Allies risk US ire over Tehran oil deal

Western firms in Azerbaijan consider plan to 'swap' Caspian Sea and Iran Gulf crude

A Western-dominated group of oil companies is looking at the possibility of sending oil from the Caspian Sea to Iran. The controversial move threatens to intensify the dispute between Britain, its European partners, and Washington over US sanctions against foreign firms who invest in Iran's energy industries.

The sensitive plan is being explored in Azerbaijan by oil companies which are developing the ex-Soviet republic's Caspian riches and have begun seeking outlets to the international marketplace in a region criss-crossed by geopolitical rivalries.

The idea involves an "oil swap": Iran would take delivery of up to 250,000 barrels a day of Caspian crude at a refinery in Tabriz, north-west Iran, and release oil of equal value from its south-western oil fields for shipment from the Persian Gulf to the Far East.

This arrangement is believed to benefit the Iranians, as deliveries from the Caspian would replace oil they pipe up from the south over hundreds of miles of deserts to supply northern Iran.

It is also offers potential advantages to the oil companies and the Azerbaijan government as an economic means of getting their oil to a port, and an alternative route to the marketplace in a volatile environment where pipelines can fall victim to politics and violence.

Those favouring the idea say there are also political arguments in its support. It would fit into an elaborate strategy, masterminded by Azerbaijan's 73-year-old president, Haidar Aliyev, of balancing conflicting international interests - notably the US, Turkey, Iran and Russia - by cutting them into the looming oil bonanza.

A swap would increases Iran's share of the spoils from the Caspian, whose total reserves are reckoned to be 50-70 billion barrels - at least twice those of the North Sea. At present, Iran has a small stake in only one of five international oil consortia exploring and drilling for Azeri oil. By contrast, the Americans have a hefty 40 per cent and 55 per cent holding in two, and 30 per cent of a third.

The logic is straightforward: increase Tehran's involvement, and it has less to gain by trouble-making - for instance, by trying to increase its influence over its Azerbaijani neighbours by fostering the growth of Islamic fundamentalism.

"The rationale is that if you have balance in the Caspian, then the Western interests are even more secure," said one Western analyst, "That policy would be well-served by involving Iran in a realistic way." It also gives outsiders control, albeit it temporary, over a major oil supply to Iran's most populated region. "The beauty of an oil swap is that you both have your hands on each other's throats," the analyst observed.

If it goes ahead, the Iranian "swap" would be one of several paths through which oil would eventually get out of Azerbaijan. Chief among these will be a main export pipeline, the route of which is causing intense manoeuvring, particularly in Washington, Ankara and Moscow. Three principal options - one via Russia, another via Georgia and a third through Georgia and Turkey - have been identified as viable by the Azerbaijan International Operating Company (AIOC), the leading consortium in Baku, which includes BP, Exxon, Amoco, Unocal and Russia's Lukoil. Next month, it will present a report outlining them to the Azerbaijan government, beginning a period in which funding, licences, and assessments will be sought before a decision in 18 months to two years.

Such is the sensitivity surrounding a possible oil swap that few in Baku are willing to discuss it openly. Aspokesman for the US embassy said: "There have been discussions, but it has generally been discounted because it doesn't fit into our policy."

That policy is enshrined in the Iran and Libya Sanctions Act, which - to the fury of London and Brussels - was signed into law last August by President Bill Clinton to discourage investment in countries which Washington considers to be sponsors of international terrorism.

It is too soon to be clear whether an oil swap would violate the act, which imposes penalties on companies that invest more than $40m in the Iranian oil and gas industries in any 12-month period. But sources in Baku suggest that it will: "There is one problem - the Americans," said one.