Gimme, gimme

Gimme, gimme

Contracts be damned, Iran wants more money for its gas – and meanwhile flexes its military muscle. Can the neighbors afford to say no?

September 21, 2008 3:27 by kippreport

Scott MacMillan

With the price of gas having shot up, Iran is trying to wriggle out of a seven-year-old contract with a UAE firm to deliver 600 cubic feet of natural gas per day. The counterparty, Sharjah-based Crescent Petroleum, has expressed nothing but puzzlement over recent demands from across the water. “There is clearly a misunderstanding,” the company says, which seems to be a polite way of asking, “Which part of ‘contractual obligation’ don’t you understand?”

The 2001 deal was “properly negotiated and executed at a time when energy prices were lower,” the company adds. Indeed, prices then were a quarter of today’s levels.

Meanwhile, Iran’s leaders are holding war games to boost military readiness and have made clear not only that it could seal the Strait of Hormuz in the event of a military confrontation with the US, but that any ships in the Gulf are within reach of its missiles.

Complaints about the Crescent gas contract have long been echoing in Tehran’s political establishment, with President Mahmoud Ahmadinejad himself recently criticizing the deal on the grounds that “[t]his government will not allow even one penny belonging to this nation to be wasted.”

Most UAE media reporting on the dispute left out Ahmadinejad’s claims that the deal had been tainted by bribes.

These developments take place against two important backdrops – the first military, the second economic. On the political front, tensions in the Gulf are up a notch after a senior military advisor to Iran’s supreme leader reminded the world that the country is prepared to close the Strait of Hormuz – through which about 40 percent of the world’s traded oil passes – in the event of war. He also said the country’s Revolutionary Guards are ready to attack any ships in the Gulf with coast-to-sea missiles if hostilities with the US break out.

That means the area just off the UAE coast could be the site of a major showdown between the US Navy’s Fifth Fleet, which is based in nearby Bahrain, and Iran’s Revolutionary Guards, which have a command structure that is separate from that of the country’s conventional armed forces.

The saber rattling takes place at a time when Iran has never been more frustrated with more unfulfilled potential to capitalize on natural gas exports. The country sits on about 28 trillion cubic meters of gas, the world’s second largest reserves. Yet its extraction industry is so underdeveloped that the country is actually still a net gas importer.

The Gulf region, meanwhile, is facing a major gas shortage, which is putting the brakes on development of energy-intensive heavy industry. An aluminum smelter in Ruwais, UAE, was recently put on hold because the partners couldn’t stop arguing about the power supply.

The region’s only other source of gas, Qatar, has declared a moratorium on exports from its massive North Field, which holds 14 percent of the world’s reserves, until it figures out how much of the stuff it needs for its own use.

With development of key industries on hold due to the gas shortage, it should therefore come as a shock to nobody that Iran wants to squeeze its neighbors for all they’re worth.