NETHERLANDS: SHELL DISCUSSES BUSINESS IN IRAN

C O N F I D E N T I A L SECTION 01 OF 03 THE HAGUE 000002

NOFORN
SIPDIS

E.O. 12958: DECL: 01/01/2019
TAGS: ENRG EPET ETTC PREL NL IR
SUBJECT: NETHERLANDS: SHELL DISCUSSES BUSINESS IN IRAN

REF: A. STATE 125579

B. THE HAGUE 276

C. 07 THE HAGUE 935

Classified By: Pol/Econ Counselor Andrew Mann, reasons 1.4 (b),(d)


1. (C/NF) SUMMARY: The Dutch government agrees that doing
business with Iran poses risks for Dutch companies, and it
will continue to discourage new investments there. Shell has
again pushed back its investment decision on the Persian LNG
project, this time until late 2010. However, Shell's go-slow
approach in Iran belies seething frustration at the perceived
ineffectiveness of sanctions against Iran. The company sees
Iran's nuclear activities continuing while Chinese and other
firms seal long-term energy deals in Iran at the expense of
Western energy security interests. END SUMMARY.

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GONL WARNING DUTCH FIRMS ON RISKY BUSINESS WITH IRAN
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2. (C) EconOffs delivered ref A points during a December 8
meeting with Simon Smits, Director of Economic Cooperation at
the Foreign Ministry. (Note: In summer 2008, Smits, a career
diplomat, completed a two-year secondment at Shell where he
focused on government relations in the company's hot zones.
The secondment was part of an ongoing program in which a
Dutch diplomat works at Shell's headquarters in The Hague and
a UK diplomat works at Shell's London offices. End note.)
Smits reiterated what he had told us before: although Shell
maintains a footprint in Iran, the company cares immensely
about its reputation and has therefore backed off its
Iranian ventures. He added that Shell would never want to
jeopardize its huge investments in the U.S. by violating
the Iran Sanctions Act, which factors into all its decisions
on Iran. As for Philips, Smits was not as familiar with its
business interests in Iran but he would be surprised if they
were active there. He said the Dutch government repeats
over and over to Dutch companies that they must stick to the
international regime on Iran. Smits assured us that in
light of our demarche and national measures efforts,the
Dutch government would continue to exert pressure on the
private sector to abstain from clinching new deals with Iran.
EconOffs also shared ref A points with Philips and with
trade and export control officials at the Ministry of
Economic Affairs; reporting on Philips' reaction will follow
septel.

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SHELL OFFERS DETAILED RESPONSE
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3. (C/NF) EconfOff met December 15 with John Crocker
(protect),Shell's Head of International Government
Relations, and his colleague Roelof van Ees to discuss ref A
points. Crocker, who briefs the Department regularly,
stressed Shell's commitment to its international obligations
and its opposition to Iran's nuclear activities. He also
described Shell's frustration with the current approach to
Iran sanctions, which it sees as both ineffective in stopping
Iran's nuclear ambitions and detrimental to Western energy
interests.

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SHELL: WITHDRAWAL FROM IRAN WILL REDUCE TOTAL OUTPUT
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4. (C/NF) From Shell's perspective, shutting down completely
international oil companies' (IOCs) engagement with Iran's
energy sector is counterproductive. Crocker attributed this
to the Iranian regime's absolute focus on the short-term,
they pay attention to consequences that will hit tomorrow at
the latest. Drawing on Shell's experience, he described
Qthe latest. Drawing on Shell's experience, he described
opposing methods to develop Iran's gas fields. For IOCs,
developing a new field today would require a $10-25 billion
investment using advanced technology. This would maximize
the field's long-term recovery rate and profitability, but
output would be lower in the first decade as a result and the
field might not generate positive cash flows until 2025. On
the other hand, if the Iranians develop a new field on their
own or with a Chinese partner, they will use poorer
technology. This would accelerate near-term recovery -- the
overriding concern of Iran's leadership -- but limit the
field's total output to only 20 percent of recoverable gas
reserves.

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STATUS OF SHELL'S LNG INTEREST IN IRAN
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5. (C/NF) Crocker provided an update on the Persian LNG
(PLNG) project in Iran. (Note: Shell has a 25 percent stake
in the project, Repsol 25 percent, and National Iranian Oil
Company (NIOC) owns 50 percent. End note.) Shell and the
other parties signed an initial agreement in 2004. A final
investment decision (FID) had been expected at the end of
2006, which then slipped to mid-2008. According to Crocker,
Shell's FID is now delayed until late 2010. He said Iran
blames the delay on Shell's backtracking for political
reasons. Crocker agreed Shell had dragged its feet on
purpose but added that Iran bore responsibility for its
operational incompetence and its attempts to change the
agreement's terms. He said the additional two-year delay
from 2008 to 2010 stems largely from changes in how the
project's construction will be contracted -- instead of
having one large subcontractor build the multi-train
terminal, the contract will be split up into several
components. Crocker said Shell, Repsol, and NIOC continue to
work on the design and evaluation phases of their respective
parts of the PLNG project. He said Shell would make its FID
in late 2010 taking all factors, including political ones,
into account. If the project moves ahead after that point,
Crocker said LNG deliveries would commence by 2015-16 at the
earliest.

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SHELL DISMISSIVE OF CATALYTIC CONVERTER THREAT
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6. (C/NF) Crocker was skeptical that the supply of catalytic
converters to Iran's refineries was a significant issue. He
was unaware of Shell's sales of catalytic converters in Iran.
He said the U.S. should know that it is not in the
regime's interest to upgrade its refineries, as well-placed
individuals profit handsomely from the export of Iranian
crude oil at market prices and re-import of refined products
at heavily subsidized rates. Crocker suggested that because
of this lucrative arbitrage scheme, it was in the interest of
Iran's rulers for the refining sector to remain incompetently
managed.

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SHELL'S FRUSTRATIONS IN IRAN
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7. (C/NF) Crocker vented several frustrations Shell has
concerning Iran's behavior and the international sanctions
against it:

-- Iranian Indecision: Crocker said the Iranians are not
clear on what they want for their natural gas; their strategy
depends on whom one speaks with in Tehran. Some key
officials want to export LNG, others want to export gas via
pipeline, and others still want to keep all the gas for
future domestic use. He said this internal confusion created
an uncertain environment for IOCs.

-- Double Standard for China: Crocker said Shell was dismayed
by the lack of U.S. government criticism of China after
Sinopec signed its 2007 deal with Iran to develop the
Yadavaran field. According to Crocker, this underscored
Shell executives' fear that western IOCs will get shut out of
Iran long-term to the benefit of Chinese, Russian, and even
Indian firms who disregard American and European pressure and
make lucrative investments in Iran's energy sector with
impunity. He claimed that Tehran was crawling with Chinese
eager to do business with Iran.

-- Level Playing Field: Crocker said Shell would welcome
another UNSC Resolution on Iran that levels the playing
field by imposing broader trade sanctions on Iran and
forcing Chinese and Russian firms to comply. In Crocker's
Qforcing Chinese and Russian firms to comply. In Crocker's
view, this would be more effective than just targeting the
finance and energy sectors in bringing pressure against the
Iranian regime and it would also reduce the IOCs' competitive
disadvantage.

-- U.S. Holds the Key: Crocker lamented that P5-plus-1
overtures would not be attractive to Iran unless they
included the carrot of a clear timetable for better relations
with the U.S. He said the Iranians don't want better
relations with Europe, nor do they want ten years of talks
with the U.S.


8. (C/NF) Despite Shell's fraught experience in Iran, Crocker
concluded this has not deterred the company from a long-term
presence there. He compared Iran to Venezuela, Russia,
Nigeria, and Iraq -- other potentially unstable and
dangerous places where Shell and other IOCs do business.


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9. (C/NF) Biographical Note: Crocker worked with the UK
Foreign and Commonwealth Office for several years, mainly in
the Middle East, before moving to Shell ten years ago. He
gained operational experience managing Shell's business in
Oman before coming to headquarters to oversee government
relations.

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COMMENT
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10. (C/NF) In our dialogue with the Dutch government and
private sector on finance and trade measures to combat Iran's
nuclear activities, they express frustration that
international sanctions are only as strong as their weakest
link, i.e., Russia, the Gulf states, and -- especially --
China. The Dutch think they are doing their fair share to
implement sanctions effectively (and they see far higher
trade volumes with Iran coming from Germany, Italy, and
France). The Dutch will continue to be a dependable partner
on Iran sanctions, but excluding them from the national
measures dialogue (as occurred in early December) undercuts
their ability to support our position on a bigger stage. END
COMMENT.

CULBERTSON