Disappointment and delays dog development. on Iran's South Pars Field.

THE INTERMINABLE PROBLEMS mat have beset Iranian efforts to develop its South Pars gas field look set to continue as a result of disagreement between French firm Total and the Pars Oil and Gas Company. The Iranian government seems unwilling to meet its share of spiralling development costs but the collapse of the deal would provide a major setback to Tehran's plans to become a major source of global gas supply.

South Pars is the Iranian part of the giant gas structure known in neighbouring Qatar as the North Dome field. Qatar is managing to use its share of what is the world's biggest known gas field as the foundation of its economic boom and is turning itself into the world's biggest LNG producer in the process. Yet while the North Dome reserves are being developed by joint ventures of Qatari and I foreign firms, Iran's convoluted investment system has resulted in delays and disappointment for the foreign investors helping to develop South Pars.

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Tehran has sought to exploit the South Pars reserves in phases, with different foreign companies partnering the Pars Oil and Gas Company--a subsidiary of the National Iranian Oil Company (NIOC)--on each section. Most of these partnerships aim to export the gas in the form of LNG but contractual problems, delays in the delivery of equipment by Iranian sub-contractors, political infighting within the Iranian establishment and geological difficulties have all held up development.

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In the latest setback, Total says rising costs are hampering efforts to develop South Pars phase 11. The company's president of gas and power, Philippe Boisseau, says: "We are restudying the project. We are facing huge cost issues and are reviewing the project with the Iranian government; it could take some time." Although the project is being developed by a consortium of the National Iranian Gas Exports Company (NIGEC) (50%), Total (40%) and Petronas of Malaysia (10%), rather than through Iran's notorious buy-back contracts, the terms of investment continue to undermine progress.

NIGEC responded to Total's doubt by threatening to take back half of the French firm's 40% stake in the venture and selling it to potential LNG customers, most likely in China and India. Total has held its stake since the phase 11 agreement was signed at the start of 2004.

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Tehran had hoped the Total scheme, called Pars LNG, would result in its first operational LNG export terminal, with a production capacity of 10m tonnes a year and first shipments due next year. However, construction costs in the LNG industry ' worldwide have rocketed over the past two years, prompting investors to postpone the construction of almost all planned liquefaction plants. The Iranian government wants Total to take the final investment decision on the project by June this year but this seems unlikely at this stage.

The dispute over investment costs between Total and the Pars Oil and Gas Company may also have been influenced by the French government's new hardline stance towards Tehran. Since the election of Nicolas Sarkozy as French president in May last year, Paris has moved closer to the United States and the United Kingdom in terms of foreign policy. As a result, the French government advised French companies to "exercise restraint" in their dealings with Iran.

Sarkozy provoked an angry response from Tehran in late March when he suggested France needed to renew its nuclear deterrent as "life insurance" against the threat posed by countries like Iran. He said Iran was "increasing the range of its missiles while serious suspicions weigh on its nuclear programme". A spokesperson for the Iranian Ministry of Foreign Affairs, Mohammad Ali Hosseini, observed: "Making such comment has no value. The Islamic republic has always been a centre of stability and peace-seeking in the region and its foreign policy is completely in line with international criteria."

Yet while France has now joined international efforts to force a halt to Iranian plans for uranium enrichment, the French government is actively promoting its nuclear technology in other parts of the region. Nuclear firm A reva has teamed up with Total and Suez to offer to construct two reactors in the UAE, although it is keen to point out the UAE will not be enriching its own uranium but will have to rely on imports. Nevertheless, the active promotion of nuclear reactors so close to Tehran, coupled with the new French attitude towards Tehran, is unlikely to encourage the Iranians to compromise in negotiations with Total.

Despite such setbacks, Iran is making progress on some other aspects of its South Pars strategy. At the end of March, Tehran revealed that a contract had been signed with the Iran LNG consortium for the development of an LNG plant on phase 12 of South Pars. Deputy oil minister, Ali Kordan, commented: "This contract, worth 700m [euro] ($1.1bn), will be implemented in two phases. The first will take 31 months and the second 36 months. The contract will be carried out with the participation of an Iranian-European team and an Iranian-Chinese group." Although Kordan declined to name the companies involved, he revealed that two LNG production trains will be constructed with output of 10.5m tonnes a year, fed by 995m cubic feet of gas daily. Tehran estimates total project costs at $4.35bn but even though Iranian contractors will be used on many stages of the development, this figure seems very low in comparison with other LNG schemes in Iran.

In a separate development, the long-awaited Iranian-Chinese LNG agreement is expected to be signed before the middle of this year. A bilateral agreement between Beijing and Tehran in 2004 provided the basis for the deal, which will see Chinese companies help with upstream development. All output from the scheme will be shipped to new LNG terminals being developed along China's east and south coasts. Iranian officials announced that the China National Offshore Oil Corporation (CNOOC) and the Pars Oil and Gas Company will sign a joint agreement to enable work on the venture to begin. Development costs are estimated at $16bn but this is believed to include all upstream investment, as well as the liquefaction plant near Assaluyeh on the Gulf. CNOOC will invest in South Pars via a buy-back agreement.

Total's Pars LNG project is by no means dead in the water. The executive director of Total, Christophe de Mergeris, revealed in mid-March that the company was continuing talks with the Iranian Ministry of Oil and the Pars Oil and Gas Company in an effort to overcome the impasse. After years of negotiation and preliminary development, the scheme's collapse would be a major reversal for all those involved. Investment by Chinese and Indian state owned companies in upstream projects may help to plug the gap, but until Tehran manages to attract large-scale private sector investment, it will continue to look enviously across the Gulf at its tiny neighbour in Qatar.