Iran’s energy sector has again proved to be a point of controversy as both Royal Dutch Shell PLC (RDS.A, RDS.B) and Spain’s Repsol YPF SA (REP) have withdrawn from one of Iran’s largest natural gas projects after being pelted with political pressure from the United States.

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Shell and Repsol will no longer aid Iran in the development of phase 13 of the country’s South Pars, the world’s biggest gas field, the Financial Times reported. They did, however, leave open the possibility of working with Iran to develop phases 20 and 21, but it may be 10 years before those blocks are operational.

"Shell has agreed the principle of substitution of alternative later phases for the Persian LNG project so that [the National Iranian Oil Company] can proceed with the immediate development of phase 13," the company said in a statement.

Neither company would comment on U.S. pressure.

Last month, Iran’s oil minister Gholam-Hossein Nozari gave the European oil majors, including France’s Total SA (TOT), until June 19 to finalize their deals or risk losing them to Gazprom OAO (OGZPY) or Sinopec Shanghai Petrochemical Co. Ltd. (SHI).

Total has a memorandum of understanding with the state-owned NIOC to develop phase 11 of the South Pars field. However, Total Chief Executive Christophe De Margerie warned yesterday (Monday) that it would be difficult to reach an agreement in the short-term.

"In the short-term it will be difficult to find a win-win situation," Margerie told reporters in Doha. "We have told them we are interested in the long-term."

Iran produces more than 20 million tons of petrochemical products each year, and is the fourth largest oil producer in the world. The country controls about 5% of the global oil supply. It is estimated to have the world’s second largest natural gas reserves after Russia.

However, the country has been ensnared by three sets of United Nations sanctions related to its ongoing nuclear program. While Iran insists its nuclear ambitions end at the civic level, the United States has spearheaded a campaign to keep the country from becoming a nuclear power in the volatile Middle East.

Bankers around the world have cut back lending to satisfy the U.S. government’s demands. UBS AG (UBS), Deutsche Bank AG (DB), and HSBC Holdings PLC (HBC) have all reduced lending to Iran, and in some cases, cut it off all together.

Last year, the Organization for Economic Cooperation and Development cut Iran’s country-risk rating for export credits to the second worst level. It now shares a category with Albania, Bangladesh and Mozambique.

That doesn’t bode well for Iran, which lacks the experience, technology, equipment and money to develop its natural resources on its own.

Iran’s own Nozari said in April that Iran would require about $500 billion in oil industry investment over the next 15 years.

However, as many Western parties back off, other foreign interests are stepping in to fill the void. Malaysia’s SKS Ventures has signed a $6 billion contract with Iranian National Oil to develop the Golshan and Ferdows offshore gas fields. China’s Sinopec announced a $2 billion contract to develop the Yadaravan oil field in Southern Iran. And Switzerland’s Elektrizitaets-Gesellschaft Laufenburg signed a 25-year supply agreement with the Iranian regime.

Most recently, Iran, India and Pakistan put the finishing touches on an agreement that will bring Iranian gas to Pakistan and India through a $7.6 billion pipeline.
In response, the State Department’s Sean McCormack warned that the United States would "counsel against" the pipeline plan.

"Given where Iran is in the international system, being under sanctions, and given its actions within the international system, is now really the time to conclude a pipline deal with the Iranian government?" he said.

However, insinuations from the United States that India should turn its back on Tehran or use its leverage to pressure Iran into abandoning its alleged nuclear ambitions have not been welcomed by Indian policymakers.

"India and Iran are ancient civilizations whose relations span centuries," India’s Foreign Ministry fired back. "Neither country needs any guidance on the future conduct of bilateral relations."
Still, none of these countries have the experience, technology, or management expertise of the Western majors.

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• Financial Times:
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After a visit to Sri Lanka, Iranian Prime Minister Mahmoud Ahmadinejad stopped off in India yesterday (Tuesday) to put the finishing touches on an agreement that will bring Iranian gas to Pakistan and India through a $7.6 billion pipeline.

The 1,615-mile pipeline will transport 30 million cubic meters of natural gas to Pakistan and India upon completion of its first phase. Capacity will later increase to 45 million cubic meters.

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It will be integral in shoring up India’s energy grid, as the country currently imports 70% of its petroleum needs. India’s current gas supplies of 85 million cubic meters a day fall well short of the country’s potential demand of 170 million cubic meters a day, according to government statistics. What’s more is that demand could grow to 400 million cubic meters a day by 2025.

The possibility of a pipeline has been a point of discussion since 1994, but talks ground to a halt during price negotiations. India balked at the price of the gas, and Pakistan has expressed dissatisfaction with the proposed transit fees. Now, Ahmadinejad and Pakistan’s President have "resolved all issues" related to the pipeline, the Associated Press of Pakistan recently reported, and that leaves New Dehli’s cooperation as the last surviving hurdle. And Ahmadinejad’s stopover in India has been widely interpreted as a landmark development that will usher in a new era of energy cooperation.

"There will be a proposed review that will be taking place which will discuss the price, review the price, certification and project structure," Manu Srivastava, director of India’s Ministry of Petroleum, told Bloomberg News. Though he cautioned that, "there are a lot of issues to be resolved."

Still, with India’s need and Iran’s availability, the deal seems to be a near certainty at this point. Particularly since India’s communist party torpedoed a historic nuclear power agreement with the United States. The deal would have opened the door to peaceful cooperation between the United States and India concerning nuclear power as an alternative to fossil fuels. But without it, India has no choice but to improve ties with Tehran.

The State Department’s Sean McCormack said Monday in Washington that the United States would "counsel against" the pipeline plan.

"Given where Iran is in the international system, being under sanctions, and given its actions within the international system, is now really the time to conclude a pipline deal with the Iranian government?" he said.

However, insinuations from the United States that India should turn its back on Tehran or use its leverage to pressure Iran into abandoning its alleged nuclear ambitions have not been welcomed by policymakers.

"India and Iran are ancient civilizations whose relations span centuries," India’s Foreign Ministry said last week. "Neither country needs any guidance on the future conduct of bilateral relations."

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• Asia Times Online:
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• Associated Press:
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• Bloomberg:
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Iran opened an exchange for crude and petrochemicals Sunday, an effort that encourages private investment in the nation’s prominent energy sector.

"The bourse provides an economic opportunity for Iranians, other countries, and foreign customers," Iranian Oil Minister Gholam Hossein Nozari said in a statement.

The primary trade currency used by the bourse will be the euro, thereby establishing a euro-based oil marker if successful. Iran first floated the idea of trading oil in euros several years ago, but a weak dollar has breathed new life into the concept.

Iran has also registered for another oil bourse, in which it intends to trade crude contracts in euros instead of dollars with the hope of reducing U.S. influence in the country’s economy.

Iran’s president, Mahmoud Ahmadinejad has repeatedly demonstrated his willingness to use its oil resources as bargaining chips in his ongoing standoff with the West over Iran’s nuclear program.

Iran produces more than 20 million tons of petrochemical products each year, and is the fourth largest oil producer in the world. The country controls about 5% of the global oil supply.

Financial institutions are in the midst of a global credit crunch and most are shying away from riskier investments. Bankers around the world reduced lending to Iran to satisfy a campaign led by the United States to isolate the country and its economy. UBS AG (UBS), Deutsche Bank AG (DB), and HSBC Holdings PLC (HBC) have all reduced or stopped lending to Iran entirely.

That doesn’t bode well for Iran, which lacks the technology and equipment to develop its natural resources on its own.

A statement posted on the ministry’s Web site said 100 tons of polythene – a plastic used for packaging – was traded at the market’s open. However, some analysts believe that political pressure, and the use of spot pricing, will reduce interest in the exchange.

"I don’t expect there will be much liquidity on this market," Dalton Garis, an economics professor at the Abu Dhabi Petroleum Institute told Bloomberg News. "Traders use such exchanges to hedge against price risk, rather than buy a commodity. Also, traders will be under pressure not to trade with Iran."

The exchange uses "spot," rather than futures trading, which requires the immediate payment and delivery of the physical product.

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• Associated Press:
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Various industries in Iran are beginning to feel the pinch as bankers around the world have cut back lending to satisfy the U.S. government’s demands.

U.S. efforts to halt Iran’s uranium enrichment program stalled in the United Nations, thwarted by Russia and China. But U.S. Treasury officials Stuart Levey and Robert Kimmitt have spearheaded a campaign to curb lending to a country the United States perceives as a global threat.

Banks such as UBS AG (UBS), Deutsche Bank AG (DB), and HSBC Holdings PLC (HBC) have taken heed, reducing lending to Iran, and in some cases, cutting it off all together.

"We do absolutely no business in Iran," Serge Steiner, a spokesman for UBS, Europe’s biggest bank by market value, told Bloomberg News.

Deutsche Bank, Germany’s largest financial institution, said in July that it was retreating from Iran as well.

"We have sent a letter to private clients in Iran who have an account with Deutsche Bank in Germany, and told them that we have to terminate our business relationship with them," Deutsche Bank spokesman Ronald Weichert said last year.

Iran is indeed an oil rich nation. It ships about four million barrels of crude a day and accounts for 5% of global supply. But an unnamed German banking analyst told Forbes that Deutsche Bank’s interest in the Iranian oil business was inconsequential.

"I think leaving Iran improves the business opportunities [for Deutsche Bank]," he said. "Iran is a small country. It’s not worth it to deal with Iran and then lose business in the U.S."

Six months ago, the Organization for Economic Cooperation and Development cut Iran’s country-risk rating for export credits to the second worst level. It now shares a category with Albania, Bangladesh and Mozambique.

The number of banks doing business with Iran has dropped substantially in the past two years. According to Bankers’ Almanac, the number of institutions used by Bank Saderat Iran, one of the country’s largest banks, have fallen from 29 in 2006 to 8.

The result of such precautionary measures has been detrimental to Iranian business, which has been deprived of funds necessary to acquire equipment and services. European Union data agency Eurostat reported that machinery and transportation equipment exports to Iran dropped 20% in the first nine months of 2007 from the previous year.

Financial institutions are in the midst of a global credit crunch and most are shying away from riskier investments. That doesn’t bode well for Iran, which lacks the technology and equipment to develop its natural resources on its own. Without foreign investment, Iran is an island.

"Banks tend to be very, very conservative creatures," Peter Djinis a former member of the Treasury’s Financial Crimes Enforcement Network told Bloomberg. Until they hear directly from the U.S. government that Iran can be trusted, "there will not be any wavering." 

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China’s largest oil refiner, China Petroleum & Chemical Corp. (SNP), commonly known as Sinopec, has signed a $2 billion deal with Iran to develop the Yadavaran oil field, Monday. The deal is further evidence of China’s determination to acquire the resources necessary for its expansion, and its indifference to global, or more precisely U.S., opinion.

According to Iranian estimates, the Yadavaran field has reserves of 18.3 billion barrels of oil and 12.5 trillion cubic feet of natural gas "in place." Of that, 3.2 billion barrels of oil and 2.7 trillion cubic feet of natural gas are currently recoverable. 

"Various companies are continuing to invest in Iran and we are witnessing the full presence of foreign investments in the country," Gholam Hossein Nozari, Iran’s oil minister, told the Voice of the Islamic Republic of Iran. "The other message this contract has is that if other countries intend to invest in our major oil and gas fields, they should not waste time, otherwise they will surely lose investment opportunities in Iran."

Nozari told Xinhua, the official Chinese news agency, that the Yadavaran field will produce 85,000 barrels of oil a day in four years and another 100,000 barrels a day three years after that. According to the agreement, originally reached in 2004, China would pay Iran as much as $100 billion over 25 years for liquefied natural gas and oil, and a 51% stake in Yadavaran.

Sinopec did not make any official announcement concerning the deal, which suggests the company was trying to keep it off the radar. However, the United States, which has repeatedly called for tougher sanctions on Iran as penalty for its alleged nuclear operations, registered its objection.

"We’re deeply disappointed and disturbed at the reports [of the deal], and we’ll be making this clear to the Chinese authorities," Jessica Simon, a U.S. State Department spokeswoman, told reporters in Washington. "Major new deals with Iran, particularly ones like these involving investment in oil and gas, really undermine international efforts to pressure the Iranians to comply with obligations already in place under the U.N. Security Council resolutions."

The criticism is particularly poignant as recent energy deals struck by China in Africa, Latin America and the Middle East have already been criticized by the international community as opportunistic and self-serving.

Chinese Foreign Ministry Spokesman Qin Gang fired back saying the deal was "business conducted by a Chinese company based on equality and mutual respect with Iran." And that "the Chinese government does not need to comment on [the deal]."

He could be right – especially considering a U.S. intelligence report released last week stated that, contrary to U.S. suspicions, Iran ended its nuclear weapons development in 2003.

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Just weeks after two U.S. oil giants were forced out of Venezuela, Venezuelan President Hugo Chavez and Mahmoud Ahmadinejad, President of Iran, are forging multi-billion dollar oil deals that will further cement relations between the two anti-American nations. The two leaders’ rapidly evolving relationship will also further reduce the American oil industry’s involvement in both South America and the Middle East.

For investors who have traditionally looked upon U.S. oil stocks as safe-and-steady investments, this deal and the developments that preceded it may demand a shift in investment strategy [for a Money Morning report on special-situation plays in the energy sector, click here].

Just days ago, Chavez and Ahmadinejad put the finishing touches on a $4 billion deal to develop a block of the Venezuela’s Orinoco Reserve. The project will capitalize on the “Ayacucho 7 Block,” which is believed to hold more than 30 billion barrels of oil, making it one of the largest reserves in Venezuela. Plans call for the actual production of oil to start in two years.

The deal stipulates that, over the next year, Iran will build four oilrigs off the coast of Venezuela. The announcement comes less than two weeks after the PDVSA, Venezuela’s national oil company, announced it had taken complete control of all the country’s oil production, including two large projects operated by U.S. giants ConocoPhillips (NYSE: COP) and ExxonMobil Corp. (NYSE: XOM).

ConocoPhillips and Exxon were ousted as part of Venezuela’s sweeping nationalization initiative, because they refused to accept diminished roles in the development of the country’s oil reserves. The PDVSA now has complete control over Venezuela’s lucrative Orinioco belt, which holds the world’s largest reserves of extractable crude and currently produces 418,000 barrels of oil per day. Estimates suggest it holds as much as 230 billion barrels of extra heavy oil.  The renovation of Venezuela’s oil production is part of an extensive nationalization effort that includes several of the country’s leading industries including oil, electricity, and telecommunications.

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When the announcement was made, a number of internationally known oil-sector analysts said Venezuela had bought itself substantial trouble with the move, because the country is now faced with the task of getting the most production out of its reserves without the industry-leading oil-extraction technologies, or the lavish financing deep-pockets and business connections U.S. companies’ bring to the table. But taking a lesson from the ongoing global private-equity boom, Venezuela and Iran will be working even closer together to establish a multibillion-dollar investment fund to finance projects in countries, that up to now, have been dependent upon U.S. funding.  

“It will permit us to underpin investments, above all in those countries whose governments are making efforts to liberate themselves from the (US) imperialist yoke,” Chavez said in January. “This fund, my brother,” the Venezuelan president said, referring affectionately to Ahmadinejad, “will become a mechanism for liberation. Death to US imperialism!”

The United States has long considered Iran and Venezuela as global points of contention. Chavez, the Venezuelan president, has repeatedly accused the United States of having imperialist designs on poorer countries and of sponsoring opposition groups to topple his regime. And Iran is a member of the infamous “Axis of Evil,” and has repeatedly bristled United States policy makers with its supposed nuclear ambitions. This newest Venezuela-Iran deal is the latest in a series of steps that Chavez and Ahmadinejad, have taken in spearheading what Iran’s Kayhan daily newspaper has labeled as a “Global Anti-Imperialism Wave.”

For instance, just this month, Chavez and Ahmadinejad launched the construction of a joint petrochemical plant in Iran, with plans to build another in Venezuela. Each are estimated to cost between $650 million and $700 million and take four years to complete. Many of the official posters near the worksites are alleged to have read: “Iran and Venezuela – the Axis of Unity.” Ahmadinejad hailed this latest deal as a step towards cementing “brotherly” ties between the two “revolutionary” nations, while Chavez referred to it as “the unity of the Persian Gulf and the Caribbean Sea.”

In 2006, Venezuela was the sixth largest oil exporter in the world, casting off 2.2 million barrels per day, a figure that is expected to rise as high as 3.2 million barrels per day this year. Iran, whose production has been hampered by U.S. imposed sanctions, was still the fourth largest exporter of crude in the world, shipping out 2.5 million barrels per day. Both nations are members of the Organization of Petroleum Exporting Countries, which produces more than a third of the world’s crude. 

Joint projects such as these will help Iran to access the growing markets of Latin America and will bring Venezuela closer to the markets of India and Pakistan. However, these developments are also evidence of thickening ties between two prominent oil-producing nations that boast a strong anti-American agenda. In addition to Venezuela, Ahmadinejad is also visiting Bolivia, Ecuador, and Nicaragua in the hopes of cementing relationships with their respective leaders. Washington is no doubt dismayed by the prospect of having that much anti-American sentiment take up residence in its own backyard.

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