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European, Iranian oil firms ink agreement

European oil companies Royal Dutch Shell PLC and Repsol YPF SA have signed a preliminary agreement with Iran's state oil company on developing gas fields in the Persian Gulf, a Shell spokeswoman said.

"We've signed an upstream service agreement as part of our work to assess the feasibility of the project" known as South Pars, Sarah Smallhorn said on Monday.

Smallhorn said the agreement, signed with National Iranian Oil Co (NIOC) on Saturday, follows a framework agreement the companies signed in 2004. However, the final go-ahead for the project was not expected for another year -- an apparent delay, since Shell said last February it expected final approval in about a year.

The US and its allies have been pressuring banks and oil companies to pull out of oil and gas projects in Iran, due to Tehran's pursuit of nuclear technology for what it says are nonmilitary purposes. Some analysts believe oil companies may ultimately have to choose between doing business with the US or Iran.

Both Shell and Repsol have operations in the US, while Iran has the second-largest reserves of natural gas worldwide, after Russia.

Smallhorn declined to comment directly on whether there was a delay or US pressure to pull out, saying Saturday's deal was "broadly in line'' with the 2004 framework.

The deal covers developing the upstream, or production, of the gas, but not costs for a processing and storage facilities, which must be agreed separately in order for the project as a whole to go ahead, Smallhorn said.

Iran's state-run radio said on Sunday the upstream deal represented an investment of US$4.3 billion, but Shell couldn't confirm that number for a project that's still being negotiated. The National Iranian Oil Co estimated the facilities investment costs -- not yet agreed -- at another US$5 billion to US$6 billion.

The NIOC said the project will produce 3 billion cubic feet of gas and the equivalent of 110,000 barrels of oil per day. Iran hopes to begin exporting gas in liquefied form to China and India in 2009.

Under the framework agreement, Shell and Repsol are each participating in the project at 25 percent on a "buyback'' basis, meaning they will build the facilities but not own them, and will receive their costs plus a pre-agreed profit in return.

US State Department Spokesman Sean McCormack said at a press briefing on Monday that if Shell's investment represents "an investment greater than a certain amount, as specified in US law, then our folks, our lawyers, take a look at it and the policy makers take a look at it, and see if there's any further steps that we, as a government, take.''

Told that the proposed project was worth billions of dollars, McCormack said "it's likely" that the project would be investigated.
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