Analysts: Iran politics
- The United States is on a concerted campaign to discourage foreign energy
companies from doing business in Iran. But analysts say Iran's
investment woes are its own fault — it could dodge international pressure and
attract more foreign money by simply offering better deals.
"They are doing the
embargoing for us," said Mikkal Herberg, a former oil executive now with the National
Bureau for Asian Research, a think tank partially funded by the U.S.
"The terms they offer
(to foreign energy companies) for these deals are very poor, with low rates of
return against the geopolitical risk," he said.
Even Chinese firms, eager to
invest in troubled countries like Sudan,
have been slow to follow through on energy deals in Iran.
The situation shows how
domestic politics often hamper Tehran's
ability to withstand Western efforts
to curb the country's controversial nuclear program.
Iran is currently flush with oil
revenue, but its economy, reliant on oil and gas, lacks the investment needed
to reverse falling oil production. The shortage could seriously weaken the
country in future, leaving it more vulnerable to foreign pressure.
U.S. Secretary of State
Condoleezza Rice and Defense Secretary Robert Gates continued the push for
sanctions against Iran
recently, urging allies to support broader financial moves against the country
during their Mideast visit.
Iran could do more by sweetening
its own foreign deal terms, many oil industry analysts say. But that would run
contrary to Iranian President Mahmoud Ahmadinejad's
belief in self-reliance and his goal to channel oil revenues to the country's
Other conservatives in Iran, like
former President Akbar Hashemi Rafsanjani, have pushed for economic reform to
attract foreign investment. Leaders like Rafsanjani, who belong to an old guard
of conservatives at odds with Ahmadinejad, are
thought to hold private control of much of the oil sector.
The basis for Iran's posture
goes back decades. Its constitution prohibits foreign ownership of the
country's energy resources, a reaction to Britain's near monopoly control of
the nation's oil industry until it was nationalized in the early 1950s.
To attract foreign
investment now, Iran
offers so-called "buyback"
contracts that leave ownership in
Iranian hands and pay international energy companies a fixed return to develop
oil and gas fields.
said the contracts are relatively unattractive because the returns are not
equal to the risk of investing in a country with tense international relations.
"What you can earn
gives you a rate of return of 6 to 9 percent, maybe 10 percent if you're
lucky," he said. "In a very low-risk environment, you want to see 10
to 12 percent returns. In a high-risk environment, you need 15 percent plus to
Tehran was at odds with
China's Sinopec over the development of the Yadavaran
oil field because the company wanted a 15 percent return, and Iran something
lower, the managing director of the National Iranian Oil Company, Gholam Hussein Nozari, told the
official IRNA news agency in January.
Consistently high oil prices
over the past few years have left Iran awash in petroleum revenues,
with close to $50 billion in 2006. But the economy lacks the investment it
needs to reverse falling oil production, mostly because Iran spends
close to $60 billion a year on subsidies for fuel and other goods.
Oil production will decline
5 percent a year unless Iran
gets new investment, Akbar Torkan, managing director
Pars Oil and Gas Co., was quoted as saying by the semiofficial ISNA news agency
Some experts believe Iran's oil
exports could go to zero within a decade.
All parts of Iran's energy industry need additional capital,
noted Narsi Ghorban, an
independent energy consultant based in Tehran
— exploration, development, transportation and marketing.
Iran has made some improvements
to its buyback contracts over the past few years, extending their duration and
allowing a company that discovers a field to develop it.
And last December, NIOC's director for exploration announced that Tehran would allow
production sharing in contracts for the first time, the Economist Intelligence
Although commonly offered by
developing countries, such a contract would be a radical departure for Iran, allowing
foreign companies a contracted share of production, giving them equity rights
without full ownership.
Herberg called it an ingenious way
for those in Iran
eager for investment to get around the country's aversion to foreign ownership.
But Alex Forbes, a
consultant with U.K.-based Gas Strategies, said he was skeptical that Iran would
follow through on the plan.
"I doubt it very
much," he said. "They would have to change their constitution to do
Amy Jaffe, an energy expert
at Rice University's James A. Baker III Institute for Public Policy, noted that
Iran lags behind countries like Nigeria that have used production sharing to
increase oil output despite their own high risks — in Nigeria's case, from
pipeline attacks and corruption.
"There would be a
fairly sizable improvement in investment in Iran's oil and gas industry if they just offered terms that make sense,"