European Companies Brokering Deals with Iran Despite US Stance

A02927464.jpgWhen Austria-based energy company OMV AG (OMV.VI) saw a chance to develop a lucrative Iranian gas field in April, it jumped at the $18 billion deal despite strong opposition from the US.OMV isn’t an energy giant – its revenue was EUR18.97 billion in 2006, compared to the EUR153.8 billion at France’s Total SA (TOT). But OMV’s investment in Iran, if finalized, would be one of the largest joint European-Iranian projects ever conducted.

The Austrian company’s decision shows how the US’s increasingly strident threats to enforce sanctions against companies doing business with Iran are having limited success. Smaller European companies, in particular, are emerging as impediments to the US drive to cut off Iran economically.

The chance to reap large profits is enough incentive for them to ignore US threats of punishment.

“Any company with US exposure is going to be beat over the head to shut these operations down,” said Cliff Kupchan, an analyst with the Eurasia Group, whose clients include multinational oil and natural gas businesses.

But smaller European energy companies, such as OMV, have less exposure to the US market than do big oil producers like BP PLC (BP). As a result, they “may be doing a different cost-benefit analysis,” he said.

The US push to target foreign companies involved in Iran’s energy sector has accelerated in recent weeks. The US is now trying to draft even tougher UN sanctions against Iran, because the country has failed to heed repeated warnings from the UN Security Council to stop enriching uranium. Iran insists its enrichment program is for generating nuclear power but the US and its allies believe the program is aimed at creating nuclear weapons. West has never presented corroborative documents or evidence to substantiate its allegations about Iran.

In response to the OMV investment, the State Department warned the company and Austrian officials that the Iran Sanctions Act might soon be enforced. This law, passed in 1996, allows the US president to ban imports from and restrict bank loans to companies investing more than $20 million per year in Iran’s energy industry, among other punitive measures.

In 1996, the European Union pushed back against US efforts to restrict European operations in Iran by forbidding European companies from complying with US sanctions. The Clinton Administration chose not to punish Total or its minority partners Gazprom (SIBN.RS) of Russia and Petronas (6033.KU) of Malaysia when they signed a $2 billion contract to develop a phase of the South Pars gas field in 1997. Similarly, the Bush Administration has so far avoided sanctions on European companies doing business with Iran.

But now the Bush Administration is threatening to enforce the sanctions more vigorously. Even if President George W. Bush doesn’t do so of his own accord, he may not have a choice. Legislation to remove the president’s ability to waive sanctions on companies doing oil and gas business with Iran is moving through Congress.

US lawmakers are also taking up a bill encouraging US states to sell their shares in such companies, and 14 states are considering stricter rules. In addition, the US Securities and Exchange Commission recently added to its Web site a “blacklist” of companies and banks which continue their involvement in Iran. The list is designed to “inform investors” and, presumably, discourage US citizens from buying shares in these groups.

OMV spokesman Thomas Huemer said Iran, which has the second largest gas reserves in the world after Russia, is an interesting opportunity for OMV and its peers. “Other companies have the intention to explore and produce gas there, and ship it and sell it,” he said. Asked about the US threat of penalties, Huemer said, “We are a European company working within the framework of all European and international laws.”

The Austrian government, which owns 31.5% of OMV, says Austrian companies aren’t bound by US domestic sanctions legislation. Austrian foreign ministry spokeswoman Astrid Harz said possible investments in Iran were a “further step towards diversifying energy sources, a goal that is shared within the EU”

The US also can’t expect opposition to the OMV deal from the EU “In principle, we have no problem,” said Ferran Tarradellas Espuny, spokesman for the EU’s top energy official, Commissioner Andris Piebalgs. Cristina Gallach, spokeswoman for EU foreign policy chief Javier Solana, said UN and EU rules allow investments with no direct connection to Iran’s nuclear program.

Beyond OMV, a number of other European businesses have proven resistant to the pressure and are maintaining or deepening their connections to Iran. Such companies include Norway’s Norsk Hydro ASA (NHY), Italy’s Ansaldo Energia SpA, a unit of Finmeccanica SpA (FNC.MI) and Switzerland’s EGL Inc (EAGL).

Norsk Hydro, with revenue of about EUR24.81 billion last year, won a $107 million exploration and development contract for the Khorramabad oil block in Iran in September, 2006. Under the terms of the contract, Norsk Hydro will drill a minimum of three wells and acquire hundreds of kilometers of seismic data on the site within four years. And the Norwegian group is now trying to deepen its investment in the Azar oil field, part of the 3,500 square kilometer Anaran block.

Norsk Hydro has already carried out “extensive operations” to remove mines from the block and to prepare for exploratory drilling, according to the company’s Web site.

The US is “not happy that we’re there,” Norsk Hydro spokeswoman Kama Holte Strand said, adding that her company is talking to the US Securities and Exchange Commission on its Iran dealings. But staying in Iran is profitable, she noted.

Direct development of Iran’s oil and gas fields isn’t the only area in which European companies are pushing ahead. Italian power engineering company Ansaldo Energia now has contracts to supply 44 gas turbines to Iran – providing over 20% of Iran’s total energy production, according to the company’s Web site. The number of gas turbine units supplied has grown from an initial 32 in 1999.

Switzerland’s energy trading company EGL, with 431 employees, signed an agreement in June to buy 5.5 billion cubic meters of Iranian natural gas per year for the next 25 years. The gas will reach Western Europe through a pipeline EGL is building between Greece and Italy. EGL says its gas purchases don’t constitute an investment.

But the US has objected to deepening ties with Iran in general. “This is not an appropriate time to have business as usual with the government of Iran,” said Deputy Undersecretary of the Treasury Stuart Levey, a leader of the US drive to cut off Iran financially.

Joachim Conrad, who heads EGL’s gas division, said importing Iranian gas, as a step to diversify gas supply to Europe, is supported by European officials. He noted a German Foreign Ministry official’s recent comment that “Iran must not be pushed into a corner or isolated.”

In the Europeans’ long-term calculation, however, Iran has too much potential to ignore. In companies’ “long term view,” said Frank Harris, head of the natural gas division at the Scotland-based Wood Mackenzie consulting group, “there is a huge amount of gas in Iran.”

All the aforementioned facts show that the US has failed in cutting off Iran’s relations with the international community.

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