Will BP and the UK Be Exempt from Iranian Sanctions?

Oil

The U.K. needs oil and BP (NYSE:BP) needs to drill, so the British government is discussing with the U.S. and the European Union a possible exemption to sanctions against Iran that would allow the British oil company to once again drill in a North Sea natural gas field partially owned by a Tehran-controlled company.

“The BP gas field could be exempted from sanctions under an EU Council Regulation adopted in December 2012 amending previous regulation on restrictive measures against Iran,” an EU spokeswoman told The Wall Street Journal. “We are working with the EU to ensure the long-term security of the Rhum North Sea gas field and will be making an announcement on this in due course,” added a spokeswoman for the U.K.’s Department of Energy and Climate Change, while a representative for the U.S. State Department merely confirmed the issue had been discussed.

IOC UK, an affiliate of the state-owned National Iranian Oil Company, owns 50 percent of BP’s Rhum field in the North Sea. The joint venture was opened in 1973, before the Iranian revolution, and gas was found in the field in 1977. However, because of technical challenges, the location only began to produce gas in 2005.

Then, because of tightening international sanctions against Iran, the field was closed in 2010. Before the closure, the Ruhm field produced approximately 5.4 million cubic meters of gas per day, according to BP. That figure translates to approximately 5 percent of current output of the United Kingdom.

While the project is the only joint venture between a Western company and an Iranian company in that region, U.K. and EU officials have convinced the U.S. to make exemptions to the sanctions before. In 2010, sanctions were lifted for the $40 billion, BP-led Shah Deniz natural gas project in the Caspian Sea, off the coast of Azerbaijan. An affiliate of the state-owned oil company held a 10 percent in that venture.

For Britain, the desire to resume operations at the Ruhm field came at the right time. The change in leadership in Iran earlier this year, which was welcomed by the United States and its allies, made the question of making an exemption to sanctions against Iran an easier topic to broach. The U.K. government is pushing for the exemption because the country has a natural gas problem: domestic output is declining, pushing up prices, increasing imports, and leaving the government worried over the country’s natural gas supplies.

“The UK has entered a period of declining output of North Sea oil and gas,” explains a briefing on the country’s energy supply written by Parliament. In February, Alistair Buchanan — who was chief executive of Ofgem, Britain’s industry regulator, at the time — warned of an impending “near-crisis” for the nation’s energy supply. He called the situation “horrendous” and described it as similar to being on a roller coaster headed “downhill — fast,” according to U.K. publication the Mirror.

The problem is that Britain was forced to close several aging coal-fired power plants and a few oil and nuclear plants to meet EU environmental laws. Over the next 10 years, one-fifth of the existing power stations are scheduled to close, which will reduce the U.K’s generating capacity by 12 gigawatts in the next two years. Even though Britain will face a shortfall in energy over the next few years, “consumers are more at risk from higher prices than blackouts,” Wilf Wilde, executive director of the Durham Energy Institute at Durham University, told National Geographic in August.

The reason the closure of those coal-fired plants is such a concern is because over the past few years, the U.K. took advantage of cheap coal from the U.S., where the shift to natural gas left coal producers searching for new markets. Last year, 39 percent of the U.K.’s power came from coal plants. But with the plant closures, the U.K. will have to relay increasingly on liquefied natural gas. In that market, the nation has to compete with growing demand from countries such as China, competition that will likely force Britain to pay top dollar.

BP would benefit from restarting drilling in the North Sea, as well. The 2010 Gulf of Mexico oil spill is still casting a long shadow on the company’s finances. By the end of June, the costs of compensating the individuals and business harmed by the disaster had hit $9.6 billion, and since then, restitution costs have only continued to climb.

In its second-quarter results, the oil producer revealed that restitution-related costs skyrocketed, leaving just $300 million in the $20 billion fund set up to compensate oil spill victims. BP said any future restitution payments will be deducted straight from earnings. The fact that BP still cannot bid on new contracts with the federal government in the United States makes the North Sea field much more desirable.

Furthermore, the assets that BP has sold to finance its $42.4 billion spill bill amounted to one-fifth of the company, and, long ago, the company dropped from the second-largest global oil company to No. 4 as its ever-growing spill bill has decreased the company’s earnings power. BP used to be a company that produces oil, wrote Bloomberg’s Paul Barrett, but ”these days, it’s producing litigation in almost equal measure.”

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