Why Didn't Conoco See This One Coming?

It was over in 20 minutes. On Mar.10, Conoco Inc. Chief Executive Constantine S. Nicandros had rushed to Washington hoping to assuage White House officials and salvage a $1 billion Iranian oil deal that had been made public five days before. But Senior Presidential Adviser Thomas F. McLarty III wasn't won over. In a terse meeting, he bluntly delivered the Administration line: Any deal with Iran was unacceptable.

Nicandros flew back to Houston the next day in shock. McLarty's curt dismissal was followed by an announcement on Mar. 14 that President Clinton would sign an Executive Order canceling Conoco's plans. The next day, he did so. Three years of negotiations with Iran and the promise of becoming the first U.S. company with an Iranian development contract since the 1979 Islamic revolution had vaporized.

INTRACTABLE. Insiders at Conoco and its parent, DuPont Co., blamed the collapse on Iran's premature announcement of the deal, which came a day after the agreement was signed but before Conoco could secure the approval of DuPont's board of directors and the State Dept. "Iran blew it.... When they announced, they blindsided DuPont, Conoco, and the White House," says a company official close to the deal.

Yet the dramatic breakdown also appears to have followed a subtle shift in U.S. policy. A year after the Administration suggested that Iranian behavior could be modified by international pressure, says one analyst, it has come to view Iran as an intractable "rogue." The country's links to recent terrorist bombings in Britain and Argentina and continued opposition to Middle East peace proposals forced a turn in U.S. posture, say observers. "If this [deal] had happened in November, it might have been all right," says an analyst.

Conoco either never recognized the shift or misread its implications, gambling that its venture, which was not illegal, would not be stopped. Not once, say Conoco and DuPont officials, had the company been specifically warned off its talks with Iran--despite 20 company briefings to State Dept. officials. And even as the furor rose, the company continued to insist that it had acted properly. The deal, Nicandros thought, had been constructed carefully with a Dutch subsidiary to skirt U.S. rules--even proposing to accept payment, say industry insiders, in gas delivered to Dubai, a friendly emirate.

An Energy Dept. spokesman insists the company should have known better. "This policy should not have taken any U.S. firm by surprise," says William White, Deputy Energy Secretary. While current rules ban imports of Iranian products, American oil companies are permitted to buy and sell Iranian oil outside the U.S. Conoco's deal would have significantly altered the economic picture. Iran wants to increase production to 5 million barrels of oil a day, from about 3.6 million.

"BOTH EYES OPEN." The immediate worry in the U.S.: Conoco's development of offshore reserves would help Iran attract new capital and bolster its sagging economy--a scenario the U.S. opposes. The Administration's view of the deal was that Conoco would be going beyond acting as a trader. The deal "would dangerously add to [Iran's] economic capacity to do the things that we find objectionable in the world community," says White House spokesman Michael D. McCurry.

Nicandros, 61, has run Conoco for the past eight years and worked for the company since 1957. He led Conoco into such troubled areas as Russia and Somalia, but DuPont insiders say the highly respected executive is no cowboy. "I suspect Nicandros was extremely careful in his steps and didn't try to pull a fast one," says one. Indeed, says Thomas O'Connor, principal petroleum engineer at the World Bank: "I can't imagine Conoco going into Iran without both eyes open."

At the same time, though, Nicandros may have been misreading the appetite of DuPont's board for his initiative. According to insiders, Nicandros, a DuPont vice-chairman and board member, brought a broad outline of the deal to directors on Mar. 1--just days before terms were agreed to in Teheran by Conoco and the National Iranian Oil Co. A spokesman insists the deal was contingent upon approval by the DuPont board and Iranian officials.

At the board meeting, there was discussion but no decision taken. Indeed, the project met resistance from board members, including Edgar Bronfman Jr., whose family controls 24% of DuPont's stock. Even DuPont Chairman Edgar S. Woolard Jr. was noncommittal, assuring the board that the presentation was only informational. While Nicandros clearly was backing the proposal, he did not seek immediate approval. Recalls an insider: "It was made clear this was not a vote. We didn't have all the details."

DISBELIEF. By now, perhaps, they wish that they had. As a result of the

Conoco deal, the State Dept. is considering tightening policies toward Iranian oil. And Conoco Vice-President J. Michael Stinson, who directed the talks with Iran, was to appear on Capitol Hill on Mar. 16 to explain the company's actions. The furor has helped give new impetus to a bill sponsored by U.S. Senator Alfonse M. D'Amato (R-N.Y.) that would ban all trade with Iran.

In the oil patch, Clinton's Executive Order was greeted with disbelief. U.S. oil giants are being welcomed back in countries such as Kuwait, where they've been outcasts for years. And with the Administration fighting Europe to keep the international embargo on Iraqi oil, not Iranian, "there was a general sense in the industry that the Conoco project would not finally be in trouble," says Jay Gallagher, a senior exploration analyst at oil industry adviser Petroconsultants Inc.

Should the meltdown really have come as such a surprise to Conoco? With the signs obvious that the Administration and Congress were moving toward increased isolation of Iran, some find it hard to accept that Conoco was blindsided. "They were told repeatedly that large projects like this present a real problem for us," says a White House official. But the blowup points to the need for clear U.S. foreign policies toward troublesome oil-producing states--especially now that Big Oil is being welcomed back where it used to be persona non grata.

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