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. Last Updated: 07/27/2016

Iran Builds Alliances With Oil

TEHRAN, Iran -- As it faces the threat of global sanctions from the United States and Europe because of suspicions that it is turning its nuclear program to weapons production, Iran is fighting back with a powerful weapon of its own: its vast oil and gas resources.

Iran's ruling clerics are meticulously arranging energy sales and building partnerships with influential countries, including China and India, as a way to win stronger friendships around the world.

The rising price of oil, nervousness in the energy markets and the scramble by fast-growing countries to secure their own access to oil supplies have lately played into Tehran's hands.

This renewed push to turn underground riches into political power complicates the Bush administration's attempt to isolate Iran, which holds 10 percent of the world's oil deposits and has the second-largest gas reserves.

High-profile talks with European negotiators continue over the future of its nuclear program, as does the threat of United Nations sanctions and American action in the background.

But in the meantime, Iran has approached China and India, two of the largest and most dynamic consumer markets, and promised them long-term supplies of gas and access to oil exploration.

In addition, Iran last year granted Japan, traditionally its largest customer in Asia, even greater access to oil.

"Iran wants to diversify its strategic alliances and is looking to the East," said Ali Ghezelbash, an oil analyst at Atieh Bahar Consulting, a business consultancy in Tehran. "China and India are huge consumers of energy and could be very powerful allies for Iran on the international scene."

As U.S. oil companies are barred from investing in Iran because of unilateral sanctions, Iran's policy is opening the door to their state-owned rivals in Asia to build up oil and gas reserves as a counterweight.

There is no guarantee, though, that Iran's clients will necessarily turn into political allies. Moreover, Iran's ability to buy friendships is undermined by its own limitations.

While the country pumps close to four million barrels of oil per day, it spends $2 billion each year to import fuel because of a lack of refining capacity. Then it spends another $3 billion to subsidize gasoline that is sold in Iran at one of the lowest prices in the world -- 8 cents per liter.

And nearly one-third of Iran's production is unavailable for export because it is tied up in domestic consumption, where much of it is squandered by inefficient cars, homes and industries.

"Iran definitely has geology on its side," said Vincent Lauerman, the editor in chief of Geopolitics of Energy, an industry newsletter based in Calgary, Alberta. "But if you look at the fields that are producing, these tend to be mature and declining."

Still, for all its problems, Tehran is definitely making progress in its geopolitical campaign. In January, Iran said it would provide India with liquefied natural gas for 25 years, an agreement valued at $40 billion. It also gave India's state-owned Oil and Natural Gas Company a 20 percent stake in the Yadavaran oil field, a 300,000-barrel-per-day project.

Iran is also trying to persuade the strategic rivals India and Pakistan to agree to the construction of a $4 billion pipeline that would carry Iranian gas through Pakistan to India.

In the meantime, after years of fruitless talks, Japan's Inpex last year was granted a $2 billion development contract for the Azadegan field, Iran's largest discovery in the past three decades.

"It is very clear, for example in the case of China, that their energy interest in Iran gives them a stake in the game," said Ian Bremmer, the president of Eurasia Group, a political risk consultancy based in New York.

Oil-rich countries, of course, have long used their resources to expand alliances, make new friends or punish adversaries. Nor is energy diplomacy something new for Iran: In the 1970s when the shah ruled Iran, the country was very active in using its oil to build up political support, particularly with the West.

But Iran's Islamic regime is finding that its oil weapon can be a double-edged sword. With the bulk of the world's oil reserves slowly waning, Iran knows that it has time on its side.

"The world will be consuming growing amounts of oil and only five or six countries can supply this," said Mehdi Hashemi, a son of Iran's former president, Ali Akbar Hashemi Rafsanjani, who maintains ties with the oil ministry. "Iran is one of them."

In 1995, Rafsanjani, who was president then, even tried to lure the United States into improving relations by granting Houston-based Conoco a $1 billion oil development deal.

But 10 days after the announcement, President Clinton banned U.S. companies from contributing to Iran's oil sector.

The following year, Congress threatened penalties against American and non-American companies investing more than $20 million in Iran's energy sector.

"Whenever Iran has wanted to get closer to a country, it has used its oil diplomacy," said Siamak Namazi, a managing director at Atieh Bahar, a Tehran consultancy. "But the history of American-Iranian relations has been that when one opens the window, the other nails it shut."

Iran is counting on outside help to bolster its stagnating production. After nearly two decades of isolation, the clerical rulers of Iran have realized they cannot afford the massive expansion and modernization without capital and expertise from abroad.

Since the mid-1990s, foreign investors have poured about $15 billion into Iran's oil and gas industry, but the country's energy resources have never really recovered from the Islamic revolution of 1979.

After the clerics toppled the shah, they cut their oil output by two-thirds to demonstrate their resolve to sever ties with the West. But when Iran signaled it was once again ready to open up access to foreigners, the United States imposed sanctions against its oil sector.

Iran's peak oil production was of 6 million barrels per day, in 1974, and it has since stabilized at around 4 million bpd, or 5 percent of the world's output.

The question of energy's role in policy is very much alive today in Iran. "It's true throughout the Middle East, but the public here is very emotional about the oil issue," said Manouchehr Takin, an analyst at the Center for Global Energy Studies in London.

But as with any high-stakes business, Iran's energy diplomacy is partly a bluff. For many oil executives here, the decisive coup would be, as it tried in 1995, to attract American companies back -- but this time lock them in.

"We've been in this business for over a hundred years," said Hossein Kazempour Ardebili, a senior adviser to Iran's foreign and oil ministries.

"Security of supplies is our bread and butter. If the United States is looking for security of supplies, Iran is an inevitable partner."