Sanction threats already hampering energy investment in Iran: US

Washington (Platts)--25Jul2006

The international community's decision to give Tehran a "clear choice" --
opt either for incentives or for punishment -- when deciding whether to
continue to pursue nuclear enrichment activities has already hampered
investment in the country's energy sector, a US State Department official said
Tuesday.

"Iran, already, even before sanctions have been imposed, is a less
desirable place to invest," said Paul Simons, deputy assistant secretary for
economic and business affairs at the State Department.

Simons was testifying before the Senate and House's Joint Economic
Committee on Iran's energy sector and economy.

"Putting the sanctions option front and center has had a significant
impact," he said. "It's affected the political risk calculations of business
and banks" by making it difficult for international companies to reach
agreement on terms for new energy investments that would mitigate the high
political risk of such deals. The threat of sanctions has also caused banks to
downgrade Iran's credit rating, he added.

Simons said US unilateral sanctions against Iran that began in the 1980s
and the broad prohibitions on US business transactions in Iran imposed in the
mid-1990s also have played a role in slowing global investment in Iranian
energy investment.

"US companies were certainly not investing in this period," he noted. The
Iran-Libya Sanctions Act, a US law that threatened reprisals against non-US
countries that sought to invest in Iran's energy sector, also played a role in
tamping down foreign investment, he said, even though ILSA sanctions were
never levied despite several high-profile energy investments by international
oil companies. "There was a lot less involvement by the rest of the world than
there would have been had we not gone down this road," Simons said.

Simons said he would not answer questions in "an open session" of
Congress on whether Iran's threat to use oil as a weapon in the nuclear
dispute was credible. But he did note "the importance of oil and energy to
Iran's economic engine."

Iran has not ruled out using oil as a weapon in the dispute over its
nuclear program, and oil market concerns about the potential for Iranian
supplies to be disrupted helped drive crude prices towards the record highs of
more than $78/barrel seen earlier this month.

Oil and gas account for 80% of Iran's export revenues and its oil and gas
exports represent about 20% of its Gross Domestic Product, said committee
chairman Representative Jim Saxton, a New Jersey Republican.

Simons insisted the US and its allies could "handle" a potential shutoff
of Iran's 2.5 million b/d of oil exports by using "various methods at our
disposal" including use of emergency crude oil reserves held by the member
countries of the International Energy Agency. The US does not import any oil
from Iran.

--Cathy Landry, cathy_landry@platts.com

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