VZCZCXRO8572
RR RUEHAG RUEHBC RUEHDE RUEHDIR RUEHKUK RUEHROV RUEHSR
DE RUEHTC #0002/01 0020903
ZNY CCCCC ZZH
R 020903Z JAN 09
FM AMEMBASSY THE HAGUE
TO RUEHC/SECSTATE WASHDC 2377
INFO RUCNMEM/EU MEMBER STATES COLLECTIVE
RUCNIRA/IRAN COLLECTIVE
RUEHTC/AMCONSUL AMSTERDAM 4074

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. 

--------------------------------------------- ------- 
GONL WARNING DUTCH FIRMS ON RISKY BUSINESS WITH IRAN 
--------------------------------------------- ------- 

¶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. 

------------------------------ 
SHELL OFFERS DETAILED RESPONSE 
------------------------------ 

¶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. 

--------------------------------------------- ------- 
SHELL: WITHDRAWAL FROM IRAN WILL REDUCE TOTAL OUTPUT 
--------------------------------------------- ------- 

¶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. 

-------------------------------------- 
STATUS OF SHELL'S LNG INTEREST IN IRAN 
-------------------------------------- 


THE HAGUE 00000002 002 OF 003 


¶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. 

--------------------------------------------- - 
SHELL DISMISSIVE OF CATALYTIC CONVERTER THREAT 
--------------------------------------------- - 

¶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. 

---------------------------- 
SHELL'S FRUSTRATIONS IN IRAN 
---------------------------- 

¶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. 


THE HAGUE 00000002 003 OF 003 


¶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. 

------- 
COMMENT 
------- 

¶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