- The Washington Times - Monday, August 13, 2007

CAIRO (AP) — The United States is on a concerted campaign to discourage foreign energy companies from doing business in Iran. But analysts say Iran’s investment woes are its own fault — it could dodge international pressure and attract more foreign money by simply offering better deals.

“They are doing the embargoing for us,” said Mikkal Herberg, a former oil executive now with the National Bureau for Asian Research, a think tank partially funded by the U.S. government.

“The terms they offer [to foreign energy companies] for these deals are very poor, with low rates of return against the geopolitical risk,” he said.

Even Chinese firms, eager to invest in troubled countries such as Sudan, have been slow to follow through on energy deals in Iran.

The situation shows how domestic politics often hamper Tehran’s ability to withstand Western efforts to curb the country’s nuclear program.

Iran is flush with oil revenue, but its economy, reliant on oil and gas, lacks the investment needed to reverse falling oil production. The shortage could seriously weaken the country in the future, leaving it more vulnerable to foreign pressure.

Secretary of State Condoleezza Rice and Defense Secretary Robert M. Gates continued the push for sanctions against Iran recently, urging allies to support broader financial moves against the country during their Middle East visit.

Iran could do more by sweetening its foreign deal terms, many oil industry analysts say. But that would run contrary to Iranian President Mahmoud Ahmadinejad’s belief in self-reliance and his goal to channel oil revenues to the country’s poor.

Other conservatives in Iran, such as former President Akbar Hashemi Rafsanjani, have pushed for economic reform to attract foreign investment. Leaders such as Mr. Rafsanjani, who belong to an old guard of conservatives at odds with Mr. Ahmadinejad, are thought to hold private control of much of the oil sector.

The basis for Iran’s posture goes back decades. Its constitution prohibits foreign ownership of the country’s energy resources, a reaction to Britain’s near monopoly control of the nation’s oil industry until it was nationalized in the early 1950s.

To attract foreign investment now, Iran offers so-called “buyback” contracts that leave ownership in Iranian hands and pay international energy companies a fixed return to develop oil and gas fields.

But Mr. Herberg said the contracts are relatively unattractive because the returns are not equal to the risk of investing in a country with tense international relations.

“What you can earn gives you a rate of return of 6 to 9 percent, maybe 10 percent if you’re lucky,” he said. “In a very low-risk environment, you want to see 10 to 12 percent returns. In a high-risk environment, you need 15 percent plus to make sense.”

Oil production will decline 5 percent a year unless Iran gets new investment, Akbar Torkan, managing director of Iran’s Pars Oil and Gas Co., was quoted as saying last month by the Iranian Students’ News Agency.

Some analysts think Iran’s oil exports could go to zero within a decade.

All parts of Iran’s energy industry — exploration, development, transportation and marketing — need capital, said Narsi Ghorban, an independent energy consultant based in Tehran.

Iran has made some improvements to its buyback contracts over the past few years, extending their duration and allowing a company that discovers a field to develop it.

In December, the National Iranian Oil Co.’s director for exploration announced that Tehran would allow production-sharing in contracts for the first time, the Economist Intelligence Unit reported.

Although commonly offered by developing countries, such a contract would be a radical departure for Iran, allowing foreign companies a contracted share of production, giving them equity rights without full ownership.

Mr. Herberg called it an ingenious way for those in Iran eager for investment to overcome the country’s aversion to foreign ownership.

But Alex Forbes, a consultant with Gas Strategies in Britain, said he was skeptical that Iran would follow through on the plan.

“I doubt it very much,” he said. “They would have to change their constitution to do that.”

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