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The End of ILSA?

February 20, 2004
Stratfor
Stratfor.com

Summary

Japan and Iran on Feb. 19 finally sealed a $2 billion deal on the 26-billion-barrel Azadegan oil field. The announcement marks the beginning of an Iranian oil rush -- not because the Japanese have arrived, but because the Americans are about to.

Analysis

Japanese state oil firm Inpex finalized discussions Feb. 19 with an affiliate of the Iranian National Oil Co. and agreed to invest $2 billion in the 26-billion-barrel Azadegan oil field in southwestern Iran. Inpex will hold a 75 percent stake in the operation. The first oil is expected in 2007, with a full flow rate of 260,000 barrels per day projected for 2012.

Initial discussions with Japan over developing the Azadegan superfield began in the mid-1990s, but always ran afoul of the U.S. Iran-Libya Sanctions Act, which threatens sanctions on any firm that does business in either country. Despite the fact that Japan imports 99 percent of its 5.3 million barrels of daily crude usage, fear of angering the United States meant that U.S. pressure kept the project from becoming realized. After all, the United States is Japan's security guarantor and largest trading partner.

The finalization of the deal has nothing to do with the skill of Japanese diplomats and everything to do with the ongoing rapprochement between the United States and Iran.

Washington and Tehran quietely have been negotiating a means of working together on issues of mutual interest for nearly a decade. Before the 1979 Islamic Revolution, the two worked hand- in-glove to dominate the Persian Gulf and keep the various Arab powers -- as well as the Soviets -- in check. In many ways, the events of Sept. 11, 2001, galvanized both players. The attackers were mostly Saudi; al Qaeda originated in Saudi Arabia, and most of the money that keeps the network going is believed to come from Saudi families. The United States, therefore, started looking for ways to dump its erstwhile Saudi ally and link up with Riyadh's natural counterbalance, Tehran.

It was Iraq, a longtime foe of the United States and Iran, which ultimately provided the impetus for detente. Once U.S. forces ejected Saddam Hussein, Washington had to figure out how to return the country to Iraqi rule. Since the majority of Iraq's population is Shiite -- the type of Islam followed in Iran -- the groundwork was laid for U.S.-Iranian cooperation, whether the two wanted it or not.

Now the players are working out the details for Iraqi elections and a formal transfer of power that again will make Iran the dominant player in the Persian Gulf -- a dominant player indirectly backed by the United States. The only major task left for Tehran and Washington is figuring out how to break the news to their respective populations that the U.S.-Iranian cold war is over. Even this process is rapidly accelerating.

With Washington and Iran playing kiss-and-make-up, it will be only a matter of time before ILSA, and its effects on Iranian energy, fall by the wayside. Iran pumps 3.9 million bpd, a figure it wants to nudge up to 4.5 million bpd by 2005 and 8.0 million bpd by 2020.

This is a realistic schedule for Iranian production, since ILSA already is on its way out. Once Libya opened its weapons program to international inspection, U.S. firms perked up at the possibility of regaining access to the country. Tripoli's cooperation has been so thorough, in fact, that the "L" in ILSA might be removed in time for the U.S. presidential elections in November.

Iran will take longer. The bad blood between the United States and Iran is far thicker than it was between the United States and Libya, simply because Libya never managed to humiliate Washington -- unlike Iran, which did so twice (the embassy seizure and the subsequent botched rescue attempt).

Make no mistake: Washington-Tehran relations are on a path of rapid improvement. ILSA has never really been enforced, but the threat of its enforcement has acted as an anchor on Iranian energy development. This will be true no more. By this time next year, U.S. firms are likely to be poking around the Islamic republic right alongside their Japanese counterparts.

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