Saturday, October 13, 2007

The story of Iranian oil and Israeli pipes

In recent months, Israel and Iran have been playing a game of cat-and-mouse. This is not the predictable game of intelligence, counter-espionage and field security.

Such games have been taking place for years. Israel’s intelligence community tries to obtain information about the development of Iran’s nuclear program, and is preparing in case it has to attack Iran; while Iran tries frustrate these efforts.

But alongside this routine game, Israel and Iran are working feverishly in an entirely different area: Iran is trying to locate property and assets belonging to the Israeli government and three Israeli oil firms abroad, and Israel is trying to thwart it. This affair arises from an international arbitration that determined more than three years ago that the Paz, Sonol and Delek oil companies must compensate the National Iranian Oil Company (NIOC) hundreds of millions of dollars.

The three companies were government-owned in the 1970s, but since then have been privatized. The oil companies have appealed the arbitration decision and are trying to create a delay, and are succeeding for now. The NIOC has not yet succeeded in enforcing the ruling and in collecting the debt. Parallel to this appeal, legal proceedings are still continuing in another two arbitrations on similar issues.

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All these legal proceedings have been taking place in Europe (in Switzerland and Holland) for more than 20 years, and are related to the activity of a legal entity called Trans-Asiatic Oil. This was a top-secret partnership that existed between the Israeli government and the NIOC during the period of the Shah. This partnership operated the Eilat-Ashkelon Pipeline Company, the oil terminals in Eilat and Ashkelon, and a large fleet of giant tankers for transporting oil. After the Shah was expelled from Iran and Khomeini came to power, in February 1979, the Islamic Republic cut off all ties with Israel and stopped shipping Iranian oil.

In 1985, the NIOC filed huge lawsuits (today worth several billion dollars) against Israel and the oil companies. The lawsuits were discussed in three separate arbitrations. The NIOC claims that Israel owes it huge sums for the partnership. Haaretz first reported on the Iranian victory in December 2006, and now Prof. Uri Bialer of Hebrew University in Jerusalem is publishing a study on the circumstances under which Trans-Asiatic Oil was established.

Bialer’s study, “Fuel Bridge across the Middle East - Israel, Iran, and the Eilat-Ashkelon Oil Pipeline,” is based on documents that have been declassified in the Israel State Archive and in the British National Archives, and on interviews with leading figures involved in the issue. It provides a rare glimpse at a particularly interesting chapter in the history of the State of Israel. The study was published in the latest issue of the periodical Israel Studies.

Until the mid-1950s, Israel received its oil from the Soviet Union, Kuwait (under British rule) and international oil companies. But in 1955-1956 these ties were severed, and Israel was forced to find new sources. Israel maintained secret ties with Iran, and wanted to turn it into its main oil supplier. Iran hesitated, for fear of undermining its relations with the Arab world, but after the 1956 Sinai Campaign, the Iranians were convinced and agreed to supply oil to Israel.

With the help of pumps and pipes “confiscated” - meaning stolen - from an Italian company and a Belgian company operating an oilfield in Ras Sudar in Sinai, Israel built a pipeline from Eilat to Ashkelon. The pipe, 40 centimeters in diameter, was paid for by Baron Edmund de Rothschild. The initiative was called Tri-Continental. By demand of the Iranians, who wanted to conceal their involvement in selling oil to Israel and in the joint company, the parties established a secret partnership called Fimarco, which was registered in July 1959 in the tax shelter of Lichtenstein. Iran owned 10 percent of the partnership. Tankers transported the oil from Iran to Eilat, and from there it was sent to Ashkelon through the pipeline.

But over the years Israel’s needs increased, and the Finance Ministry formulated a plan to replace the small pipe with a large 40-inch (106 centimeter) pipe and to set up a genuine partnership with Iran. Foreign minister Golda Meir, who secretly visited Tehran in August 1965, brought up the subject with the Shah and with Fatollah Nafici, one of the directors of the NIOC and the person in charge of the company’s clandestine ties with Israel. In order to demonstrate the seriousness of its intentions, Israel appointed Felix Shinar, one of the architects of the reparations agreement with Germany, as the project manager. Working with him were deputy defense minister Tzebi Dinstein; Dov Ben Dror, who was involved in the energy market; and Mossad operative Avigdor Bauer. NIOC president Manuchar Akbal joined the negotiations on behalf of Iran. The talks were conducted in Israel, Iran and Switzerland.

According to Bialer’s article, the turning point in the talks came after Israel’s victory in the Six-Day War and the closing of the Suez Canal. The Shah, who was referred to by the code name “Landlord” in the Israeli correspondence, was persuaded to establish a fifty-fifty partnership between the Israeli government and the NIOC. The company was called Trans-Asiatic Oil and was registered in Switzerland, at Iran’s request, in order to conceal the Israeli partner and to make it appear to be a foreign company.

After the Shah gave his consent, the main problem was finding funding for the initiative, which was expected to cost $85 million, a huge sum in those days. Baron de Rothschild refused to fund the project, claiming that it would not be profitable, but the Iranians thought that he said no because he was insulted Israeli representatives had kept him in the dark about two years of contacts with Iran. An Israeli attempt to interest American oil billionaire David Rockefeller, the Chase Manhattan Bank president, also failed.

In the end, thanks to his connections, Shinar obtained funding from the German Deutsche Bank, through which some of the reparations money had been transferred to Israel in the 1950s and the 1960s. Shinar and Nafici met in Geneva and Zurich with Hermann Josef Abs, chairman of the board of Deutsche Bank, and discussed the loan conditions with him. Abs had a Nazi past: He was responsible for the bank’s foreign operations from 1938, and after World War Two he had been imprisoned for several months. Apparently, however, this did not prevent Israeli representatives from enjoying close, friendly ties with him.

Early in 1968, the German bank agreed to give a low-interest, $22 million loan to finance the project. On February 29, 1968 a contract establishing the company was signed; its exact details are still considered a state secret. The contract was signed by then-finance minister Pinhas Sapir on behalf of the Israeli government and by Akbal on behalf of the NIOC. The operational contract was set for a period of 49 years. In 1969, the pipeline between Eilat and Ashkelon was completed, and huge tankers were purchased to transport the oil. In December 1969, Iranian oil began flowing through the large pipe. A small percentage of the oil was earmarked for Israel. Most of it, however, was loaded onto tankers at the Ashkelon terminal and sent to consumers in Europe, mainly Romania, the only Soviet bloc country to continue maintaining diplomatic ties with Israel.

In 1970, 162 tankers brought 10 million tons of oil to the pipeline. That was the pipeline’s peak year, but the ambitious goal of 50 million tons a year was never achieved. At the end of 1978, with the fall of the Shah, the oil stopped flowing, and the ties between the two countries deteriorated into the hostility that characterizes them to this day. The NIOC has sued for payment for the last three months of oil and for the value of shared assets, such as oil tankers; Israel counters that it is owed money because Iran broke its contract.

For the Shah’s Iran, the initiative had financial value only and was even a political burden. But for Israel it was a national enterprise, another vision produced by the Mapai government (the forerunner of Labor), and its main importance was strategic.

Trans-Asiatic, which still operates the pipeline, informed Haaretz that the arbitration decision concerns the oil companies. The oil companies, for their part, refused to respond to this article.

Source: Haaretz

Posted by Editors at 19:46:06 | Permalink | No Comments »

Hidden costs of Iran’s wheat obsession

The government of Mahmoud Ahmadi-Nejad brags about the Islamic Republic’s self-sufficiency in wheat, holding it up as a source of security and a cause for pride.

But while Iran no longer needs to rely on wheat imports, the pursuit of self-sufficiency has had hidden costs, creating shortages in other produce and raising the government’s import bill.

The distortions are seen by regime critics as an example of the waste and economic mismanagement that has bedevilled the Iranian economy for decades and has been exacerbated by the policies of the current government.

“The government’s agricultural policies and its obsessive focus on wheat while ignoring other products has disrupted the agriculture sector,” says Issa Kalantari, former minister of agriculture and now head of the top nationwide farmers union.

It was in 2004, under the previous reformist government of Mohammad Khatami, the moderate president, that Iran first celebrated self-sufficiency in wheat production.

The Khatami government, however, appeared to be pursuing the policy grudgingly, as if to show that Iran could be independent but without ruling out a continuation of imports. By contrast, Mr Ahmadi-Nejad’s administration, which has faced escalating tensions over Iran’s controversial nuclear programme, has been a vigorous supporter of self-sufficiency, on both nationalist and security grounds.

But as more and more land has been diverted to wheat cultivation – 500,000 hectares on top of the 2.2m hectares that were already in use – the production of cattled feed, cotton, potatoes and grains has suffered, sending prices higher and pushing the government to increase its imports.

“This self-sufficiency (reached in 2004) has been at the cost of other products, like barley, which has lost lands to wheat production,” said Mansour Bitaraf, an economic analyst. “This has indirect impacts on other goods like red meat, because barley is also used as cattle feed.”

The Iranian regime sees wheat as a strategic commodity and always stores at least three months of consumption, which currently stands at 11.2m tonnes a year.

Wheat is also highly subsidised in a country where bread and rice constitute a main part of daily food. According to Mr Kalantari, the government buys wheat from farmers at $200 (£98) a tonne and sells flour at $50 a tonne to bakers.

Iran’s ministry of agriculture was not available for comment. But according to government newspaper reports Iran used to import about 2.2 tonnes of wheat a year, with the purchases reaching a peak during the drought in 1999, when 6.6m tonnes were imported.

Mr Ahmadi-Nejad, however, recently said that thanks to a drop in wheat imports, Iran has saved $4bn during the past two and a half years.

Yet, food imports as a whole have doubled to more than $3.1bn during the past Iranian year (ending March) and food supply is now 10 per cent dependent on imports, according to the government, though experts put the figure at 25 per cent.

Moreover, prices of grains and potatoes have gone up by an estimated 200 per cent in the past two years, with potatoes now being imported for the first time.

The ballooning agricultural import bill has sparked controversy in Iran, with economists complaining that the government is bringing in more than is needed.

Some experts blame the excessive imports on government mismanagement. Others, however, suspect the policy is deliberate, and suggest the government is storing strategic commodities such as sugar and rice to avoid facing a food crisis if tensions with world powers over the nuclear programme intensify.

Source: FT

Posted by Editors at 19:44:31 | Permalink | No Comments »