US Financial Squeeze On Iran To Affect Petroleum Sector.

The New York Times on March 20 reported that the US had quietly been warning energy companies, including Shell, Repsol/YPF of Spain and SKS of Malaysia, as well as the governments of China, India, Pakistan and Malaysia, that "sanctions are possible if they pursue energy deals with Iran". As a result, the paper said, several huge projects planned for Iran could be vulnerable, including one possible $10 bn project planned by Shell and Repsol for gas E&P/LNG; and another $20 bn by SKS to produce natural gas in Iran's Golshan and Ferdows fields as well as LNG for export.

The NYT said: "In recent months, the [Bush] administration has tried to avoid a diplomatic or political flap from its jawboning. But the potential for sanctions is posing a dilemma for the administration by setting up a possible new fight with Europe if it proceeds with them, or a fight with Congress if it does not. One factor behind the warnings, administration officials acknowledge, is that Congress, out of concern about Iran's suspected nuclear arms program and support for terrorism, appears to be moving quickly toward passing a law that would make sanctions mandatory".

The NYT quoted US Under-Secretary of State for Political Affairs R. Nicholas Burns as saying: "What we're trying to do is create multiple points of pressure on Iran in both the private and public sector. These companies also need to know that the attitude of Congress on their activities in Iran is hardening".

In February, the US Ambassador to Spain Eduardo Aguirre Jr. met with Repsol executives in Madrid to advise them against going forward with a deal to develop a phase of Iran's South Pars gas field. The NYT quoted a Repsol spokesman in Madrid as saying: "No investment is being made at present. There will not be a decision on this until next year".

The messages to oil firms mark the latest episode in a long campaign of pressure which reached a turning point on Dec. 23, when the US won approval of a UNSC resolution designating 10 Iranian companies and a dozen individuals as off limits for international financial dealings. A resolution designating another 15 individuals and 13 Iranian government and business groups, including a leading Iranian bank, was to be approved last week. The US, using the UNSC list, wants virtually all of the world's banks and businesses to boycott all these Iranian entities. But in orchestrating all this pressure on Iran, President Bush and his top aides have been careful to avoid any kind of boycott or other threat that might cause oil and gas prices to soar and strangle the economies of the West.

Short of a cut-off, the administration wants to make it harder for Iran to tap into its oil and gas reserves to increase exports in the future. Iranian energy output has lagged in recent years, and many experts say the country faces the possibility of not having enough oil to export in 10 years.

Despite the stepped-up US pressure, some Democratic leaders in Congress want Bush to invoke a statute enacted in 1996 which obliges the US government to punish any foreign energy firm doing business with Iran, unless Bush waives the sanction on national security grounds.

Representative Tom Lantos, a California Democrat who chairs the House Foreign Affairs Committee, recently said: "This administration has done nothing to punish Iran. The method I don't favor on Iran is to bomb their nuclear facilities. The method I favor is to starve them of resources, which can only be done through sanctions".

After the bill passed in 1996, European governments and companies vehemently objected, charging that it amounted to a brazen case of "extraterritoriality", the term for one nation imposing its laws on foreign firms and sovereign states. Then-President Bill Clinton, acting in part to avoid a confrontation with Europe and in part to send a conciliatory message to Iran at a time when moderates seemed to be vying for power, waived the sanctions on several European firms, including Total of France.

Recalling that precedent, Lantos said his bill would strip the president of the ability to waive sanctions on Iran on national security grounds. The Bush administration opposes that provision as a weakening of presidential prerogatives. A spokesman for House Speaker Nancy Pelosi says she backs Lantos's bill, and Lantos said he was confident he could pass such a bill with a big enough majority to override a presidential veto.

The existing sanctions law gives the government the option to choose among several penalties, including denial of government credits to firms which deal with the foreign oil company, denial of export licences and a ban on US government procurement or imports from these companies. Administration officials say the reason no decisions have been made on whether to invoke or waive such sanctions is that the energy exploration deals by Shell, Repsol, China, Malaysia, China and Pakistan are all still in an "embryonic" stage, and that it is better to head them off by using persuasion. But they also say the administration does not want to take any action now that would divide the US from its allies in Europe on Iran, or to provoke China, India and Pakistan, whose support Washington needs for other foreign policy objectives.

The NYT quoted a "senior European envoy involved in discussions over Iran" as saying Europeans would be unhappy with US sanctions against private oil firms but that they also understood the importance of pressing the Tehran government. He added: "As long as we want to avoid a war with Iran, we have to try sanctions". The energy steps being contemplated are part of a web of pressures which could be invoked in coming months. These include plans to sanction Iranian banks beyond the two which have already been sanctioned and barred from obtaining dollars from US banks. The aim, US officials say, is to prevent Iran from obtaining dollars, the world's reserve currency, for use in any purchase of goods or services. Iranian leaders says US sanctions are forcing them to sell oil for euros or other currencies, even though oil is traded on the international markets in dollars.

US and EU officials say recent stepped-up pressure on European governments has led several to reduce, or to pledge to reduce, their government-backed credit guarantees for deals with Iran. Germany had $6.2 bn in outstanding export credits to Iran as of 2005, according to figures circulating at the UN. But recently Germany reported that after cutting back credits by 60%, it planned further cutbacks this year. Japan, which had $1.9 bn in credits as of 2005, has informed the US it has granted no medium or long-term credit insurance since last June and had cut short-term credits to $8m since last May. US officials say they have received similar pledges from Italy and France to cut back export credits.