RUSSIAN ENERGY TIES WITH IRAN SEND U.S. A MESSAGE

Reuters
Friday, February 22, 2008

DUBAI/MOSCOW (Reuters) – As the United States warns the world away
from business with Tehran, Moscow’s tightening ties to Iran’s energy
sector underline Russia’s differences with Washington over Iranian
nuclear plans and Kosovo’s independence.

While the timing of Moscow’s announcement on Tuesday may have been
political, the deal for Russian state-controlled energy giant Gazprom
to take on big new Iranian oil and gas projects was a long time in the
making and dovetails with Gazprom’s strategic ambitions, analysts said.

Gazprom, the world’s biggest gas producer, will play a larger role
in developing Iran’s giant South Pars gas field and will also drill
for oil.

"The Russian government and the United States are at loggerheads over
how to engage with Iran, with Russia actively favouring a more open
relationship," said Ronald Smith, chief strategist at Alfa Bank. "This
makes Gazprom rather indifferent to American policy wishes."

The U.S. accuses Iran of using uranium enrichment to develop weapons,
while Tehran says it needs nuclear power. Russia has been reluctant
to impose more U.N. sanctions on Iran.

Despite voicing its own concerns about Tehran’s ambitions, Moscow is
building Iran’s first nuclear power plant and has supplied the fuel
it will use.

Russia opposes Kosovo’s split from Serbia, which the U.S. has backed.

Despite growing clout on the world stage, Moscow has proved powerless
to prevent Kosovo announcing its independence this week.

"There is probably a political element given what happened last week
in Kosovo," said Chris Weafer, chief strategist at UralSib bank.

"I would say this investment is in keeping with Gazprom’s declared
position to become as global as possible but the timing of the
announcement clearly has a political message as well."

FILLING THE VOID

Gazprom is advancing in Iran while U.S. political pressure has delayed
progress on gas projects by European companies such as Total and Royal
Dutch Shell and led to some European banks pulling their financing
for Iranian oil deals.

With European and U.S. companies out of the competition, Gazprom
has an edge as it bids for a bigger role in developing the world’s
second-largest gas reserves after Russia’s own.

"The Russians know full well that they are at a disadvantage in terms
of the quality of their technology compared to the West under normal
circumstances," said Ali Rashidi, a university economics professor
in Iran.

"Under conditions that Iran cannot attract real rather than token
Western foreign investment, the Russians are in an ideal situation
to fill the void."

Gazprom may also have been able to negotiate better terms due to
the lack of competition and Iran’s eagerness to press ahead with
development despite U.N. and U.S. sanctions, Rashidi said.

Strategically, a tie-up between Moscow and Tehran makes sense,
analysts said. Gazprom’s major market is Europe, which would also be
the likely destination for much of Iran’s future production. Gazprom
supplies a quarter of Europe’s gas needs.

The deal with Iran will do little to help Gazprom’s ambition to boost
its presence in the United States.

But for now, it’s exposure there is small, analysts said. That,
and Europe’s dependence on Gazprom, would limit the effectiveness
of any reprisal action from the United States, said Teymur Huseynov,
head of the Eurasia department at risk consultancy Exclusive Analysis.

"Gazprom’s vulnerability to U.S. sanctions is minimal," Huseynov
said. "And if you put sanctions on Gazprom you are basically
threatening Europe’s energy security and that would strain the
relationship with Europe and the United States."

Increased coordination between the two countries on investment
policy and pricing would also boost the chances of the formation of
a gas producers’ group resembling the Organization of the Petroleum
Exporting Countries (OPEC), Huseynov said.

Iran has called on Russia to set up such a group, which has caused
jitters in top customers and politicians in Europe.

Gazprom could also help Iran develop its pipeline system, potentially
linking the north of the country to fields in the south, Huseynov
added.

That would lessen dependency on gas imported from Turkmenistan, which
angered Tehran when it cut off gas supplies at the end of December.

The Russian gas export monopoly owns all the gas pipelines in Armenia,
to which Iran has recently completed a new export pipeline. Gazprom
will operate the section of that pipeline in Armenia.

Gazprom has been involved in Iran for years and invested about $4
billion in the country between 2000-2007, said Huseynov. It was
involved in an earlier phase of development at South Pars with Total
and Malaysia’s Petronas.