Support for Iran Embargo Losing Ground

Guy Dinmore in Washington, The Financial Times:

US efforts to isolate Iran over its nuclear ambitions are colliding with the energy concerns of Asia’s economic powers, testing Washington’s ability to form a diplomatic coalition and its influence on oil and gas markets. Officials tell the Financial Times that the US is looking at “creative” ways of addressing the energy worries of China, Japan and India – major buyers of Iranian oil.

The US is searching for a viable energy framework that would persuade such thirsty customers to halt planned investments in Iran’s energy sector or even contemplate the shock of a sudden break in oil exports.

Officials and analysts are sceptical it can be done and, so far, US moves seem to be having the opposite effect.

Iran, second largest producer in the Organisation of the Petroleum Exporting Countries, is racing to conclude big energy deals with all three countries before possible discussion of sanctions reaches the United Nations Security Council.

China, meanwhile, brought its concerns to Washington last month, laying out three principles that underpinned its energy policy: no interference in the internal affairs of others, no nuclear proliferation and secure energy supplies from the Middle East.

The US urged China to avoid investing in Iran; China said it would support diplomatic efforts to resolve the Iranian nuclear crisis as long as oil supplies were not affected.

The US’s success last week in referring Iran to the Security Council over breaches in its nuclear safeguards commitments raises the prospect of sanctions, although the US says they are not the first step. Nonetheless, it is moving towards “targeted sanctions” – such as a travel ban and an asset freeze for senior officials – and forming a coalition of “concerned countries” to impose what Dick Cheney, the vice-president, has called “meaningful consequences”.

The US message to China and Japan – as well as India and Pakistan, which want to share a gas pipeline from Iran – is that Iran cannot be trusted as a reliable energy provider.

But the Bush administration’s image is also taking a hit. “The general perception in the oil industry is that the biggest risk to the oil industry is the US administration,” commented Fareed Mohamedi, chief economist with PFC Energy consultants. This is China’s perception too, he said, following the destruction of Iraq’s oil industry after the US invasion and the long-standing US embargo that has hobbled Iran’s energy sector.

To enhance its independence of energy supplies, China is investing where the US is absent: Iran, Sudan, Burma, Uzbekistan and, possibly Venezuela. “They fear that in the case of conflict or a cold war, the US will interfere in China’s oil supplies,” Mr Mohamedi said. “By saying ‘we can help’, the US is making the situation even worse. There is very little the US can offer China.”

James Placke, analyst with Cambridge Energy Research Associates, doubts the US can devise an energy framework that would exclude Iran and satisfy Asia. “If Iran for any reason were to severely reduce exports or stop exporting, the world would really be in a bind in the short term,” he commented. “There is not a whole lot the US could do.”

One option would be to tap the oil stockpiles of the 26 industrialised nations co-ordinated by the International Energy Agency. Claude Mandil, IEA executive director, recently said emergency stocks were enough to fill an 18-month hole if Iranian oil exports stopped. Countries negotiating with Iran “did not have to worry about an eventual loss of Iranian oil because you have the means to deal with it,” he said. READ MORE

Despite these assurances, analysts say crude oil could easily hit $100 (€84, £58) a barrel if Iran was taken off the market.

The US continues to press Japan not to proceed with the $2bn Azadegan oilfield deal it signed with Iran in 2004. Japan negotiated a clause in the contract to the effect that the deal would be off if Iran’s nuclear crisis was not resolved.

“The difficulty, of course, is that Iran has used its oil and natural gas as a weapon, and used it very skilfully with a variety of countries. They’ve used it with India, China, with others,” John Bolton, US ambassador to the UN, told Kyodo, the Japanese news agency. “I hope there’s a way to work around the energy question, but it may be awkward for Japan. We understand that, but we think it’s important to stick together on the non-proliferation.”

A US official said Washington felt it had a “bit more leverage” over its ally but that Japan had complained China would fill any investment gap left by Tokyo. “They tell us to solve the China problem first,” he said. Manouchehr Mottaki, Iran’s foreign minister, visiting Tokyo last month, stressed how Azadegan was a symbol of the two countries’ good relations.

India and Pakistan are also of concern for the US. Although President George W. Bush skirted the subject to avoid offending his hosts on his recent visit, the White House later clarified that the US remained strongly opposed to the proposed “peace” pipeline from Iran through Pakistan to India.

Nicholas Burns, undersecretary of state, urged India to meet its energy needs by turning to Kazakhstan and Turkmenistan, as well as clean coal technology and nuclear power – with US assistance in a deal that allowed India to develop its nuclear arsenal.

The diplomatic tug-of-war goes on, with pipeline talks in Iran this week.

Additional reporting by Stephen Fidler in London