15-07-05 With the announcement of a landmark oil and power agreement with Iraq, Iran is on the move diplomatically. Under the deal with Iraq, the two countries will swap refined oil for crude oil and connect their electricity grids. Also, Iran secured "serious commitment" from India and Pakistan for a $ 4.5 bn pipeline deal carrying Iranian oil eastward.
The United States is wary of Iran's oil diplomacy. While reluctant to speak out against the Iraq deal, it has made no secret of its displeasure with the India-Pakistan pipeline. US Secretary of State Condoleezza Rice said: "We have communicated to the Indian government our concerns about gas pipeline cooperation between Iran and India."

The Iraq agreement stemmed perhaps more from the fledgling government's desperation to solve its energy crisis, and the US offered tepid support. The deal with Iraq comprises a 40 kilometre oil pipeline between the Iraqi oil centre of Basra and Iran's Abadan port, using Iran's Caspian ports to import refined fuels into Iraq from Central Asia. A senior Iraqi official said it will be signed soon.
Mismanagement and sabotage against power facilities have turned Iraq into an importer of refined fuels, mostly from Turkey and the Gulf, after the US invasion in 2003 created severe energy shortages. Iraq will export 150,000 bpd of crude oil to Abadan and receive the equivalent in return in refined oil, helping to ease shortages in the country.

A State Department spokesperson told: "While we have serious concerns about Iranian policies -- including its support for international terrorism -- decisions regarding Iraq's oil and power generation sectors are purely for the Iraqi government to make. It is in Iraq's interests to have solid, cooperative relationships with all its neighbours, and we support the Iraqi government in these efforts."
Building its regional sphere of economic influence isn't Iran's only goal in the recent agreements. The Islamic state is depending on increased revenue from oil, which amounts to almost 90 % of its total exports, to bridge the growing divide between rich and poor.

The US is worried that Iran will use the money to advance a nuclear arms program, and has threatened sanctions. Pakistan has said it is aware it faces sanctions if it goes ahead with the Iran-India gas pipeline but cannot abandon the project due to the economic benefits it will bring.
The announcement of a "serious commitment" on the part of Pakistan and India suggests that US influence hasn't succeeded in foiling, or even slowing, the project.

A joint statement issued at the end of talks in New Delhi between Indian and Pakistani oil officials said technical, financial, commercial, and legal aspects were discussed about the pipeline. The project is expected to be operational by 2010, the year an energy shortage is expected in Pakistan.
"Both sides conveyed their serious commitment to address various issues pertaining to the project so as to maintain the momentum of the dialogue," the statement said.

India and Pakistan will meet again in August to negotiate remaining issues, including the pricing of gas. The three countries are scheduled to hold bilateral talks before shifting discussions to a multi-forum dialogue. Negotiations for the pipeline began in 1994 but were stifled due to political tensions between the two countries.
Recently, India and Pakistan have been engaged in a peace process that has established the best relations the two nations have had in recent history. For this reason, the project poses a major foreign policy challenge for the US as it tries to balance its interest in endorsing the Indo-Pakistan peace process with its objective to isolate Iran.

US Under Secretary of State Nicholas Burns stated recently: "Our problem is not with the government of India. As you know, our problem in other realms is with the government of Iran. None of us around the world want to see Iran acquire the capability to produce fissile material or to produce a nuclear weapon," he added.
The Iran and LibyaSanctions Act (ILSA) forbids more than $ 20 mm of investment in Iranian oil and gas projects. The violator can be deprived of US economic assistance and may also face sanctions.