With the major powers considering a third set of U.N. sanctions against Iran over worries it is using a civilian nuclear program to cover up attempts to develop nuclear weapons, France's recent turn to harsher rhetoric toward Tehran may signal a tipping point in Iran's oil and gas exploration and modernization.

Last Thursday, French President Nicolas Sarkozy called for stronger sanctions against Iran, but also further softened comments by his foreign minister earlier in the week by saying France does not want war with Iran. Last Sunday, Foreign Minister Bernard Kouchner said war with Iran would be the worst outcome, but they should be prepared for it. Iran denies it is pursuing nuclear weapons.

Kouchner also said Thursday the European Union should impose its own sanctions, pressuring energy companies to stop investing in Iran.

France's energy giant Total has long been invested in Iran's massive South Pars natural gas field, which is estimated to contain between 280 trillion cubic feet and 500 tcf of gas. In 2006, Total took out about 2 billion cubic feet of natural gas a day from two sections of the South Pars field it has developed since 2004.

Total has also been seeking to develop another section, Block 11, of the South Pars field in order to feed a liquid natural gas processing plant it hopes to build in Iran, which would eventually process 15 million tons a year of natural gas.

But Total and Tehran have been haggling over the terms of the contract since 2004. Iran uses what are called buy-back agreements with foreign companies, in which the company pays for the initial development and construction, and Iran buys it back with its share of the profits. The exact details of how long a foreign company keeps control of the investment, and therefore continues to profit from it, is often unfavorable and has long made energy companies hesitate before investing in Iran.

Recent cost increases in the region have made companies think even harder before they sign agreements, according to Samuel Ciszuk, a Middle East analyst with international consulting firm Global Insight.

"The cost increases in Iran, apart from the accumulated costs of standstills and time losses, are the same as the general drastic cost rises we have seen across the board, downstream and upstream, globally," he said. "Rising raw material costs, rising construction material costs, a shortage of drilling rigs and other equipment and crucially, a shortage of skilled personnel.

"Projects like the huge LNG plants do need a lot of people with the right know-how, of whom there are very few, at the same time there are many large LNG projects going on worldwide."

Iran holds the world's second-largest proven reserves of natural gas, but international pressure, as well as the buy-back policy, has limited foreign investment in development of those gas fields. About two-thirds of the country's 970 tcf of natural gas reserves lie undeveloped, according to the Energy Information Administration, the data arm of the U.S. Department of Energy.

Despite all of this, Iran and its president, Mahmoud Ahmadinejad, look like they will maintain this policy toward international oil companies, according to Ciszuk.

"There is a strong political force against any lowering of gas export prices �� or better conditions for developers, in what can be described as a quite strong anti-IOC sentiment among Parliament," he said. "The populist powerbase of Ahmadinejad has also been fed by a very resource-nationalist rhetoric for many years, which all in all has led to quite a bad general business climate in Iran in the last years, seen from a Western perspective."

In the past week, Iran's rhetoric has become even more severe, and it has threatened to cut off negotiations with Total, showing Tehran is becoming even less likely to compromise over pricing, according to Ciszuk.

Iran's ongoing uranium enrichment program has worried the international community, and after recommendations from the International Atomic Energy Agency, the U.N. Security Council imposed two sets of sanctions against Iran starting in 2006, targeting materials that Iran could use for its avowed uranium enrichment program, as well as Iranian arms sales and the foreign assets of some Iranian individuals and groups.

A third set of sanctions that might target Iran's energy sector is being pushed by the United States, as well as France, and may be proposed during the upcoming meeting of the U.N. General Assembly in New York next week. Kouchner met with U.S. Secretary of State Condoleezza Rice in Washington on Friday to discuss what steps to take against Iran, among other things.

For its part, the United States, concerned not only with Iran's nuclear program, but also with its alleged support of terrorist groups, has sanctioned Iran for more than a decade. Under U.S. sanctions, U.S. companies are barred from doing more than $20 million dollars in business with Iran. Foreign companies that operate in the United States are also subject to these restrictions, but so far Washington has not enforced this aspect of its sanctions, despite rhetoric earlier this year that it may start.

China, with interest in Iran's gas projects, and Russia, which hopes to supply nuclear power to Iran, as well as profit from Iran's gas and oil deposits, were the most difficult to convince to impose U.N. sanctions last year. But if the EU imposes its own sanctions, even possible Chinese and Russian investment may not save Iran's energy sector.

"Looking at energy, neither Russian, nor Chinese companies have the necessary experience of deep-water drilling and especially LNG to rescue Iran's gas projects," Ciszuk said.

France's hearty backing of U.S. efforts for further U.N. sanctions, as well as European sanctions, has the possibility of pushing Iran's energy sector over the edge. The sanctions against Iraq under Saddam Hussein were successful in pressuring international oil companies out of Iraq, according to Ciszuk, and they could do the same in Iran.

"The threat of unilateral U.S. sanctions has played a certain part in companies choosing to withhold final investments -- and caused some Europeans like BP to leave as early as 2003. Applied EU sanctions, targeting investment and finance, would make it virtually impossible and definitely not worth the risk, since the Iranians have provided these companies with a low risk/reward ratio through the buy-back schemes. It is just hard to see what could continue under a sanctions regime," Ciszuk said.

(e-mail: [email protected])

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