DAR AL HARB/ISLAM - THE WEST/IRAN: EURABIAN COMPANIES BROKER DEALS WITH IRAN @ BREAKNECK SPEEDS - - - DESPITE U.N. SANCTIONS & THE STAND OF THE U.S.A.

European companies brokering deals with Iran despite U.S. stance
By Rachel Bayefsky


BRUSSELS (MarketWatch) -- When Austria-based energy company OMV AG (OMV.VI : OMV.VI0.00, 0.00, 0.0%) saw a chance to develop a lucrative Iranian gas field in April, it jumped at the $18 billion deal despite strong opposition from the U.S.

OMV isn't an energy giant - its revenue was EUR18.97 billion in 2006, compared to the EUR153.8 billion at France's Total SA (TOT : 83.50, +0.40, +0.5%) . But OMV's investment in Iran, if finalized, would be one of the largest joint European-Iranian projects ever conducted.

The Austrian company's decision shows how the U.S.'s increasingly strident threats to enforce sanctions against companies doing business with Iran are having limited success. Smaller European companies, in particular, are emerging as impediments to the U.S. drive to cut off Iran economically.

The activities of these companies could backfire if stricter sanctions are imposed by the U.S. or multinational bodies. But for now, the chance to reap large profits is enough incentive for them to ignore U.S. threats of punishment.

"Any company with U.S. exposure is going to be beat over the head to shut these operations down," said Cliff Kupchan, an analyst with the Eurasia Group, whose clients include multinational oil and natural gas businesses.

But smaller European energy companies, such as OMV, have less exposure to the U.S. market than do big oil producers like BP PLC (BP). As a result, they "may be doing a different cost-benefit analysis," he said.

The U.S. push to target foreign companies involved in Iran's energy sector has accelerated in recent weeks. The U.S. is now trying to draft even tougher U.N. sanctions against Iran, because the country has failed to heed repeated warnings from the UN Security Council to stop enriching uranium. Iran insists its enrichment program is for generating nuclear power but the U.S. and its allies believe the program is aimed at creating nuclear weapons.

In response to the OMV investment, the State Department warned the company and Austrian officials that the Iran Sanctions Act might soon be enforced. This law, passed in 1996, allows the U.S. president to ban imports from and restrict bank loans to companies investing more than $20 million per year in Iran's energy industry, among other punitive measures.

In 1996, the European Union pushed back against U.S. efforts to restrict European operations in Iran by forbidding European companies from complying with U.S. sanctions. The Clinton Administration chose not to punish Total or its minority partners Gazprom of Russia and Petronas (6033.KU) of Malaysia when they signed a $2 billion contract to develop a phase of the South Pars gas field in 1997. Similarly, the Bush Administration has so far avoided sanctions on European companies doing business with Iran.

But now the Bush Administration is threatening to enforce the sanctions more vigorously. Even if President George W. Bush doesn't do so of his own accord, he may not have a choice.
Legislation to remove the president's ability to waive sanctions on companies doing oil and gas business with Iran is moving through Congress.

U.S. lawmakers are also taking up a bill encouraging U.S. states to sell their shares in such companies, and 14 states are considering stricter rules. In addition, the U.S. Securities and Exchange Commission recently added to its Web site a "blacklist" of companies and banks which continue their involvement in Iran and other countries considered by the U.S. to sponsor terrorism. The list is designed to "inform investors" and, presumably, discourage U.S. citizens from buying shares in these groups.

OMV spokesman Thomas Huemer said Iran, which has the second largest gas reserves in the world after Russia, is an interesting opportunity for OMV and its peers. "Other companies have the intention to explore and produce gas there, and ship it and sell it," he said. Asked about the U.S. threat of penalties, Huemer said, "We are a European company working within the framework of all European and international laws."

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