Business Week International International Business: THE MIDEAST
EMBARGO? WHAT EMBARGO? (int'l edition)
The White House may think Iran is a hotbed of terrorism, and Congress wants to stiffen sanctions against the Muslim state. But to Conoco Inc., Iran is an oil-patch opportunity it just cannot pass up.
That's the message the energy company is sending with its Mar. 6 deal to develop two big offshore oil fields in the Persian Gulf and construct a major pipeline to the Iranian mainland. The State Dept. is howling, but Conoco so far is holding its ground. The company's response: The deal is legal--and lucrative. Wall Street figures the project is worth $1 billion.
The Conoco deal is more proof that Washington's attempts to isolate and punish the rogue regimes of the Middle East--Iraq, Iran, and Libya--are crumbling fast. On Mar. 5, just when the Conoco deal was being wrapped up, France opened up a diplomatic office in Baghdad, becoming the first member of the coalition that beat Saddam Hussein to do so. Meanwhile, European companies are rushing in to cut new energy deals and construction contracts with both Iraq and Iran. "The U.S. government is going in one direction and the Europeans in another," says Max Becker, an executive at engineering giant ABB Asea Boveri (Holding) Ltd., which is building a power plant in Qom, Iran.
If the pace of deals keeps up, the rogue states could escape economic isolation--and American foreign policymakers will have suffered a major defeat. Although a U.N. ban on all business dealings with Iraq remains in place, companies are planning projects in Iraq that will go into effect the minute the embargo is lifted. As the ventures pile up, they are building pressure to call a halt to the embargo.
For Iran, no U.N. ban exists, so the U.S. can only plead with its allies not to play ball with Tehran. Yet U.S. diplomacy just cannot change the cold economic facts driving companies to work with these regimes. Iraq's 100 billion barrels in proven oil reserves are the world's largest after those of Saudi Arabia. Iran, now the planet's third-biggest oil exporter, holds 14% of the world's natural-gas reserves.
It's not only the Europeans. Russian companies are scoring contracts in both Iraq and Iran, ranging from oil deals to nuclear reactors (page 30). Russia's Zarubezh Oil & Gas Construction Co. hit pay dirt in early March when it signed a $1.5 billion draft contract for work in Iraq's oil patch after the embargo is gone. The Russians are helping build four nuclear reactors in Iran. Japanese and South Korean companies also are busy scouting out new business.
But it's the European intiatives that hurt Washington the most. Germany's export credit agency will soon be offering hundreds of millions of dollars of export guarantees to German companies doing business with Iran. Italy and France are likely to do the same.
Such deals directly challenge the policy of "dual containment" pursued by the U.S. since the end of the gulf war. Washington has argued that economic isolation of Iraq and Iran--and to a lesser extent Libya--would effectively reduce the capabilities of those regimes to finance terrorism or thwart the Mideast peace process. But critics say the policy actually reduces U.S. leverage in the region. "Dual containment," says Vahan Zanoyan of Washington-based consulting firm Petroleum Finance Co., "is one of the most short-sighted policies ever devised in this town."
These arguments don't seem to interest the many foreigners angling for contracts. At Mama Juanita's Bar at the Intercontinental Hotel in Amman, Jordan, executives from France, Britain, Holland, and even the U.S. are more intent on downing a few last margaritas before making the grueling 12-hour drive to Baghdad. U.N. bans on commercial flights to Iraq make this commute necessary--and more and more are making it. In February, groups of British and French executives trekked overland in search of contracts.
MANEUVER MARGIN. France is especially interested in Iraq, since it lost out to British and U.S. companies when Middle Eastern oil reserves were carved up before and after World War II. Now, preliminary deals worked out recently in Baghdad by France's two main oil companies, CFP-Total and Elf-Aquitaine Inc., could soon give France a stake in key Iraqi oil reserves in the country's southwest. "Elf and Total want to profit while Iraq is weak," says Pierre Terzian, head of Paris-based Petrostrategies. "Once sanctions are lifted, their margin of maneuver will be much narrower."
Russian and European companies see similar opportunities in Iran. Although Iran's misplaced bet on higher oil prices in the early 1990s left Tehran owing up to $30 billion to European and Japanese companies, much of the debt has been restructured. That is paving the way for normal business relations.
All of which is deeply disturbing to Washington policymakers, including some in the White House, where President Clinton does not want to appear soft on terrorism. U.S. officials are pressuring Europe and Japan to withhold trade and investment financing to Tehran, in particular, as a way to penalize the Iranians for strong anti-Israel, anti-U.S. policies. By and large, it hasn't worked. "Getting action against Iran is harder than it is against Iraq," admits one senior State Dept. official. "You're just not dealing with a renegade aggressive dictator like Saddam."
Even big U.S. oil companies trade with Iran, as long as the oil does not go to the U.S. Exxon Corp., for example, is one of the biggest buyers of Iran crude oil, which goes to company refineries in Italy, France, and Germany. Senator Alfonse M. D'Amato (R-N.Y.) is introducing legislation that would make it illegal for Exxon or any U.S. company to buy Iranian oil for any puurpose. Not a good idea, says Dennis J. O'Brien, head of strategic planning at Dallas' Caltex Petroleum Corp.: "This [bill] will have zero effect on Iran and will hamper U.S. business."
Business fears the U.S. policy has done plenty of damage already. Iran's increasingly close ties with Russia and China could translate into Americans being shut out of the markets of central Asia. Washington has lobbied the World Bank not to help finance proposed oil-and-gas pipelines that would cut across Iran to the energy-rich central Asian republics of the former Soviet Union. Oil executives say political interference could jeopardize valuable energy deals between U.S. companies and Kazakhstan, Azerbaijan, and Turkmenistan.
Even though containment is slowly crumbling, the U.S. is not giving up. Madeleine K. Albright, U.S. Representative to the U.N., recently visited allied governments to show satellite photos of new military construction undertaken by Saddam Hussein. The show-and-tell was meant to maintain support on the Security Council for continuing sanctions against with Iraq. Yet an upcoming U.N. report is expected to say that Iraq has destroyed its most lethal weaponry, thus meeting conditions for lifting the embargo.
As for Conoco, a U.S. official says the government will see if the company has violated any technical rule in its Iranian deal. If so, the government may pressure the company to back off. Says this official: "It's a constant struggle to get the cooperation of business and the allies." The U.S. government may soon need a graceful way to ease back from the struggle--or face the humiliation of having the world simply ignore it.
Doing Business With The Pariahs
-- Dutch affiliate of U.S.'s Conoco to develop two offshore oil fields
-- Russia's MinAtom supplies four reactors worth about $1 billion
-- German export credit agency, Hermes, resumes guarantees for German exporters to Iran
-- Royal Dutch Shell negotiating to rebuild refineries, develop the South Pars field
-- France's Elf and Total to develop oil fields; government opens a trade office in Baghdad
-- Italy's Agip negotiating an oil field development
-- Britain's steps up oil sales from Jordan
-- Russia's Zarubezh Oil & Gas Construction signs contract worth about $1.5 billion to expand the Iraqi oil and gas industry
DATA: BUSINESS WEEKBy John Rossant in Rome, with Peter Galuszka in Moscow, Ruth Pearson at the U.N., and Amy Borrus in Washington