Iran Brandishes The Energy Weapon To States Backing US-Led Moves On The Nuclear Front.

*** The EU Hopes To Resume Nuke Negotiations And USA Now Wants A Tougher Line In Referring The Issue To The UN Security Council If Iran Is To Begin Conversion Of Uranium; ElBaradei, Now With A Nobel Peace Prize For Him & The IAEA, Is Optimistic; But Tehran Is Facing A More Nervous GCC Bloc Because Of Iranian Meddling In Shi'ite Arab Affairs In Iraq

*** Zawahiri, In A July Letter To Zarqawi Caught By US Forces, Inspired Bush To Reveal A Neo- Salafi Plan To Establish A Sunni Caliphate Stretching From Spain To Indonesia & Ultimately Ruling The World; Like A Shi'te Imamate Under Khamenei Stretching To The Lebanon

TEHRAN - Highly-placed APS sources here discount the possibility of the Shiite theocracy going ahead with a warning to punish states which recently backed a US-led campaign on Tehran's nuclear programme. At stake are plans for huge energy-based economic integration with Asian-Pacific markets on which Iran will depend heavily in the coming decades.

The sources point out that the leaders of the Shiite theocracy are essentially pragmatic and are aware that Iran is in no position to push or pull things to the limit and thus lose such friends as India and/or Japan. These are two huge clients with oil and LNG markets on which Iran will potentially depend heavily.

The sources, part of a moderate camp which lost in the presidential elections last June - a vote won by Mahmoud Ahmadi-Nejad, an ultra-conservative puppet of the Supreme Leader - stress that Ayatollah Ali Khamenei is a pragmatist despite his current appearance as a hardening theocrat.

Former President Ali Akbar Hashemi Rafsanjani, who is chairman of the powerful Expediency Council (EC) which mediates between the key branches of the theocracy, has repeatedly attacked the new negotiators on Tehran's nuclear issue for risking damage to diplomatic achievements made by the two previous Iranian administrations.

Nevertheless, the Iranian warning has worried some people in China, India and Japan. But their energy diplomats, consulted by APS in Beirut, this week said their leverage as major importers of oil and gas was stronger than that of Tehran.

It has taken many years for Iran to catch up with a tiny neighbour like Qatar in getting complicated LNG ventures off the ground. Already Qatar is on its way to becoming the world's biggest exporter of LNG, having committed itself to supply 77m t/y of LNG by 2012 - by far the biggest capacity in this business. The projects in Qatar will eventually bring its LNG export capacity to 83m t/y (equal to 2m b/d of crude oil - see survey of Qatar serialised in the APS Review Package from omt9QatrProsAug29-05 to gmt12QatrWhoSep19-05).

While the Ja'fari theocracy in Iran is projecting a harder line, in Saudi Arabia King Abdullah is lowering the curtains of a Wahhabi theocracy and gradually raising those of a more liberal monarchy (see survey of Saudi Arabia being serialised in the Review Package from omt13SaudiProspSep26-05 to gmt17SaudiWhoOct24-05).

Tehran has said it would reconsider economic ties with countries which voted against it at the Sept. 24 governing board meeting of the UN's International Atomic Energy Agency (IAEA). The Foreign Ministry spokesman, Hamid Reza Asefi, said Tehran was particularly surprised by the vote against it from India, which has agreed to import 5m t/y of LNG from Iran and was also to buy natural gas by pipeline to link the two countries. Tehran in June signed a $22 bn deal with India, under which a consortium will purchase the LNG for 25 years from 2009.

India has been seeking to buy gas from Iran in a $7 bn pipeline to cross Pakistan. Asefi said India's vote at the IAEA "came as a great surprise to us", adding: "We will reconsider our economic co-operation with those states that voted against us".

India's Petroleum Minister Mani Shankar Aiyar on Sept. 27 said he did not believe the vote would "adversely impact the enormous progress we have made in the proposed...pipeline project". Aiyar told reporters India stood "firmly committed in bringing the Iran-Pakistan-India [gas] pipeline into fruition".

National Iranian Gas Export Co. (NIGEC), a unit of the state-owned National Iranian Oil Co. (NIOC), has not been able to finalise any of its four LNG ventures. Even the one on which the Indian deal depends may not be ready to start deliveries by 2009, in view of US sanctions in place against Tehran.

The Financial Express (FE) on Sept. 28 reported that the Indian side said the LNG deal was fully protected under both Indian and English law. According to a joint legal opinion obtained by GAIL, Indian Oil Corp. (IOC) and BPCL from domestic legal firm Amarchand Mangaldas and French firm GADE, the LNG sales and purchase agreement (SPA) signed between the participating Indian companies and NIGEC is "legally enforceable". A company official said: "The LNG SPA incorporates arbitration clauses and is protected under UNCITRAL (UN Commission on International Trade Law) Arbitration Rules. The SPA is legally effective and valid. In case of any breach of contract and a dispute arising between the two sides, the same can be challenged in the international court of law... [in] Geneva". Along with the SPA, a letter was signed by the Indian companies and NIGEC on June 13 under which NIGEC would take NIOC's approval within 15 days of the signing of SPA. Even after the lapse of three and half months, these approvals have not been communicated. However, according to Amarchand-Mangaldas, "The FOB LNG SPA is effective and valid and the side letter merely obligates NIGEC to obtain board approval of NIOC within a specified time frame".

Officials said the Iranian side had maintained the delay was due to the change in leadership in Tehran and because they did not have a full-time petroleum minister in place. The FE quoted a senior Indian Petroleum Ministry official as saying the Iranians had earlier assured the Indian side that requisite approvals from the new administration would be given by September at the latest. The issue was discussed in the first week of September during the visit of Iran's special envoy to India, Ali Larijani. He, too, assured the Indian leadership that Iran was keen on sorting out all pending issues concerning the two projects - the gas pipeline and the LNG SPA.

The LNG business relies on the credibility of the long-term customer whose take-or-pay (ToP) contract to buy the LNG must be bankable. None of the Indian firms involved in the state-owned consortium would be able to satisfy commercial banks unless NIGEC's commitment is bankable. President Ahmadi-Nejad made it clear in August, when he took office, that he was getting rid of what he called the Petroleum Ministry's "mafia". That meant he was not only to reshuffle the ministry's top leadership but also to change the management of NIOC and its various units including NIGEC. Already the ministry's top figures and some of NIOC's have moved to other bodies or companies in anticipation of what Ahmadi-Nejad intended to do.

In effecting such changes, however, the leadership of the theocracy would be causing itself a great deal of harm. This is because before the June elections foreign firms were preparing themselves for the worst scenario in the petroleum and petrochemicals sectors. These sectors need foreign capital and technology crucial to all of Iran's mega-ventures.

There have been repeated warnings that the new government may review some of its economic ties in the light of political considerations. Ali Larijani, the new hardline secretary of the Supreme National Security Council (SNSC), has explicitly linked oil and gas contracts to the fate of nuclear talks with the EU3 (Britain, France and Germany), suggesting that EU3 pressure over Iran's nuclear plan was putting at risk multi-billion dollar energy deals with oil majors, including Total and Shell. In a warning to the EU, Ahmadi-Nejad in August told parliament "economic ties are not irrelevant to political ties", especially with "hostile" countries which "fail to recognise Iran's legitimate rights" in the full cycle of its nuclear development plans.

The APS sources stress that Ahmadi-Nejad "must quickly learn from what Rafsanjani said when he first took the oath as president of the Islamic republic [in 1989]". He then said the priority was for Iran "to attain economic independence" as without that Iran's political independence was less important. The sources, who backed Rafsanjani's candidacy in June but the latter lost because Khamenei had tipped the balance in favour of the much younger and less experienced man, said it would take Ahmadi-Nejad at least four years to learn what the former two-term president had meant, unless the Supreme Leader intervened.

Iran has developed gas links with China and India, important markets more sympathetic than the Europeans to Tehran's nuclear issue. Tehran last year signed a 30-year, $70 bn LNG deal with China's Sinopec. China abstained from the IAEA vote. Japan, which voted against Iran, is pursuing a giant oil investment project at Azadegan - a super-giant - in south-western Iran, hailed as one of the world's largest untapped reservoirs.

India on Sept. 27 defended its decision to support the Sept. 24 resolution of the IAEA which found Iran in "non-compliance" with the nuclear Non-Proliferation Treaty (NPT), a first step to referral to the UN Security Council. This came after Iranian officials reacted strongly to India's decision to line up with the EU3 and US, which drew up the resolution and which say Iran's nuclear activities may cover atomic weapons. Javad Vaeedi, deputy head of the SNSC, said Tehran would review its ties with New Delhi. His boss Larijani, who lost in June as a conservative presidential candidate, is one of the figures who want Iran out of the NPT.

Foreign Secretary Shyam Saran said India had acted in Iran's interests and aimed at "averting a major confrontation" between Tehran and the West. The IAEA resolution demanded that Iran improve inspectors' access to documents and scientists, suspend conversion of raw uranium into feeder gas, and restart talks with the EU3. But the strength of Iran's reaction surprised New Delhi's strategic elite, who said the resolution gave Iran more chance to explain its nuclear programme.

Washington vigorously opposes the proposed $7 bn gas pipeline to Iran, via Pakistan, and has warned it may expose India to sanctions. Indian PM Manmohan Singh questioned the pipeline's viability recently. But India's Foreign Secretary Shyam told reporters in New Delhi on Sept. 26 that if the project proved good for India, "certainly we will go ahead with it".

The nuclear crisis is testing Iran's relationships with Russia and China, both having abstained at the IAEA with each holding a veto at the Security Council. Russia is building a nuclear reactor at Bushehr in south-western Iran, under a project which involves Tehran importing fuel rather than enriching its own uranium. But the Bushehr reactor is close to Kuwait and other members of the Arab Gulf Co-operation Council (GCC) states, which are worried that any leaks from the plant caused by an accident or sabotage there will affect them. The reactor is to start up in late 2005 or early 2006.

Beijing's trade with Iran in 2004 reached $7 bn, up from $1.3 bn in 2000, and is due to increase further under a 25-year agreement for China to buy 10m t/y of LNG, and for Sinopec, the Chinese oil group, to exploit the Yadavaran oilfield. The value of Iranian exports deals with China signed in 2004 exceeds $100 bn.

President Ahmadi-Nejad on Oct. 3 denied telling the Dubai newspaper Khaleej Times his government might curtail oil sales if Iran was referred to the UN Security Council for possible sanctions. His office on Oct. 1 said he had "never had an interview, either oral or written, with the Khaleej Times". But in a statement issued on Oct. 2 the paper said it stood by the contents of the interview and by the reporter, a freelance journalist. The newspaper acknowledged confusion might have arisen because the reporter on several occasions "presented herself [to Ahmadi-Nejad] as a reporter with the US-based Arabic News, and not as a Khaleej Times reporter, though she has given this report exclusively to Khaleej Times".

The paper's editor, Prem Chandran, said the daily stood behind the interview and the reporter. The paper had reported Ahmadi-Nejad as speaking about the Sept. 24 resolution, and quoted him as saying: "If Iran's case is sent to the Security Council, we will respond in many ways, for example, by holding back on oil sales or limiting inspections of our nuclear facilities". Ahmadi-Najad office denied this, saying: "Such a claim is nothing more than a mere fabrication".

Iran pumps over 4m b/d of crude oil, making it the second-largest producer in OPEC after Saudi Arabia. If Iran were to curtail its exports by a substantial amount, it would raise the price of oil on the world market. But it would reduce Iran's revenue.

Khaleej Times reported Ahmadi-Nejad as saying Iran's nuclear plan was peaceful and it had to be so. It quoted him as saying: "Our religion prohibits us from having nuclear arms and our religious leader has prohibited it from the point of view of religious law. It's a closed road". But none of the big Western powers believes this.

Iran & Syria Warned: The US and UK on Oct. 6 issued blunt warnings to Iran and Syria over their involvement with terrorist groups, with UK Prime Minister Tony Blair declaring there was no justification for Tehran interfering in Iraq's affairs. Blair, promising UK troops would stay in Iraq as long as they were needed, said there was evidence Tehran had supplied weapons technology to insurgents in Iraq carrying out deadly attacks on US and British forces. In Washington, President George W. Bush warned both Iran and Syria to abandon their links with terrorists.

In remarks billed as an important speech on the war on terrorism, Bush named Syria and Iran and said: "Any government that chooses to be an ally of terror has chosen to be an enemy of civilisation, and the civilised world must hold those regimes to account". Blair's outspoken comments marked a severe deterioration in UK's relationship with Iran and sparked an angry response from Tehran. Blair confirmed that Tehran or its Lebanese Hizbollah surrogate might be supplying weapons to insurgents who had killed eight British soldiers in roadside bomb attacks. He said there was "no justification for Iran or any other country interfering in Iraq", stressing that the UK and other foreign military presence in Iraq had been authorised by the UN.

At a joint news conference with visiting Iraqi President Jalal Talabani, Blair linked Iran's ties to neo-Salafi insurgents in Iraq and a radical Shi'ite group to the dispute over Tehran's nuclear ambitions, suggesting the interference in Iraq could be designed to intimidate the US and Europe. He said: "If it is also the case that they are trying to make some point about the negotiations over the nuclear weapons issue in respect of Iran...we are not going to be intimidated on that". His comments, which followed a similar briefing in London on Oct. 5 by a senior government official, moved Britain several steps closer to matching US hostility towards Iran. They follow the discovery of infra-red technology, some of it intercepted near the Iranian border, suspected to have been used in recent insurgent attacks in Iraq. The equipment, which triggers explosions, is the same as that Lebanese Hizbollah obtained from Iran and used. Blair said the accusations were worrying, adding: "What is clear is that there have been new explosive devices...the particular nature of those devices leads us either to Iranian elements or to Hizbollah".

Iranian Foreign Ministry spokesman Asefi promptly said: "This is a lie. The British are the cause of instability and crisis in Iraq". Hizbollah rejected any link.

British officials believe they have evidence the Iranian Revolutionary Guard has been supplying insurgents in Iraq with weapons technology used in roadside bomb attacks in Iraq. "These comments weren't premeditated", said a senior UK official on Oct. 6, referring to Blair's remarks, adding: "But it was inevitable that we were going to have this discussion in public at some point...we have got an awful lot of incriminating material". He said the technology was the same as that used extensively by Hizbollah and which the group obtained from Iran. "There have been interceptions near the [Iranian] border. It's coming from one direction", said the official.

London has become frustrated by Iran's denials of involvement and counter-accusations that the UK is trying to stir up trouble. This, with suspicion it may suit Tehran to keep the US and UK under pressure while it raises the stakes on the nuclear issue, stretches Blair's patience to breaking point. The official said: "The fact the Iranians are pursuing these in parallel means we will be pursuing them in parallel as well".

While US military commanders in Iraq have expressed concerns in recent weeks over political instability and the slow progress in training Iraqi troops, Bush insisted: "Some observers look at the job ahead and adopt a self-defeating pessimism. It is not justified. By any standard or precedent of history, Iraq has made incredible political progress". He accused neo-Salafi insurgents of trying to end the US influence in the Middle East, topple the local regimes and establish a radical Islamist empire from Spain to Indonesia. In this Bush was alluding to the neo-Salafi plan to revive a Sunni caliphate which should ultimately rule the whole world.

It was Bush's strongest warning on the threat of Sunni extremism, saying USA's enemies "have endless ambitions of imperial domination". He rejected critics saying the US was losing ground in the war and insisted that Iraq had made "incredible political progress" to defeat the insurgency and deal a serious blow to the ambitions of terrorist groups. But Bush offered no new ideas on how the US would fight al-Qaeda and Iraqi insurgents. He terrorist groups regarded Iraq "as the central front in their war against humanity", adding: "The militants believe that controlling one country will rally the Muslim masses, enabling them to overthrow all moderate governments in the region and establish a radical Islamic empire that spans from Spain to Indonesia". He said: "With greater economic and military and political power the terrorists would be able to advance their stated agenda: to develop weapons of mass destruction, to destroy Israel, to intimidate Europe, to assault the American people and to blackmail our government into isolation".

For most of his speech to the National Endowment for Democracy, a group promoting democratisation abroad, Bush warned that any sign the US was backing down in Iraq would be perilous. "We're not facing a set of grievances that can be soothed and addressed. We're facing a radical ideology with inalterable objectives to enslave whole nations and intimidate the world". He called Syria and Iran "allies of convenience" backing terrorists. He said: "State sponsors like Syria and Iran have a long history of collaboration with terrorists and they deserve no patience from the victims of terror". He said the US made no distinction between those "who commit acts of terror and those who support and harbor them because they're equally as guilty of murder".

Zawahiri Warning To Zarqawi: In his mention of the neo-Salafis' scheme for a universal caliphate, Bush may have been inspired by a letter sent by al-Qaeda's No. 2 man Dr. Ayman al-Zawahiri to al-Qaeda's Iraqi branch leader Abu Mus'ab al-Zarqawi caught by US forces during their latest offensive against neo-Salafi insurgents in a Sunni Iraqi area near the Syrian border. The New York Times on Oct. 8 said the 6,000 word letter was dated early in July. The NYT quoted a senior US official in Iraq as saying that, in the letter, Zawahiri warned Zarqawi that attacks on civilians and videotaped executions committed by the latter's followers threatened to jeopardise the broader neo-Salafi cause.

According to the US official said in a briefing, Zawahiri said Iraq had become "the place for the greatest battle of Islam in this era" but that Zarqawi's forces should keep in mind that it was only a stepping stone towards a broader victory for militant Islam across the Middle East. "The mujahedeen must not have their mission end with the expulsion of the Americans from Iraq, and then lay down their weapons, and silence the fighting zeal", Zawahiri said in the letter, which The NYT said was "according to a partial translation provided by the official, who declined to provide verbatim translations of anything more than three sentences from the document".

The US official said Zawahiri had warned that Zarqawi's forces should concentrate their attacks on Americans rather than on Iraqi civilians, and should refrain from the kind of gruesome beheadings and other executions which had been posted on al-Qaeda Websites. The US official would not say when or how US forces obtained the communication, or whether it was in electronic or printed form. But the official said he had "the highest confidence of its authenticity", which he said had been verified by "multiple sources over an extended period of time".

Is Syrian Regime Collapsing? There are indications that the Ba'thist regime of Bashar al-Assad in Syria is either about to collapse or about to make a special deal with the US in order to survive. In either case Iran will be affected as Syria is the only strategic ally in the Arab world and in the Greater Middle East. Iran's Ja'fari Shi'ite theocracy depends heavily on its Shi'ite Arab surrogate, the Hizbollah movement in Lebanon.

Bashar's brother, Maher al-Assad who used to control Lebanon, and his brother-in-law Assef Shawkat, are said to be implicated in the Feb. 14 assassination of former Lebanese Prime Minister Rafiq Hariri in Beirut (see ood4bbIraqConstnOct10-05).

Iranian Isolation: Iran's theocracy now is isolated in the Arab world, not only because of the US-led Western campaign over its nuclear development programme, but also because of its meddling in the affairs of Iraq's Shi'ite Arabs (as explained in this week's OOD monthly newsletter).

It is said that it was one of the main Shi'ite Arab parties in the Iraqi government which told the British in Basra that the Iranian Revolutionary Guards and/or Lebanon's Hizbollah had supplied Iraq's Shi'ite insurgents - as well as the neo-Salafi insurgents who are killing Shi'ite Arab civilians - with the sophisticated explosives.

It was apparently on the basis of this information that the UK last week accused Iran of seeking to undermine western forces in Iraq by making contact with Sunni Arab insurgents and backing a renegade Shi'ite group in possible retaliation for escalating Western pressure over Tehran's nuclear file. The Financial Times on Oct. 6 quoted a senior UK official as saying Britain had complained to the Iranian leadership that explosives technology used by Lebanon's Hizbollah guerrillas against Israel had been found in the hands of a renegade Shi'ite Arab faction. The FT said part of the thinking of Iran "may be to put pressure on the West over the nuclear issue, at a time when negotiations between Tehran and European governments had collapsed and European Union governments are backing moves to refer Iran to the Security Council".