ImageWall Street Journal: As Iran prepares to hold nuclear talks this weekend with Europe and the U.S., economic sanctions are crimping Tehran's oil industry -- but they haven't broken it.

The Wall Street Journal

U.S. Tries Squeeze
But Fears Tehran
Is Buying Time

By CHIP CUMMINS in Dubai and ROSHANAK TAGHAVI in Tehran
July 18, 2008; Page A5

ImageAs Iran prepares to hold nuclear talks this weekend with Europe and the U.S., economic sanctions are crimping Tehran's oil industry -- but they haven't broken it.

Sanctions have been a key part in Washington's strategy to force Tehran to the bargaining table. U.S. Treasury officials have said they think the strategy is working, and Iran's foreign minister appeared to soften his stance this month.

While Iran had insisted it would never give up its nuclear program -- which it says is for peaceful purposes -- the minister hinted his country might consider a freeze on its nuclear activities.

It is unclear whether Iran is really changing tack or buying time. And the U.S. has softened its position too: The Bush administration, which has rejected direct talks with Iran, said this week it will send a top diplomat to talks this weekend in Geneva between Iranian and European officials.

The U.S. is also weighing whether to open a diplomatic interest section in Tehran -- in effect, a substitute for an embassy that could assist with visas, passports and emergencies involving U.S. citizens. White House spokeswoman Dana Perino said Thursday a decision on the idea isn't imminent.

A recent U.S. congressional research report called the Iranian oil and gas sector's vulnerability to sanctions "debatable." Iranian officials say they have been coping. Surging oil prices have helped. The U.S. Energy Information Administration estimates Iran brought in some $54 billion in oil-export revenue in the first six months of this year. That compares with an estimated $57 billion for all of 2007.

National Iranian Oil Co. plans to spend about $16 billion investing in oil and natural-gas projects this year, according to Akbar Torkan, Iran's deputy oil minister for planning. (The Iranian calendar begins in March.) That's up from an average of about $12 billion each year for the past three years, he said. "We are using our domestic capacity instead of foreign funds, which today are not so available for us," Mr. Torkan said.

The sanctions on Iran include measures imposed by the United Nations two years ago and toughened last year, as well as unilateral steps by the U.S. The effect of the sanctions is to limit Iran's access to international capital markets and block it from acquiring advanced American and European technology.

The measures have caused considerable pain for Iranian businesses. In the oil patch, sanctions have made it harder for private contractors to finance big projects and find suppliers, sending oil-field costs higher. Najaf Pezeshkian, an adviser at the Iranian Offshore Engineering & Construction Co., an oil-services firm in Tehran, estimates that sanctions have increased the company's costs by as much as 30%.

The sanctions effectively ban American companies from doing business in Iran. European oil giants BP PLC, Royal Dutch Shell PLC and Total SA have said political considerations rule out new plans to invest in Iran's petroleum sector for the time being. Shell and Total say they remain in talks about getting involved in projects.

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