September 6, 2010 | Australian
Aussies Pull the Plug in Iran
IRAN is slowly suffocating from sanctions that are beginning to bite where the maverick state has been strongest: its energy sector.
The tougher set of sanctions imposed mid-year by the UN, the US, Australia and especially the European Union are aimed at preventing Iran from developing nuclear weapons. They are proving the most effective since more comprehensive sanctions triggered the downfall of the apartheid regime in South Africa.
Despite initial scepticism, the sanctions ensure that the price that Iran pays for building its bomb keeps climbing.
Last Friday, Japan joined in, tightening sanctions, especially targeting the banking and energy sectors, and the move was applauded by Australia’s Foreign Minister Stephen Smith.
Iran claims the third largest oil reserves and second largest gas reserves, after Russia.
But it needs foreign technology, capital and markets to take full advantage of these assets, and international investment and support are drying up fast.
One of Australia’s most internationally engaged companies – Sydney-based engineering contractor WorleyParsons, which employs 30,000 people worldwide – has announced since the sanctions were tightened that it will not accept any more work in Iran.
WorleyParsons chief executive John Grill says the company “remains vigilant to ensure that it complies with all relevant international trade sanctions”.
“With regard to projects in Iran, the company has decided not to accept any further contract awards,” he says.
Mahmoud Ahmadinejad’s oil minister Massoud Mirkazemi announced in May that Iran faced a “liquidity shortage”, and would seek $US200 billion ($220bn) for its oil, gas and refinery industries in the next five years.
Iran imports 30 per cent to 40 per cent of the petroleum it uses because it lacks the refining capabilities to process its large resources of crude oil.
That refined oil is mostly coming from Turkey and China, which say they will abide by UN sanctions but not those of the US or the EU.
The situation is hitting Iran hard because it is one of the most energy-intensive countries in the world – thanks to huge subsidies that encourage waste – its consumption per person being 15 times that of Japan and 10 times Europe’s.
Abandoning the subsidies, however, would cause inflation – expected to average 10 per cent this year – to soar even higher, while growth is anaemic for a developing country, running below 3 per cent.
Iran is abandoning ambitious plans to become one of the world’s top suppliers of liquefied natural gas, which can be sold anywhere.
Crucial equipment can be obtained only from Germany’s Siemens and the US’s GE, both now out of the equation. Iran is instead hatching schemes to pipe gas to markets, but the latter are so far proving elusive, especially now that Europe has backed away.
Deputy oil minister Ahmad Ghalebani said last month: “Gas export through pipeline has priority over LNG. Right now, [a pipeline] is more feasible, more convenient and faster, while exporting LNG requires huge investments and sophisticated technology and needs a long process.”
But the Nabucco pipeline scheme, which formerly included Iran as a source for Europe, is instead focusing on Central Asia and Iraq. Pakistan, one potential market, has been impoverished by recent floods. Turkey, another, appears not to be rushing because Iran has failed to honour supply commitments in the past.
Iran’s gas demand often exceeds supply, especially in winter, and as more gas is required to help extract its oil, using techniques that rely on injecting gas to maintain pressure.
The nation last month suspended two of its giant LNG schemes, the Persian project and the Pars project. Ghalebani, who is also managing director of the National Iranian Oil Company, has blamed costs and complexity.
And rising LNG supply worldwide – with Australia set to become the biggest producer in five years – is causing prices to decline. But sanctions are clearly the key factor.
The geostrategic setting of this intense drama is one of Iran receiving support from other northern states of the region: Syria and, more importantly, Turkey, which is striving aggressively to re-establish its Ottoman-empire power and which took over the rotating presidency of the UN Security Council on September 1. While Iran’s economy is teetering, its support from Turkey encourage Tehran’s ambitions in the region. Australia-Israel and Jewish Affairs Council executive director Colin Rubenstein says: “If you like what Hezbollah and Hamas are doing, their proxy wars and their meddling on Iran’s behalf, you’re in for a treat because there’ll be more coming.”
At the same time, much of the Arab Sunni world – including Egypt, Saudi Arabia and Morocco – is aligned in concern about Iran’s intentions, with such states also considering acquiring their own nuclear capacity in response.
Two years ago the Pars International Development and Engineering Co signed a $1.24bn contract with Chinese, South Korean and European companies – and with WorleyParsons – for the final stages of the development of an LNG field in Iran.
This year WorleyParsons also signed a separate contract with China’s National Petroleum Corporation, which agreed to replace France’s Total in another gas deal.
Both projects now appear to be shelved as LNG operations, though production of gas for other purposes may continue.
China National Offshore Oil Corporation, which works with WorleyParsons in other areas, including the South China Sea, has also become more heavily engaged in Iran as the European companies have pulled out. China lacks key technological skills to liquefy gas but could play a key piping role if the development of Iranian gas fields goes ahead.
WorleyParsons says in its recent annual report it “will complete existing contracts, subject to ensuring it does not breach any sanctions”, though that appears to require some tricky tightrope-walking.
A spokesman says the company “actively monitors sanctions to ensure continued compliance”.
The starkest threat to companies dealing with Iran is that the US – which has again become active in pursuing likely sanction breaches – would shut them out. Banking and insurance are the latest sectors fitted into this jigsaw of a strategy for isolating Tehran, which is an easier target since Ahmadinejad’s regime lost legitimacy at home and abroad after the last election.
Recently, the ANZ bank had to move to clear itself from claims of complicity with the Iran regime. Global database Bankers Almanac, owned by the Reed business information group and headquartered in London, had ANZ listed as a correspondent bank for Bank Sepah. This institution, 100 per cent-owned by the government in Tehran, has been dubbed “the bank behind Iran’s missiles”.
The US Treasury says that Bank Sepah has arranged dozens of multimillion-dollar missile deals and uses a range of deceptive practices, such as asking other institutions to remove its name from transactions. In fact, ANZ spokesman Paul Edwards points out, ANZ has “suspended all dealings with Bank Sepah as soon as it was placed on the UN sanctions list in March 2007”.
The ANZ representative office in Tehran was closed in July 2007 and Edwards says that “ANZ’s policy is not to have any financial exposure to Iran and Iranian banks”.
Earlier this year ANZ became embroiled in a controversy when its branch in Honiara was sent $107,000 by the Iranian government as an aid payment to the Solomon Islands government for the costs of medical students travelling to Cuba for training. The bank returned the payment to its source: the Commonwealth Bank account of the Iranian embassy in Canberra. Edwards says the ANZ will not undertake remittances or transactions involving Iran, Sudan, Syria, North Korea, Burma or Cuba.
The price of failing to observe sanctions was driven home to the ANZ a year ago when it paid a $7 million fine to the US Treasury for 31 trade finance transactions involving parties in Sudan and Cuba in 2004-06. Other banks have been hammered more heavily. Dutch bank ABM Amro was fined $US80m in 2005 for avoiding US sanctions on Iran. In 2009 Lloyds Bank was fined $US350m and Credit Suisse $US536m.
After the UN passed in June its resolution 1929, Smith announced a package of even tougher Australian sanctions, which included financial and travel restrictions against a further 98 entities and 12 individuals.
They target, Smith says, “those in Iran’s financial and transport sectors, entities involved in Iran’s nuclear and missile programs, and those connected to Iran’s Islamic Revolutionary Guard Corps”.
Rubenstein says his organisation is “watching the progress of sanctions very closely”.
“Tough sanctions such as these targeting Iran’s energy and financial sectors represent the last, best chance for the international community to avoid facing a terrible choice on Iran in the not very distant future,” he says.
Emanuele Ottolenghi, a senior fellow at the Brussels-based Foundation for Defence of Democracies and author of a forthcoming book on Iran, has spent much of his professional life trying to prove connections between the Revolutionary Guard and certain Iranian companies, especially those engaged in energy.
“There is no transparency, we don’t know who the shareholders are, basic company information can’t be downloaded,” he says.
Names are frequently changed. And profiles are confined to Farsi, the chief Iranian language.
Ottolenghi is convinced that the Pars International Development and Engineering Co has a strong connection to the Revolutionary Guard, which “through its growing business empire and illegal economic activities funds both the nuclear program and Iran’s terrorist-sponsoring activities abroad”.
During Ahmadinejad’s first four years in office, foreign investment in Iran’s energy sector sank by 64 per cent, to $US1.5bn, and the president replaced many experts with Revolutionary Guard loyalists without industrial experience. Ottolenghi says some sections of Iran’s energy industry can operate without injections of Western technology, but “some things they can’t do on their own”. And domestic power requirements, and international earnings from the industry, he says, are crucial for Iran to keep funding its nuclear program.
The leading global producer of plastics is leaving Iran, for instance, Ottolenghi says, because of the effect of the new sanctions.
Iran’s oil fields are growing old, he says, and they need new expertise to maintain output levels.
A Turkish company says it is willing to fill the gap vacated by Western companies and to begin operating in Iran, but Ottolenghi believes it may not be able to deliver.
“I hope the energy disruptions will be seen by the population at large as a consequence of their government’s unwise policies. The internal political situation makes the government more vulnerable,” he says.
“We need to improve our public diplomacy outreach to the Iranian people, to make sure they don’t feel the regime is failing to deliver because of an evil conspiracy of Western powers.
“For they are very patriotic people, to the point of xenophobia. And Iran has had a history of interference from outside.”
Ottolenghi’s colleague Mark Dubowitz, executive director of the FDD, told a US congressional committee a month ago: “The energy sector is the lifeblood of the regime. It is the source of its power and control over the Iranian people. Sanctions must complement the only thing that has so far rattled the regime: the pro-democracy Green movement.
“The regime may be near its tipping point.
“The harder it cracks down on democratic activists, the less support it enjoys, even among conservative elites.“