Iran-Total Deal:Beginning of the End of ILSA?

-Shebonti Ray Dadwal, Research Officer, IDSA


The British-Dutch energy conglomerate, Royal Dutch/Shell, announced recently that it is negotiating to build a $2.5 billion gas pipeline across northern Iran to carry natural gas from Turkmenistan to Turkey and Western Europe. Though Shell said that if the deal could be worked out, it would be a breakthrough in efforts to export the vast resources of the Caspian Sea region, the announcement was like yet another proverbial nail in the coffin of US sanctions on Iran's energy industry, and represented a further challenge to the Clinton Administration's attempts to isolate Iran.

The Turkmen Foreign Minister, Boris Shikhmuradov, said that he had received a "greenish" light during talks in Washington with the Deputy Secretary of State, Strobe Talbott, as well as the Under-Secretary of State for Business and Economic Affairs, Stuart Eizenstat. Turkmen and Iranian diplomats described the pipeline proposal as particularly attractive because it reportedly would not involve financing through international banks or lending institutions, in which the US government might be able to exercise a veto. However, it is unclear as to how much Iran will profit from this project.1

The Iran-Shell project is the second multibillion-dollar project by a European oil company with Tehran, following a $2 billion project with the French company Total SA and the National Iranian Oil Company (NIOC) to develop the South Pars gas field in Iran, thereby risking US sanctions under the Iran-Libya Sanctions Act (ILSA) or the D'Amato-Kennedy law as it is sometimes known, which was passed in August 1996, and which mandates sanctions against any company that invests more than $20 million a year in Iran's energy sector. But what worried the US government was the reaction to the deal by other Western governments, who not long ago seemed to be coming round to the US view on Iran after they withdraw their Ambassadors from Tehran following the verdict of the Mykonos trial.

After Total announced that it had signed a second deal with Tehran after it replaced the US company Conoco in the project to develop the Sirri A and E oil fields, the French Prime Minister, Lionel Jospin, went on record saying to say that he personally "rejoiced" in Total's decision, while the European Union (EU) governments warned the Clinton Administration to think twice before risking a trade dispute. Since Gazprom, Russia's state-owned company, and Malaysia's Petronas were also 30 per cent partners each (with Total having 40 per cent), Russia too supported the French position, while other US allies like Canada, Australia and Japan all maintained an official silence, signalling the absence of any support for the US view.2

Most of the European governments are resentful of the Clinton Administration's attempt to impose US law on them, which they see as legislation passed largely for domestic reasons that reflect voter support for Israel. Iran is the world's third largest oil exporter after Saudi Arabia and Kuwait and has a trade surplus of $1 billion with the EU. Also, the EU nations rely on Iran for 10 per cent of their oil imports and their companies, which have expertise in key oil and power sectors, consider Iran the largest consumer market in the Gulf.3

While France has taken the lead in challenging US policy in West Asia, known as dual containment, whose aim is to isolate the regimes in Iran and Iraq, Russia too has made it clear that it will not give up what it sees as a close relationship with Tehran. Even after the EU states abandoned the "critical dialogue" they had been pursuing with Iran after the Mykonos verdict, Russia continued to court Iran as part of the Russian policy to cultivate Moscow's traditional partners in the east and also to counter-balance Western (read US) influence in what it considers is its own backyard. Also Iran is an important commercial and defence partner for Moscow as it buys most of its defence equipment from Russia. In April, the daily Nezavisimaya Gazeta wrote: "Today Russia and Iran have practically no differences on foreign policy issues. They share similar views on ways of resolving the problems of Afghanistan, Karabakh and Tajikistan," and more importantly, they both take the same view on sharing the Caspian Sea's rich oil resources, opposing their unilateral exploitation by Azerbaijan and Kazakhstan.4

Even Japan, which has indicated that it favoured taking an independent position on Asia-related matters, has made it clear that it did not wholeheartedly support the US position on Iran. Realising that even those who have condemned Iran the loudest in the past have been trying to take a big slice of the Iranian economy, it has constantly been Japan's stated policy to keep the channels of communication open with Iran and it has refused to support ILSA. This year, Japan paid for its pro-US stance by seeing its companies being left out of any contracts with Iraq under the oil-for-food programme.5

What irked Washington even more was the fact that Total signed the contract with Iran less than a week after US Vice President Al Gore said an intelligence report on Iran showed that the Tehran government was trying to obtain technology needed to build ballistic missiles and nuclear weapons. Quoting US intelligence sources, a report in the Washington Times said that Iran was building long-range nuclear missiles with Russian and Chinese help that could be ready in three years. An extensive Israeli intelligence report about the Russian-Chinese aid to the Iranian missile programme has apparently been confirmed by the CIA as well as the Pentagon. According to the report, Tehran is allegedly building two systems based on the North Korean No Dong missile with ranges upto 1,200 miles. The report said that Yuri Koptev, the head of the Russian Space Agency as well as the Russian state arms exporting agency Rosvoorezhenie was "directly involved" in the programme, along with the Bauman Institute (the Russian version of MIT), NPO Trud, the rocket manufacturing company, and Polyus or North Star, Moscow's leading laser developer. Russia's assistance to Tehran is supposed to include wind-tunnel testing of missiles, nose cones, the design of guidance and propulsion systems and development of a solid fuel project, according to an anonymous official cited in the Times report. Israeli officials reportedly gave their US counterparts a copy of a $7 million contract between NPO Trud and the Iranian missile programme, involving the transfer of equipment related to the SS-4 medium range missiles.6

The reports are said to have worried Washington because it is providing $600 million in aid to the Russian space programme. Israel took a more strident stand with Prime Minister Binyamin Netanyahu ordering his government to suspend talks with Moscow on a proposed gas deal. Israel had announced in June that it was planning to conclude an agreement with Russia on construction of a gas pipeline across Turkey and beneath the Mediterranean Sea that would be in service by 2000. However, when asked about Israel's suspension of the talks, Russian Prime Minister Viktor Chernomyrdin said, "They (Israel), not us, need the gas," indicating the importance Iran holds in Russia's plans vis-a-vis Israel.7

Israel was also making efforts to lobby the US Congress--to the annoyance of the Clinton Administration--to block US aid to Russia for Moscow's alleged role in Iran's nuclear and ballistic missiles programmes till it agreed to stop providing assistance which will give Tehran the technology to produce missiles capable of reaching Israel within the next two years.8

Though the Israelis had less information on the Chinese aid to Tehran, which was reportedly smaller in scale compared to the Russians, among the Chinese firms supposed to be cooperating in the programme were the "Great Wall Industries," who were allegedly supplying telemetry equipment that sends and collects missile guidance data during flight tests.

While the US government recently announced that they had got Beijing to verbally agree not to provide Iran with any more technology on missiles or help Tehran with its nuclear weapons programme in exchange for obtaining US nuclear reactors, they were not so successful with Moscow. However, a State Department official said that Washington had intensified its efforts to "try and get the Russians to put a stop to it."9

A Russian Embassy spokesman in Washington denied any role of Russia in the Iranian missile programme. Russia as well as the EU states, several Gulf as well as Asian states feel that the US-Israeli campaign against Iran is a bid to draw attention away from the stalemate over the West Asian peace process and, more recently, the botched-up assassination bid against a Hamas leader in Jordan which has strained Israeli-Jordan relations and brought worldwide condemnation against Israel. However, the US government said that these new details about the Iranian missile programme have alarmed them and the Israeli government because the new missiles with "biological or chemical warheads and possibly with future nuclear warheads" could threaten the entire region and perhaps further.

The French government warned the US not to retaliate over the Total deal and the US replied that they would "take whatever action is appropriate under the law,"10 but they were confident that the Clinton Administration would not risk a major trade dispute with the EU, and would try to avoid the implementation of sanctions under ILSA, as it did the year before over a similar unilateral US embargo on Cuba under the Helms-Burton Act.

Sure enough, on October 6, following several hours of talks with the French Defence Minister, Alain Richard, US Defence Secretary William Cohen said that whatever action the US took in response to the Total deal with Iran would not undermine close relations with France. Rather than impose sanctions on Total, the US Administration said it preferred an agreement with the EU whereby Washington would scrap the threat of sanctions in exchange for increased pressure on Iran to curb terrorism.11

Richard said that his government had told Total officials that there was no reason in international or French law for them not to go ahead with the investment in Iran. But he sounded a more conciliatory note by saying, "We stand very vigilant over Iran. We observe with interest the ongoing changes in Iranian domestic politics, with the hope that they will someday yield resolve to build a more peaceful relationship with neighbouring states."12

Meanwhile US officials said that they were still assessing the Total transaction and had yet to decide whether they would impose sanctions on Total. But Cohen hastened to clarify in response to French concern that the US order to dispatch the aircraft carrier Nimitz ahead of schedule to the Persian Gulf was not targetted at Iran but against Saddam Hussein for violating UN orders barring Iraqi flights in the area, after Iran allegedly bombed some dissident bases in Southern Iraq.13

What is, however, intriguing to many oil company executives is why Total is willing to defy the threat of US sanctions over a deal that does not even have such good terms. Apparently, the Total-led consortium is to carry all costs for the project, including all exploratory and field development expenses, while the rate of return for the buy-back deal carries a return of 12-15 per cent only. Neither will Total have any rights over the gas, as the NIOC will own all the gas as well as market the condensate and oil.14

Part of the answer lies in the Total Chairman, Thierry Desmarest's assertion that Iran possesses about 10 per cent of the world's proven oil reserves, and about 20 per cent of gas reserves. But what is probably more attractive is the fact that this project, which will develop only about 1 per cent of the estimated 328 trillion cubic feet of gas in South Pars, which is an extension of Qatar's giant North Dome field, is the possibility that Tehran may give those companies which already have investments in the country priority access if and when it opens its large onshore oil fields to foreign investment.15

For Iran, on the other hand, the Total deal will allow it to meet its domestic requirements as well as fulfill its obligations under the Iran-Turkey deal signed earlier. Iran is committed to supply 300 million cubic feet a day (mcf/d) of gas to Turkey in 1999, rising to one billion cubic feet a day (bcf/d) in 2005. Also, Iran's own winter-peak energy requirements are expected to hit 6 bcf/d in 1998 and double over the next five years. Gas from the Total project, eventually expected to hit 2 bcf/d, is not expected till 2001, and with its own ongoing development efforts, it can only hope to satisfy its local needs, let alone have enough to export.16

Nevertheless, there are increasing signs that the US policy is unravelling. A growing number of deals are drawing Iran in as a central actor in the rush by oil companies and governments to accelerate the development of the region's energy resources, in response to huge new demand in East and South Asia, Turkey and other developing areas. At the Tehran International Fair held at the beginning of October, some 1,100 foreign firms from about 78 countries attended, showing the kind of interest the Iranian economy generates despite all the US and Israeli attempts to isolate it.17

Royal Dutch/Shell announced on September 29 that it was negotiating with Iran in the hope of getting a contract to develop a further phase of the South Pars gas field for export to Pakistan, rather than for domestic Iranian use. In fact, Shell was the first European company to enter into serious negotiations with Tehran on the South Pars field though it ultimately went to the Total-Gazprom-Petronas consortium.18

Another French company, Elf Aquitaine, is also talking to Iran about investing in its Doroud oil field. But unlike Total, which having sold most of its holdings in the US and can, therefore, thumb its nose at the threat of US sanctions,19 Elf has to be more careful because it is susceptible to US sanctions. However, the company's Vice President for exploration and production, Jean-Luc Vermeulen, said that under French or international law there was nothing to prevent Elf from working in Iran, unlike Iraq, which came under UN sanctions. But he admitted that since the company had considerable interests in the US in exploration and production as well as other fields, they had to be cautious regarding ILSA.20

Earlier, in July, NIOC signed a $212 million deal with the Canadian energy company Bow Valley to develop Iran's Balal oil field. This deal, in fact, preceded the Total deal, but interestingly did not draw any rebuke or reaction from the Clinton Administration. This deal was quickly followed by the Turkmen-Turkey pipeline deal transiting Iran, which too did not invite any flak from the US government, which probably encouraged many analysts to feel that the Clinton Administration is inching towards a policy revision vis-a-vis Iran.21

While the Central Asian states have been making a concerted effort to move closer to the West, especially the US, for commercial reasons as well as to lessen their dependence on Moscow, they also realise that developing relations with Iran, which shares common land and water borders with most of the Central Asian and Caucasian states, will be beneficial to them as a transit country. These countries are landlocked and lack access to the sea. Though five years have passed since they attained independence, few efficient and skilled persons exist in these countries and together with the lack of access to open seas, they find themselves face to face with serious problems in international trade and economic exchange like isolation and prospects of heavy expenditure for export-import transit via other countries. Adding to these problems is the fact of Russia's dominance over the existing transport routes through its territory forcing these countries to give Moscow a share of any deal that they sign to export their energy resources.

Little wonder then that these Central Asian states are keen that Iran play a major role at least as an alternative transit country. In the next few weeks, Turkmenistan is planning to open a separate pipeline that will initially carry 2 billion cubic metres of gas a year (bcm/y) to power plants and refineries in Northern Iran, with shipments eventually increasing up to six times more.22

For Iran, developing close ties with these states would allow it to fulfill its ambitions of regional leadership. As Iran's own oil resources become depleted, its geographic position allows it opportunities for influence over the region's new reserves. Iran also desperately needs energy for domestic consumption and despite having massive reserves it is likely to have to resort to import about 200 mcf/d of gas from Turkmenistan for its own use as well as for onward sale to Turkey under the agreement it signed earlier in the year. At the moment, Iran only produces some 3.4 bcf/d on an average.23 Therefore, despite not possessing the economic clout to offer significant aid, Iran has tried to increase economic contacts and promote joint ventures, especially in areas of oil and gas. Though Iran established and maintains relations with all the region's states, its closest ties are with Turkmenistan. But all the countries in the region maintain relations with Iran in part to balance their relations with Russia and Turkey.

The former Foreign Minister, Ali Akbar Velayati, had often talked of reviving the "Silk Route" during his visits to the region and had pushed for rapid construction of rail and road links between Iran and the Caucasus and Central Asia. These include rail links connecting Iran and Turkmenistan and improvement of transportation links with Azerbaijan. If completed, they would form the basis of a Silk Route revival because most of the countries of the region would have transportation links through Iran to the Persian Gulf. Iran also has designs on a link through Turkmenistan and Kazakhstan to China in the long run.

For a long time, Iran has sought shares in a number of Caspian oil and gas development and export ventures and is aggressively pushing these states to explore both long and short term export arrangements as an alternative to both Russian and Turkish routes, but so far the US has successfully managed to keep Tehran out of any projects, including the lucrative $7-8 billion Azerbaijani international oil consortium deal. But now after the Turkmenistan to Turkey pipeline route was passed by the US government, despite the fact that it would run through about 1,200 km of Iranian territory, Iran is hopeful that future deals with direct Iranian participation will also be forthcoming.

Iran is also scheduled to begin the controversial US-opposed $23 billion natural gas export project over 23 years with Turkey next year. At the time, the announcement of the deal seemed like a slap in America's face as it came soon after the bomb blast in Dhahran in Saudi Arabia had killed 19 US servicemen and the finger of suspicion was pointed at Iran. Also, only the week before Turkish Prime Minister Necmettin Erbakan went to Tehran, the US Congress had approved ILSA. Therefore, though the US understood Turkey's desire to reduce its dependence on Russian natural gas, it strained US-Turkish ties.

The US urged the Turks to find other places to buy the gas they needed, and in April a new and bigger gas deal was signed with Russia. In May, they struck an even more important deal in Ashkabad, whereby Turkey agreed to buy more than 28 bcm/y of Turkmen gas, almost three times the quantity that it had signed up for in Iran. However, the gas was to travel 1,200 km across Northern Iran on its way to Ceyhan in Turkey. The US allowed the deal to go through as according to them, Iran will get only transit revenues, and, therefore, did not transgress sanctions under ILSA. But to many, the deal indicates that US policy towards Iran could be on the point of change, though Secretary of State Madeleine Albright insisted that it was not a diplomatic gesture towards Iran and urged people not to read too much into the decision to allow the deal to go ahead.

According to the US, the best thing about the deal is that it does away with the Turkish-Iranian deal, and no longer necessitates US sanctions being imposed on Ankara. The Turks too have assured the US that the gas entering Turkey will not be Iranian. But, as a Turkish official said, "It makes little sense for Iran to build two pipelines when one will do. The great thing about gas is that it has no colour."24

On September 24, China and Kazakhstan announced a $9.5 billion deal connecting Kazakhstan's oil fields with both China and the Persian Gulf. According to the deal, China National Petroleum Corporation (CNPC) will develop the giant Uzen field on the east shore of the Caspian Sea and also invest in deposits controlled by producer Aktyubinskneft. While the first pipeline will have to cross 3,000 km from Uzen to China's Xinjiang province at a cost of $3.5 billion, the second line will only be 250 km long through Turkmenistan to the Iranian border and will cost only $1.1 billion to construct. Beijing has reserved the option to extend the pipeline through Iranian territory to the Persian Gulf and has made it clear that it is not concerned with US sanctions but only with the economics of the deal. A line through Iran will be more economically viable than any other route, especially as much of the transport system is already in place and would only need some enlargement and reversal.25

Though the US Administration denies that there has been any change in its policy towards Iran, there has been a growing band of policy makers and influential Iran experts within the US who have been advocating a rethink in its Iran strategy. One of the strongest indications that there could indeed be a softening of the US attitude vis-a-vis Iran was when it allowed Iran to be used as a transit country for the Turkmen-Turkey project. And with many former US statesman being on the board of US oil companies, it was only to be expected that they would like to see Washington adopt a less hard line towards US energy investments in Iran and even cooperation over oil and gas flows from Central Asia. In a recent Foreign Affairs article, former US Secretary of State Zbigniew Brzezinski, and Brent Scowcroft argued that the policy of dual-containment has failed, and said that "the strident US campaign to isolate Iran...drives Iran and Russia together and pulls US and G-7 allies apart." Worse still, they said that the isolation of Iran has damaged US efforts to gain access to energy resources in Central Asia and Iran being the geographical key to exporting large amounts of oil from the region, US efforts to isolate Iran have only succeeded in hampering efforts to wean the new Central Asian Republics away from Russian influence. By forcing the cancellation of a $1 billion oil deal between Iran and Conoco in 1995, the Administration has "served no one's interest except those of the French company Total," which stepped into the gap.26

Recently, Iran's exiled former President, Abolhasan Bani-Sadr, contended that Washington, like many European states, and Tehran have been conducting secret talks on normalising hostile relations with each other. He said that talks have taken place in Germany through mediators who want a relationship between Iran and the US and claims that his sources are informants in the Iranian government. He said Washington has set two main conditions for normalisation of relations: that Iran swears off terrorism and any desire to obtain nuclear weapons.