to flow to Europe – when and if the tight market in the upstream eases and more LNG comes on line. The commission has also backed plans by OMV and its partners to build the Nabucco pipeline, a “strategic priority”, says Piebalgs, that will help to weaken Gazprom’s grip on gas exports to the EU. Iran, says OMV, would be a crucial source of gas for Nabucco.Not if sanctions, supported by Brussels, continue to keep Iran out of the game, it won’t. There aren’t many members of the international community who want Tehran to develop a fully-functioning nuclear programme. Stopping it doing so is clearly a strategic goal of the US and its allies. But sanctions that prevent western majors from investing in Iran’s gas sector won’t just anger Tehran and punish its citizens. It will also undermine another strategic goal of Brussels and Washington: to free up energy markets and prevent the emergence of a cartel of gas suppliers hostile to the interests of consumers.