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British-Iranian ties ease path for UK oil firms. Sep 25, 1998. By Richard Mably.

LONDON, Sept 25 (Reuters) - Britain's resumption of full diplomatic relations with Iran will smooth the way for British companies to compete for business in Iran's coveted oil and gas sector, analysts said on Friday.

Iranian hydrocarbon reserves, under-exploited since the 1979 Islamic revolution, are among the world's largest.

But Tehran's ambition to host a major pipeline to transport landlocked Caspian Sea petroleum to Iran's Gulf export terminals will have to wait for warmer relations with the United States, the analysts said.

``Agreement on resolving the Rushdie issue should help remove trade obstacles and ease the way for UK companies,'' said Simon Williams at political analysts Control Risks.

``Iran needs British trade and British support for developing its economy and wants to get British and western support for the building through Iran of some of the oil and gas pipelines that will come out of central Asia and the Caspian,'' Fred Halliday of the London School of Economics told the BBC.

Iran and Britain hope to quickly exchange ambassadors after Tehran on Thursday at a meeting of foreign ministers dissociated itself from a death threat against British author Salman Rushdie.

British oil companies including British Petroleum, Royal/Dutch Shell Lasmo and Enterprise have all expressed interest in the multi-billion dollar projects offered to international investors earlier this year by Iran.

``We welcome any improvement between Iran and the West, in this case the UK,'' said a spokesman for Shell in London. ``We can reconfirm that we are interested in pursuing business opportunities in Iran.''

Shell has its eye on one of the world's largest gasfields, South Pars, where France's Total in 1997, ignoring the threat of secondary sanctions from the U.S. Iran-Libya Sanctions Act, stole a march with a deal for development of the early stages of Pars.

British trade with the Islamic Republic could soar if its companies can emulate the Total project.

A British trade mission organised by the Department of Trade and Industry and led by BP, centring on oil and related services, will travel to Tehran in October for a trade fair.

In recent years British exports to Iran have been worth some 400 million sterling ($680 million) a year with about half attributed to British companies providing parts for Iran's oil and gas industry.

The end of the Rushdie affair now centres attention squarely on Iranian relations with the United States.

Iran's new moderate President Mohammad Khatami has already made surprising progress in trying to clear the minefields obstructing better relations with the West against stubborn resistance from his conservative opponents.

But U.S. companies remain banned from doing business with Iran despite a more conciliatory tone Washington has shown no sign of lifting sanctions.

And Washington has worked hard to ensure its favoured route to carry Azerbaijan's Caspian oil via Georgia to Ceyhan on Turkey's Mediterranean at the expense of a trans-Iranian route.

A final decision on Baku-Ceyhan lines is expected from the BP-led Azerbaijan International Operating Company (AIOC) in October.

Improved ties between Iran and the United States might in the future clear the way for Caspian exports through Iran, an alternative which most experts could be completed in half the time at half the cost.

``U.S. oil policy towards Iran runs counter to its policy ... on development of the world's oil reserves (and) also runs the risk of distorting regional oil trade flows and increasing the cost of extracting oil from the Caspian region,'' said analyst Mehdi Varzi of Dresdner Kleinwort Benson in a recent report.

That may take some time to change.

``I don't expect to see too much progress made on a trans-Iranian pipeline from the Caspian until things progress with the U.S.'' said Simon Williams at Control Risks.

``The Americans are more committed to controlling the pipeline route than holding back development of Iranian hydrocarbons.''