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Iran-Europe gas deals anger Washington

By Daniel Dombey in Washington, Anna Fifield in Tehran and Haig Simonian in Zurich
April 30 2008
The Financial Times

The US and its allies are worried that the sanctions regime against Tehran is under threat from a possible new wave of European investment in Iran’s strategically important gas sector.

Tehran has already concluded gas deals with Chinese and Malaysian companies – ending a protracted lull in investment in its energy sector – and has alarmed Washington by reaching an agreement with a Swiss group.
The dilemma threatens to expose the limited US influence over foreign companies strategic decisions.

Although Washington and its allies have convinced the United Nations Security Council to sign up to three sets of sanctions against Iran’s nuclear and missile sectors and banks, it has been unable to broaden such international measures into the key energy sector.

Until recently, informal US pressure – combined with the difficulties associated with doing business in Iran – had appeared to dissuade many companies from signing formal contracts.

Now, the US fears that a 25-year supply agreement concluded in March between Elektrizitäts-Gesellschaft Laufenburg (EGL) of Switzerland and Iran could encourage other deals, particularly in the gas sector, despite American calls for tougher sanctions against Tehran over its controversial nuclear programme. The Swiss government says the deal could be worth up to €27bn ($42bn, £21bn).

“The worry is that the Swiss deal will lead others, such as the Austrians, to confirm energy investments in Iran, and that companies like [France’s] Total could then follow suit and sign contracts of their own,” said one western diplomat. He pointed out that the EGL agreement ended a period in which European energy companies had largely confined themselves to agreeing only non-binding memoranda of understanding with Iran.

He added: “There is a lot of attention on sanctions on Iranian banks, but investment in the energy sector is much more important for Iran’s economy.” Iran has the world’s second-largest proven gas reserves, but exports far below its potential.

Flynt Leverett, a former US National Security Council adviser on the Middle East, says pressure is growing on non-US companies to conclude supply contracts with Iran in the wake of the deals already signed between Tehran and Sinopec of China and SKS of Malaysia.

So angry is Washington about the Swiss deal that it has suggested that Switzerland’s role as the US representative in Cuba and Iran could be at risk.
Swiss officials reply that no international sanctions prohibit investment in the Iranian energy sector, and that the gas supply contract signed by EGL is intended to alleviate energy shortages in Italy. “For almost 30 years, Switzerland has rendered good services to the US as their protecting power in Iran,” said a Swiss foreign ministry spokesman.

The website of the US embassy in Bern carries a series of questions about the gas deal, explicitly raising the question of whether Switzerland’s role is “in jeopardy”. Officials there merely say that Switzerland has a mandate to represent the US “at this time”.

Following the deal, some European leaders have voiced concern about new investment in liquefied natural gas, the sector in which groups such as Total, Royal Dutch Shell and Austria’s OMV have struck preliminary agreements but have yet to sign formal contracts. Iran has warned such companies they need to conclude deals by June or it will look elsewhere for investment.
Gordon Brown, UK prime minister, said in the US this month that he wanted to broaden sanctions over Iran’s nuclear programme “to include investment in liquefied natural gas”.

At present, there are no such sanctions at either UN or EU level against investment in Iran’s gas sector.

European diplomats say it is unlikely that the EU will agree formal sanctions on the Iranian energy sector in the immediate future – instead it is concentrating on measures against Iran’s Bank Melli. Foreign ministers from the five permanent members of the UN Security Council plus Germany meet in London tomorrow to discuss further action against Iran. Diplomats say Mr Brown’s words are an attempt to increase the political pressure against new investment in the sector.

Under US law, investments of above $20m (€13m, £10m) in Iran’s energy sector can lead to US retaliatory measures, But Mr Leverett said Washington’s options were limited. “The EU would effectively take us to court [at the World Trade Organisation] and the US would probably lose,” he said.

Hojatullah Ghanimi Fard, head of international affairs at the National Iranian Oil Company, said Tehran was legitimately supplying an international need. “Would it be wise to deprive common people of consuming countries of supplies from Iran?” he asked.