The White House may think Iran is a hotbed of terrorism, and Congress may want to stiffen sanctions against the Muslim state. But to Conoco Inc., Iran is an opportunity it can't pass up.
That's the message the energy company sent with its Mar. 6 deal to develop two big offshore oil fields in the Persian Gulf. The State Dept. is howling, but Conoco so far is holding its ground. The company's response: The deal is legal--and company negotiators say they kept the government informed of the talks. 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. 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 Brown Boveri (Holding) Ltd., which is building a power plant in Iran.
If the pace of deals keeps up, the rogue states could escape economic isolation--and U.S. policymakers will have suffered a major defeat. Although a U.N. ban on 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 suspend the embargo and eventually lift it.
RUSSIAN REACTOR. For Iran, no U.N. ban exists, so the U.S. can only plead with its allies not to do deals there. But cold economic facts are driving companies to work with these regimes anyway. Iraq's 100 billion barrels in proven oil reserves are the world's largest after those of Saudi Arabia. Iran is now the world's third-biggest oil exporter.
Right alongside the Europeans, Russian companies are scoring contracts in both Iraq and Iran, ranging from oil deals to nuclear reactors. 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 also are helping build four nuclear reactors in Iran. Japanese and South Korean companies are scouting new business, too.
But it's the European initiatives that hurt Washington the most. Germany's export credit agency soon will 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 U.S. policy of "dual containment," under which 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.
Pressure on the policy from European companies is growing apace. For instance, preliminary deals worked out recently in Baghdad by France's two main oil companies, CFP-Total and Elf Aquitaine, could soon give France a stake in key oil reserves in southwest Iraq. "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."
Such reasoning is deeply disturbing to Washington policymakers. 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 purpose. Not a good idea, says Dennis J. O'Brien, head of strategic planning at Caltex Petroleum Corp. in Dallas: "This [bill] will have zero effect on Iran and will hamper U.S. business."
SATELLITE PHOTOS. The effects on U.S. profits could be even broader. Iran's increasingly close ties with Russia and China could translate into Americans being shut out of the emerging 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 central Asian republics of the former Soviet Union. But U.S. companies worry that political interference could jeopardize energy deals with Kazakhstan, Azerbaijan, and Turkmenistan.
Still, 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 Iraq. Yet an upcoming U.N. report is expected to say that Iraq has destroyed its most lethal weaponry, thus meeting conditions for suspending the embargo.
As for Conoco, a U.S. official says that if the company violated any technical rules in its Iranian deal, it may be pressured to back off. "It's a constant struggle to get the cooperation of business and the allies," the official says. The U.S. government may soon need a graceful way to ease back from the struggle--or face having the world simply ignore it.