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TEHRAN - A highly-placed APS source here stresses that it is more economical and, "potentially healthier", for Iran to produce and consume nuclear energy than to use fossil fuels. Dismissing Western allegations that behind this argument Iran was hiding a nuclear weapons programme, he recalls that it was the US which in the 1960s persuaded the Pahlavi regime to go for the atomic option.

The source points to the Pahlavi shah's announcement in 1974 that Iran was to develop a capacity for atomic power plants to generate 23,000 MW by the turn of the 21st century. On the basis of that announcement, the US at the time lobbied the shah for Tehran to select two US nuclear plant builders, Westinghouse and General Electric.

Washington's position at the time was not only encouraging from Tehran's point of view, but was one of admiration that the Iranian economy was set to be modernised through the nuclear option. Iran's first atomic plant was given in 1967 by the US. It was a 5 MW trigger reactor, a pilot plant installed under the Eisenhower "Atoms for Peace Program". It was still operating when Khomeini's Shiite Islamist movement came to power in early 1979.

Immediately as the revolutionary government emerged in Tehran, it cancelled the whole nuclear plan as well as a far-reaching, US-backed programme to export Iranian natural gas in LNG form to the American East and West Coasts, where receiving and re-gasification terminals were to be built. The latter programme was based on the Kangan and nearby gas fields; the JV between Iran and the US was called Kalingas. In parallel, Japan Kalingas was being developed for the Japanese market.

The nuclear option was revived in 1987. The Shiite theocracy began to revive the LNG option five years later. While none of Iran's four LNG ventures has materialised as planned, whether or not the nuclear option included atomic weapons remains to be seen.

The Washington Post on Aug. 23 reported that traces of bomb-grade uranium found two years ago in Iran came from contaminated Pakistani equipment and were not evidence of a clandestine nuclear weapons programme. This was according to a group of US government experts and other international scientists. The Post quoted "a senior official" as saying: "The biggest smoking gun that everyone was waving is now eliminated with these conclusions". Scientists from the US, France, Japan, Britain and Russia met in secret during the past nine months to pore over data collected by inspectors from the International Atomic Energy Agency (IAEA).

Many still argued that, since Iran has huge oil and gas reserves, it has no need for nuclear power for domestic energy and thus its nuclear programme will be used for weapons. But the fact that a state is pursuing a nuclear programme per se, even if it is a nuclear proliferator, is not always a cause for alarm for the US.

Earlier this year, the US announced an agreement with India - until recently a target of US sanctions, even under the current US president - to strengthen the utilisation of nuclear power in its energy mix. The Bush administration agreed with the calculations of India that development of nuclear energy was economically feasible as well as desirable from the environmental point of view.

According to the Post, scientists from the five nuclear countries "definitively matched samples of the highly enriched uranium" - a key ingredient for an atomic bomb - "with centrifuge equipment turned over by the government of Pakistan". (Iran has long contended that the uranium traces were the result of contaminated equipment bought years ago from Pakistan. But the Bush administration had pointed to the material as evidence that Iran was making bomb-grade ingredients). The conclusions were to be shared with IAEA board members in a report due out in the first week of September. Citing a Western diplomat as its source, the Post added that the report was to say "the contamination issue is resolved". The Post said US officials had privately acknowledged for months that they were losing confidence that the uranium traces would turn out to be evidence of a nuclear weapons programme. A recent US intelligence estimate found that Iran was further away from making bomb-grade uranium than previously thought.

The Foreign Affairs Select Committee of the UK parliament in March 2004 said that, based on a study it commissioned, it was "clear...that the arguments as to whether Iran has a genuine requirement for domestically produced nuclear electricity are not all, or even predominantly, on one side". Some US arguments against Iran "were not supported by an analysis of the facts", the committee added, noting that much of the natural gas flared off by Iran - which US officials say could be harnessed instead of nuclear power - was not recoverable for energy use.

Since 1995, when the petroleum sector was opened to few foreign firms, Iran has added 600,000 b/d to its crude oil production. That was enough to offset depletion in ageing fields, but not enough to boost output, which has stagnated at around 3.7m b/d since the late 1990s. Almost 40% of Iran's crude oil is consumed locally. If this figure were to rise, oil revenues would fall, spelling the end of an economic growth the country has enjoyed since 1999. Plugging the gap with natural gas is not yet possible. Iran's huge gas reserves are only just being tapped, so it is still a net importer of natural gas.

Under Article IV of the nuclear Non-Proliferation Treaty (NPT), member-states are assured access to the benefits of civilian nuclear energy. Iran is a uranium-rich country and, as a signatory to the NPT, has all the rights to use its resources as it sees fit.

There are several uranium mines in Iran whose energy contents cannot be overlooked. Expecting Tehran to disregard this valuable resource is irrational, many experts say, not to mention that taking away so much energy from the free market is an irresponsible proposition. On the other hand, helping Iran to extract, process and use this resource in a joint operation with the IAEA could help resolve many political as well as financial problems.

Its large oil and gas reserves do not mean Iran can use oil and gas at no cost. Iranian oil production has dropped from a peak of more than 6m b/d in 1974 to about 3.4m b/d in 2002. Years of political isolation, recurring war and US sanctions have deprived its oil sector of needed investment. Iran's share of total world oil trade peaked at 17.2% in 1972, then declined to 2.6% in 1980, but has since recouped to roughly 5%. In 2002, earnings from oil and gas made up more than 70% of total government revenues, while taxes made up about 20%.

After the 1980-1988 Iran-Iraq war, the National Iranian Oil Co. (NIOC) launched a programme to restore seriously damaged fields - with most of the damage caused by neglect since late 1978 when international oil companies (IOCs) abandoned Iran's fields. Since 1994, production has averaged 3.6m b/d, though this is still roughly half of the 1974 level. Tehran has hoped that foreign money and technology will help raise Iran's output to 5.6m b/d by 2010 and 7.3m b/d by 2020.

To be able to use oil or gas as a feed for power generation, Iran has to develop the resources. Once produced, oil can be treated as a commodity, which has a value. The monetisation of natural gas is more difficult, but not if one has ready markets around and if one can use a part of the gas to boost one's oil production capacity.

Most of Iran's oil and gas reserves are in the south and the country's population centres are in the north. It makes more sense to export the oil and gas in the south - oil from the terminals and gas through pipelines - as well as use gas for value-add chemicals - rather than pump them to the north and translate them into electric power. This should explain why NIOC buys oil from Caspian sources which are closer to Iran's northern refineries. Use of Caspian oil in the north frees up crudes in the south for export.

Iran's energy situation now is different from the one of the late 1970s, when the shah's regime also pursued nuclear technology, which did not seem so alarming to the West at the time. David Kay, former head of the Iraq Survey Group (ISG), speaking in November 2004 at a forum sponsored by the Washington Centre for Strategic and International Studies, said: "The first thing - of what we do know, and it's amazing how many Americans seem to skate over this - the first nuclear reactor given to Iran...in 1967... We did not say, 'it's a stupid idea, why would you want to do that when you are flaring gas and you have immense oil reserves?' We said, 'That is very interesting; it's an example of how the Iranian economy is moving and becoming modern'. Imagine in Iranian ears how it sounds now when we denigrate that capacity. They remember. We were sellers of nuclear reactors and wanted to be sellers of nuclear reactors to the shah".

Just over a year before the 1979 revolution, Iran was producing more than 6m b/d of oil and its domestic consumption was less than 10% of that output. Its natural gas production - almost all in the form of associated gas - was roughly about 12 BCM/year, of which some 9.5 BCM/year were exported to the USSR and only 20% were consumed in Iran. Iran's population then was about 35m.

Iran by than had signed a number of nuclear power construction contracts with France and Germany and was negotiating with other powers for additional ones. The stated objectives of those undertakings were to generate electricity and desalinate water. Kay said: "But according to the pre-revolution politicians there was also always an attempt to explore the nuclear technology for military purposes".

Kay added: "But there was no overt opposition to the shah's nuclear ambitions because of friendly relations between Iran and US. In fact, President Gerald Ford signed a directive in 1976 offering Tehran the chance to buy and operate a US-built reprocessing facility for extracting plutonium from nuclear reactor fuel. The deal was for a complete 'nuclear fuel cycle' - reactors powered by and regenerating fissile materials on a self-sustaining basis... The shah argued that hydrocarbon resources would be too valuable to burn by the beginning of 21st century and most of Iran's electricity generation must be supplied from nuclear power plants by then.

"After the Iran-Iraq war at the end of the 1980s, the need for electricity generation for reconstruction of the war-damaged economy was evident and as the maximum export of hydrocarbon resources was to be achieved for foreign exchange requirements, the attention was focused on rebuilding the Bushehr nuclear power plant. Today, Iran has a population of more than 65 million and most people are choking from air pollution. The country produces some 4 million barrels of [crude] oil a day of which about 1.5 million [b/d] are consumed domestically. Natural gas production has skyrocketed and almost all of it is consumed domestically and the share of natural gas of total energy consumption has more than tripled and a very significant portion of that is used to generate power".

Iran is the second-largest oil producer in OPEC, has the world's second-largest natural gas reserves next to Russia. But its population now is 70 million and its energy needs are rising faster than its ability to meet them. Driven by a young population and high oil revenues, Iran's power consumption is growing by around 7% per annum.

Iran's capacity to generate electricity must nearly triple over the next 15 years to meet projected demand. It has been retarded by US sanctions, as well as inefficiency, corruption and Iran's institutionalised distrust of Western investors.

The only viable argument to be used regarding Iran's oil and gas reserves, compared to other countries which import petroleum, is the fact that Iran has secure domestic supplies. However, if Iran manages also to secure its own indigenous supply of nuclear fuel, then the equation changes and it becomes more of an economic evaluation.

With regard to its reserves of natural gas, it bears noting that there are needs for gas in Iran which are a much higher priority than the construction of gas-fired power plants. Gas is needed for re-injection into existing oil reservoirs. This is necessary for maintaining oil output levels, as well as for increasing overall, long-term recovery of oil.

Natural gas is needed for growing domestic use, where it can free up oil for more profitable export. New uses of natural gas in Iran such as powering bus and taxi fleets in the country's smoggy urban areas are essential for development.

Natural gas exports - through pipelines to Turkey and the Indian sub-continent - and in LNG form to the more distant markets, set an attractive minimum value for any available natural gas. With adequate nuclear power generation, Iran can profit more from selling its gas than using it to generate power.

The economics of gas production in Iran are almost backwards. Much of Iran's gas contains high-value byproducts, such as LPG (butane and propane), methane and ethane. Iran can profit more by selling these derivatives or rather by feeding them to produce ethylene and a big number of other petrochemicals downstream, but not if it burns the full-bodied natural gas to generate power.

Iran derives strategic significance from its status as an oil and gas exporter. This is a status which Iran would like to maintain. As such, any initiative which would maximise Iran's potential for petroleum exports has a strategic value for Iran.
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Publication:APS Diplomat News Service
Geographic Code:7IRAN
Date:Sep 5, 2005
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