Platts - Monday, February 06, 2006 http://www.platts.com ------------ ANALYSIS:Iran brandishes 'shipping card' as nuclear row escalates Dubai (Platts)--6Feb2006 An Iranian lawmaker has raised the stakes in Iran's nuclear crisis with a warning that his country holds the "key to security" in the Persian Gulf, through which 40% of the world's tradeable crude oil is shipped to markets. Soleiman Jafarzadeh of the Majlis National Security and Foreign Policy Committee was quoted Saturday as saying that "any kind of pressure or threats against Iran would inflict severe damage on Western countries in the Middle East, particularly in Iraq and Afghanistan," a reference to the US military presence in both countries. He added that "those countries that claim they can increase their oil production in order to prevent a rise in the price of oil, in the event that the UN imposes sanctions on Iran, should know that the Islamic Republic holds the key to security in the Persian Gulf." Jafarzadeh's remarks as carried by the semi-official Iranian Mehr news agency, were widely reported by Arab media and made the front-page of the Saudi-owned newspaper al-Hayat Sunday under the headline: "Iran brandishes the Gulf shipping card." PERSIAN GULF IS HOME TO 60% OF GLOBAL OIL RESERVES The Persian Gulf contains 715-bil bbl of proven crude oil reserves, roughly 60% of the world's total and some 45% of global natural gas reserves. More importantly, the region is home to nearly all the world's spare oil capacity, the bulk of it in Saudi Arabia. OPEC powerhouse Saudi Arabia as well as neighbors Kuwait, Iraq and the UAE all export crude oil from Gulf ports though the Saudis have access to the Red Sea and could in an emergency ship more crude from Yanbu and via the SUMED pipeline through Egypt. Iraq can export from Turkey's Ceyhan port by switching the flow of its north-south pipeline but that avenue has been closed to it because of sabotage on its main northern pipeline. The US Energy Information Agency says the Gulf states ship 90% of their combined crude oil exports -- around 17.2-mil b/d in 2003 -- through the 600-mile Persian Gulf. Analysts say the slightest hint of disruption through the world's busiest international oil route would send oil prices through the roof in a market tight on spare capacity. "If this were to happen, you could see oil at $100 per barrel," said one regional oil trader. Crude oil prices resumed their upward march Monday in reaction to Iran's decision to end snap inspections of nuclear installations and preparations to resume uranium enrichment work after the International Energy Agency's governing board voted to refer the case to the UN Security Council. Tehran has insisted that its program is peaceful though Washington and its allies suspect that behind its determination to carry out highly sensitive nuclear enrichment work is a desire to produce nuclear weapons. The IAEA resolution puts off any UN action against Iran for at least a month to give time for diplomacy before the issue goes to the UN Security Council, which has the powers to impose political and economic sanctions. Iran, the world's fourth biggest crude oil exporter and holder of the second biggest gas reserves after Russia, says it wants to develop a peaceful nuclear program because it consumes roughly half of the oil it produces. Iran is currently producing just under 4-mil b/d. Exports averaged 2.7-mil b/d in 2005, according to International Energy Agency figures. IMPLICT IRANIAN THREATS SPOOK MARKETS Although Jafarzadeh's comment is not official government policy, other Iranian officials have said that any attempt by the international community to impose sanctions against Iran would lead to higher crude oil prices in what has been seen as an implicit threat to withhold crude oil. Saudi Arabia, which holds a quarter of the world's crude oil reserves, has said it stands ready to make up for any shortfall on world markets be it because of war, natural disasters or higher demand. The Persian Gulf is no stranger to regional conflict though it has never closed to maritime traffic. Its waters were mined during the Iran-Iraq war of 1980-1988, when then Iraqi president Saddam Hussein attacked Iran in a bid to control the key Shatt al-Arab waterway. Iraq's 1990 invasion of Kuwait and the US-led war against Iraq all led to fears that the vital shipping lane would be restricted to oil tanker traffic but while oil prices soared, oil exports were largely unaffected. Rising insurance costs did add a risk premium to the oil barrel at the time and could do so again. "The Iranians are the only ones in the Gulf who have the capacity to close the straight (of Hormuz) because they are the only ones with ships and military," said Judith Kipper, head of the Middle East program at the Council on Foreign Relations in Washington. She pointed out that the other Gulf littoral states relied for protection on the US, which has a major naval base in Bahrain and a big airbase at Al-Udaid in Qatar. "The US reluctantly has the responsibility to protect the free flow of oil that fuels the US economy," she said. "It raises the whole issue of energy security," said Kipper. US President George W. Bush highlighted energy security in his State of the Union address, where he called on Americans to end their addiction to oil and pledged to cut reliance on Middle Eastern crude oil by 75% in 2025 by investing in alternative fuels like ethanol and "clean, safe nuclear" energy. Of the Gulf producers, only Saudi Arabia is a major exporter of crude oil to the US market. The Persian Gulf accounted for 22% of US net oil imports in 2003 and 12% of US demand. Closure of the Strait of Hormuz, the narrow straight that leads out to the open sea, would be the ultimate energy security nightmare. Just the likelihood of disruption to Gulf shipping is enough to cause jitters in a tight oil market where the available spare capacity is not enough to make up for the potential combined loss of volume from the Gulf states. Saudi Arabia, with current production of around 9.5-mil b/d and capacity of 11-mil b/d, can only make up 1.5-mil b/d of any shortfall. The Gulf oil producing states ship 90% of their crude oil through the Strait of Hormuz. The US energy department's statistical arm, the Energy Information Agency, says that closure of the Strait of Hormuz would require use of longer alternative routes at increased transportation costs. The IEA said in its 2005 World Energy outlook for the Middle East and Africa that the most significant oil supply disruptions of the last few decades occurred in the MENA region. "In previous conflicts, such as the Iran-Iraq war and the Iraqi invasion of Kuwait, oilfields and tankers were systematically targeted. Supply interruptions can also result from deliberate political acts by the producing government," it said. MILITARY OPTION ON THE TABLE The US has not ruled out the military option against Iran for now and Israel's acting prime minister Ehud Olmert said Sunday Tehran would pay a heavy price if it pressed ahead with its uranium enrichment plans. "All options, including the military one, are on the table," US defense secretary Donald Rumsfeld said in an interview with Monday's edition of German financial newspaper Handelsblatt. But Washington-based consultants PFC Energy believe the US military involvement in Iraq made this unlikely. "The scale of the US campaign in Iraq limits the Bush administration's military options ..." said Washington-based consultants PFC Energy in a Feb 3 report on the Iranian crisis. "Washington's options are similarly constrained on the political front," it said, noting that none of the other permanent members of the Security Council favored an oil and gas embargo. "Absent an egregious move by Tehran, none of its P5 (permanent five) partners favor economic sanctions, especially any embargo that limits Iranian oil and gas exports. The economic costs to consuming nations would arguably be as painful as the financial damage to Iran," it said. - Kate Dourian, kate_dourian@platts.com For more information, take a trial to Platts Global Alert at http://globalalert.platts.com. ------------ European banks, businesses cast wary eye amid Iran nuclear row London (Platts)--3Feb2006 The current tension between US/Europe and Iran over its alleged plan to develop nuclear weapons has several European banks that are financing Iran's petrochemical expansion concerned, industry sources said. The banks are watching the current friction closely and treating developments in the political situation with caution. However, the banks are still maintaining the credit lines to that country, sources said. "We are monitoring the situation. We are not withdrawing from any projects in Iran," a source at French financial institution Calyon said. "The political situation is challenging," a source at HSBC said, but declined to comment if the bank had stopped its financing facility to Iran. It was also unclear whether Deutsche Bank, one of Iran's largest lenders, would continue to finance projects over in Iran. "It's a sensitive issue, and we can't comment on our position," a source at the bank said. Apart from Deutsche, HSBC and Calyon, Iran's massive petrochemical and oil projects have attracted financing from a consortium of major European banks, including Standard Chartered, Natexis, Banques Populaires, BNP Paribas, Commerzbank, ING, and SG Corporate & Investment Banking. In addition, Asian financial institutions such as Japan Bank for International Cooperation, and Korea's EXIM Bank, have also ploughed a lot of money into Iran's petrochemical projects. The Japanese bank in August 2005 provided export credit to the National Petrochemical Company of Iran amounting to $59-mil, while it provided a supplier's credit of about $89-mil for Itochu Corp, which has equity stakes in Iran's Mehr Petrochemical Co. Meanwhile, some industry observers said that companies involved in Iran have cited concern that their credit ratings could be potentially downgraded. But an analyst at a ratings agency said the outlook for most European companies with projects in Iran, were still stable. "There has always been tension in one place or another, but that hasn't stopped investors from financing projects in those countries. The situation (in Iran) is not serious enough to warrant any ratings action (for the moment)," the analyst said. However, one source at an engineering company involved in Iran said he expects banks would charge a higher premium for export credit, and this would add about 1% to the company's total project costs. Although the International Atomic Energy Agency, UN's watchdog atomic agency, has put off a decision on whether to send Iran to the UN Security Council, market sources said that any planned economic sanctions on Iran, could be difficult to implement because Europe collectively has huge investments in that country. Major oil and petrochemical companies such as Total, Shell, BP, Norsk Hydo and Basell; and engineering companies Lurgi, Uhde, Tecnimont, Johnson Matthey Catalysts and Davy Process Technology, all have business ventures in Iran. And some of these companies are worried the situation between Iran and US/Europe could take a turn for the worse. "We have personnel there and we worry about them. But we will go ahead with our projects there and try to complete the projects as early as possible," a source at Lurgi said. "Only if the German government tells us to pull out, then we will go." ---Nidaa Bakhsh nidaa_bakhsh@platts.com ---Shahrin Ismaiyatim shahrin@platts.com For more information, take a trial to Platts Petrochemical Report at http://petrochemicalreport.platts.com. ------------ BNFL to sell BNG America to EnergySolutions London (Platts)--3Feb2006 BNFL has signed a definitive agreement to sell BNG America to EnergySolutions, a new company comprised of the former Envirocare of Utah and Scientech D&D. BNG America is BNFL's U.S. nuclear cleanup company. BNFL did not release the value of the deal, but industry sources indicated the transaction is worth about (U.S.)$90-million. Envirocare bought the decontamination and decommissioning division of Scientech LLC in October 2005 and called it Scientech D&D. Envirocare and Scientech D&D are operating under the EnergySolutions name immediately, the new company said in an announcement today. BNG America will also operate under the EnergySolutions name upon completion of the deal in the next several weeks, EnergySolutions said. The sale, which includes BNG subsidiaries Manufacturing Sciences Corp. and BNG Fuel Solutions, represents one more step in BNFL's dismantlement. BNFL will cease to exist sometime within the next two years (for details, see the Feb. 3 Nucleonics Week). ------------