Iran Sanctions Could Mean $100 Barrel Of Oil

By Tim Nicholls, Evening Standard, London

Jan. 13--Rapidly deteriorating relations between the West and Iran, Opec's second biggest oil producer and the world's fourth-largest exporter, could see energy prices hit record highs in coming weeks.

Experts warn that the growing tension over Iraq's nuclear programme, and the possible withdrawal of Iranian oil from the market if sanctions are imposed, has put a new floor under oil prices at above $60 a barrel.

"If Iran stopped exporting it would be a major shock for world markets," said Manouchehr Takin, an analyst at the London-based Centre for Global Energy Studies, suggesting that even oil at $100 a barrel might be possible.

"Supply and demand are very tightly balanced, and the world doesn't have the spare production capacity." Iran, which holds 10 percent of the world's oil reserves, produces around four million barrels a day (b/d) and exports 2.4 million-2.6 million b/d, mainly to customers in Japan, China, South Korea, Taiwan and Europe.

Interruption to Iranian flows would be a serious matter for world markets. Besides the overall inadequacy of global spare capacity, estimated at just 1-1.5 million b/d, lies the fact that much of it consists of heavy oil, which few refineries can handle.

In response to the looming threat, crude futures soared to three-month highs yesterday after Britain, France and Germany called for Iran to be hauled before the UN Security Council, which has the power to impose sanctions for resumption of work at the country's nuclear facilities.

UK Brent crude futures climbed 18 cents a barrel today to $62.80, while US light crude added three cents to $63.97. That compares with the $70.85 record achieved after Hurricane Katrina made landfall last August.

Barclays Capital analyst Paul Horsnell said Iran remains the "major upside risk on oil prices. Nobody's going to start selling the market aggressively. It's only going to take one headline for prices to move higher."

UK-listed firms that could also be directly affected by sanctions include Royal Dutch Shell and construction group Costain. Shell has no production in Iran at present but has investments in lubricants manufacturing and marketing businesses.

Shell also has plans to expand in Iran. Along with Spanish partner Repsol, it is in talks with National Iranian Oil Company to build a liquefied natural gas plant.

Last summer, construction group Costain was awarded a $1.6 billion contract for the Bid Boland 2 gas treatment facility in southwest Iran. The project, being undertaken with Spain's Dragados and local partners Sazeh and Jahanpars, was expected to take four years to implement, but could be derailed by sanctions.

BP is absent. The UK major offended the Iran a year ago when chief executive Lord Browne said he would avoid doing business in Iran so as not to upset Washington.

Copyright 2006, Evening Standard, London
Distributed by Knight Ridder/Tribune Business News.