IRAN - Part 1 - The Prospects.

Iran's capacity to produce OPEC quota-oil is 3.9m b/d, while the state-owned National Iranian Oil Co. (NIOC) claims the capacity is 4.2m b/d. On July 3, 2004, Oil Minister Bijan Zanganeh said that, thanks to major discoveries and re-rating earlier estimates, Iran's recoverable reserves of oil and condensate had risen to 132 bn barrels. Iran's proven reserves of natural gas are about 28 TCM.

Despite the fact that Iran is one of the world's largest petroleum provinces, foreign companies involved in exploration have been discouraged by a number of problems. One of these is Iran's lack of modern drilling equipment and the difficulty of importing new rigs. Antagonism towards foreign explorers and the central government by disgruntled, impoverished locals seeking jobs is another set of problems (see Gas Market Trends of this week).

Domestic oil products, natural gas, electricity and other services remain heavily subsidised, causing the government to suffer a major budget deficit. The theocracy is insisting on developing nuclear energy on a large scale despite Western suspicions that its plan is to produce atomic bombs (see Downstream Trends of this week).

Tehran's terms for foreign companies to upgrade and expand Iran's oil and gas fields remain unattractive. What is on offer is a buyback contract in which the terms have been made increasingly tougher. As a result, no major buyback contracts have been signed since the award of the $2.8 bn Azadegan onshore oilfield to a Japanese-led group in February 2004 (see Part 2).

In an effort to secure major markets for liquefied natural gas (LNG), with Iran promoting four different LNG export ventures, the government is offering potential buyers stakes in buyback contracts to develop oilfields and guarantees of long-term crude oil supplies (see Part 3).

No major changes to decision making will be expected before presidential elections which are to take place on June 17. The second and final term of President Mohammad Khatami ends this year. The person to watch is former President Ali Akbar Hashemi Rafsanjani, who at present chairs the powerful Expedience Council and may run for the office or may nominate one of his close allies for the post. Either way Rafsanjani will be a key figure in the decision making process (see who's who in Part 4).

The Political Perspective: Leaders of the Shiite theocracy in Tehran are suspicious that, even if the US does not attack their country militarily, the Americans intend to destabilise Iran. One theory now making the rounds is that a US-Shiite alliance in neighbouring Iraq could potentially undermine the legitimacy of Iran's theocracy and lead to a popular uprising against the ruling mullahs.

According to this theory, trouble could start in the holy city of Najaf which has long been regarded as the highest seat of religious authority for Ja'fari Shiites. This is the base of Grand Ayatollah Ali Al-Sistani, the most senior Ja'fari religious leader. He belongs to a quietist tradition which holds that mosque and state should be kept separate. There are already profound roots for this philosophy in Iran, particularly in the holy city of Qom where the quietist tradition has long been upheld by Grand Ayatollahs more senior than the theocracy's Supreme Leader Ayatollah Ali Khamenei.

In an article published on March 24 by the International Herald Tribune, Cameron Khosrowshahi argues that "Iraqi Shiism could topple the mullahs" of Iran. Recalling that his grandfather left his native Iran for Najaf at the start of the last century, some time before World War I, he wrote: "This Shiite base outside Iran became one of the critical factors in the downfall of Shah Mohammed Reza Pahlavi, which culminated in the Islamic revolution in 1979. The religious classes had a network of followers and funding that existed beyond the reach of the Pahlavi state, which could never completely crush their opposition. Back then, Iraq contained the seeds of upheaval in neighboring Iran. Today, it does so once again". He noted that US policy makers now were "understandably concerned with the rise of the Shiite community to political dominance in Iraq", particularly with the candidacy of the seemingly pro-Iran Ibrahim Al-Ja'fari for prime minister.

Khosrowshahi adds: "America does not want another Iran [theocracy] in the region, particularly as the Islamic Republic presses its nuclear ambitions. At the same time, viable options against the mullahs are limited. While Europe and America are more united than ever on a diplomatic approach, their package of incentives is far from certain to be accepted. It will be difficult to convince Iran to completely give up a nuclear program that has broadly become a source of national pride. Even if an agreement is forged, how will the international community monitor Iranian compliance over the long term with dispersed nuclear sites spread across the country?

"The lesson the Iranian regime has drawn from Iraq is this: If you have the bomb, like North Korea, you are safe; it's better to build it, secretly if you have to, so you don't get caught short like Saddam Hussein. Iran will never give up its pursuit of the nuclear card. But there is a more organic way to effect change in Iran using the same networks that contributed to its last revolution".

Khosrowshahi argues that, rather than "worrying about Iran's influence over Iraq, we should be harnessing the strength of Iraq's newly empowered Shiites against the regime in Iran". He points to Sistani's quietist school and to its roots "within Iran" and says: "It was the conventional thinking among the religious authorities of my grandfather's era and was the norm until Ayatollah Ruhollah Khomeini politicized Iranian Shiism. A major artery of information flow and exchange has existed between the two countries for centuries. As Iraq's democracy and civil society stabilize, more and more Iranians will travel to Najaf and Karbala as pilgrims and seminary students. The Iranian state can restrict movement, what its people say, read and write, and what they see and hear on radio, TV and the Internet. But it will never be able to curtail their right to perform the pilgrimage to Iraq, which is a religious duty. The ideas these pilgrims take back with them to Iran could be the beginnings of an authentic counterrevolution against the tyranny of the mosque".

Sistani's religious credentials and learning, according to Khosrowshahi, "dwarf those of Ayatollah Ali Khamenei". He asserts: "There are many Iranians who would rather listen to the Iranian-born Sistani if he chooses to speak to them. Moreover, his call to freedom will be couched within a language they understand, that of tradition and religious scholarship. The mullahs of Iran will be hard-pressed to counter its effect".

Khosrowshahi noted: "The Pahlavi regime in Iran was ultimately undone from within, by the same modernizing forces that were unleashed by the Shah's White Revolution. Twenty-five years later, a startling parallel exists. The mullahs of Iran could similarly be overthrown by their own religious networks, the lifelines that had initially sustained their revolt against a secular Shah. This strategy will not be as decisive as a cruise missile or as media-friendly as a brokered agreement. However, it will be seen by the Iranian people not as an artificial solution enforced upon them from outside but as an authentic evolution of their nation toward greater freedom".

Tehran's negotiators with the European powers over the nuclear issue have warned that if the US attacked Iran there would be a severe global energy crisis. In an interview published on March 24, the government-appointed Chairman of Oil & Natural Gas Corp. (ONGC), Subir Raha, said the US would be "stupid" to attack Iran and risk imposing record oil prices on the world economy. Raha, heading India's biggest oil company, said the US invasion of Afghanistan in 2001 and Iraq in 2003 helped send the futures price of WTI at NYMEX to a record high of $57.60/barrel on March 17.

"You launch one more attack and you can't even guess where the speculation will go", Raha, 56, said, adding: "With the stalemate in Afghanistan, stalemate in Iraq and elsewhere, you already have a price of $55 a barrel". India, the third-biggest oil consumer among 45 countries in the Asia/Pacific region, relies on Iran and other Middle East countries for more than half of its oil.

American Secretary of State Condoleezza Rice on March 16 said the US had "concerns" about India's plan to buy natural gas from Iran through a pipeline proposed to be built through Pakistan. Islamabad has been promoting this project for years and has secured New Delhi's support for this after repeated efforts.

The US has expressed scepticism about Iran's nuclear intentions, and President George W. Bush on March 11 said Washington will not tolerate a nuclear-armed Iran. The US has joined the EU in offering Tehran economic incentives in return for permanent Iranian suspension of uranium enrichment. Tehran has rejected a US offer but has resumed talks with the EU3 - France, Germany and the UK.

"I see no reason why India's priorities should be subservient to US priorities", said Raha, who has worked for state-owned Indian oil companies for the past 35 years. "The US is chasing oil and gas as badly as China or India or anybody else", he said. The US says Iran, the Middle East's second-biggest oil producer and holder of the world's largest natural gas reserves after Russia, does not need nuclear energy. President Bush on Feb. 22 said "all options are on the table" after describing as "ridiculous" speculation that the US was getting ready to attack Iran.

If the US is "stupid enough to attack Iran", Raha said, "the whole market-place will go up. No one knows what will happen". India's Petroleum Minister Mani Shankar Aiyar on March 10 said the US Ambassador, David Mulford, met him to express concern about India's plan to import gas from Iran. "We have noted what US concerns are", Aiyar said, adding: "I think the US is well aware of our energy requirements. So far we are sensitive to each other's requirements".

ONGC, which was formed by the government in 1959 and became India's most profitable company, will acquire 20% in a buyback contract to develop Iran's giant Yadavaran oilfield and may have a stake in a contract for the Juffair field, the company said in a statement on Jan. 7.