Iran enacting reforms to lure E&D investment

Bob Tippee
Managing Editor
Economics and Exploration

Conciliatory statements by the presidents of Iran and the U.S. last week, whatever they meant for relations between the countries, aren't the only signs of change crucial to oil and gas activity in the Islamic republic.

Iran is shaking up its state-run oil industry and trying to improve the number and allure of oil investments it makes available to international oil and gas companies.

Area specialists at a World Policy Institute forum in Houston last week said the Iranian parliament, called Majlis, is considering legislation to open onshore exploration and production opportunities to international companies.

The step, discouraged by the revolutionary constitution as a way for non-Islamic influence to enter the country, would be a major departure from Iran's current policy of offering only offshore projects to foreigners. And it would further test U.S. sanctions against foreign investments in Iran exceeding $20 million.

France's Total SA has rebuked third-party enforcement of the sanctions by entering into a deal to handle one phase of development of South Pars gas field, the Iranian extension of Qatar's supergiant North field. Under an earlier contract, Total also is developing Sirri field near the Strait of Hormuz.

New opportunities

Fereidun Fesharaki of the East-West Center in Honolulu told the Houston forum that Iran plans to open acreage in the Caspian Sea as well as onshore tracts to foreign investment. Some of the onshore opportunities will be for exploration and some for redevelopment of old giant fields, such as Masjid-i-Suleiman, in the pattern of Venezuela's reopening of oil field opportunities to international investment.

Fesharaki said terms under discussion provide for cost recovery, a return on investment, and development rights for companies making discoveries. Other conference participants pointed out that terms offered earlier by the revolutionary government and before imposition of the U.S. sanctions had attempted to accommodate Islamic views of profits and were generally considered to be noncommercial.

Fesharaki also said National Iranian Oil Co. is gaining a degree of independence from Iran's oil ministry. Since the Islamic Revolution of 1979, the oil minister has served as NIOC's president under a scheme that kept the industry under firm control of the country's clerical leadership. "The clergy in Iran have discovered that they need expertise," Fesharaki said.

U.S.-Iran relations

For international oil companies, effects of liberalization within Iran will be limited as long as the U.S. retains economic sanctions. Even if they haven't kept all companies out of Iran, the sanctions have made projects difficult to finance.

A central question in the Houston forum, therefore, was whether Iran had changed enough to persuade the administration of U.S. President Bill Clinton to ease its longstanding policy of imposed isolation.

Hooshang Amirahmadi, a Rutgers University professor who for the past 6 years has tried, in his words, "to build bridges" between the two governments, said there's a "new sense of realism in both Washington, D.C., and Tehran."

But he warned that conciliatory statements by Iranian President Mohammad Khatami in a Jan. 7 CNN interview, and by Clinton in an official response, should not raise expectations too high. It is too early, he said, to expect a "breakthrough" statement from Khatami, whose top priority remains domestic issues.

He noted that opponents to improved relations with the West in general and the U.S. in particular remain in key positions in Iran. He also said he believes that Khatami didn't make a speech appreciative of Americans last December without consultation with Iranian supreme spiritual leader A* Khamenei, who frequently denounces the U.S.

In an observation echoed by other forum speakers, Amirahmadi also said Iran hasn't taken U.S. concerns about its behavior seriously, thinking mistakenly that they are propaganda. The countries, he said, need to find areas of mutual interest, negotiate openly and unconditionally for as long as it takes to resolve problems, and recognize that what one country sees as economic issues the other often considers chiefly political.

Repeatedly, the Rutgers professor stressed that the biggest problem is a lack of trust on both sides.

"Trust is the key word in U.S.-Iranian relations," he said.

Sanctions support

Steve Rosen of the American-Israe* Political Action Committee, presented a catalog of allegations of Iranian misbehavior, including some that have occurred since Khatami became president last May. They included assassination attempts, development of a missile capable of delivering weapons at a distance of 1,300 km, and efforts to disrupt Middle Eastern peace negotiations.

He supported U.S. sanctions against Iran, asserting, "We don't think that dialogue and sanctions are opposites."

That the Majlis is considering opening onshore oil field work to foreigners, he said, is evidence that the Tehran government feels the pain of sanctions.

And he pointed out that, although Khatami in last year's presidential elections defeated a candidate favored by the ruling clergy, the new president constitutionally was appointed by Khamenei.

Of the new president's amicable words toward Americans, Rosen said: "We don't know if Mr. Khatami is serious and, if he is serious, whether he can deliver."

Graham Fuller of the Rand Corp. said Rosen overstated some of the threats posed by Iran.

"Is the U.S. going to assist in the moderation of Iran or is it going to complicate the process?" he asked, calling current U.S. policy a complication.

Rob Sobhani of Georgetown University criticized the Iranian government for missing opportunities to advance the interests of Iranian people and cited allegations that it has participated in efforts to destabilize politics in the Caspian region.