US Govt Probe of Shell-Iran Deal May be Sanctions Test Case

WASHINGTON Jan 30, 2007 (Dow Jones Newswires)

The U.S. government will likely investigate to see if Royal Dutch Shell's (RDSA) upstream services agreement for a $4.3 billion liquefied natural gas project in southern Iran violates its sanctions laws, a State department spokesman said Monday.

The deal may become the next test case for the State Department, accused by the new Democrat-controlled Congress as having been too lax in applying laws that prohibit investment in Iran.

Current U.S. law bars companies from doing more than $20 million a year in business with Iran, and since the project is likely to exceed the parameters, State Department spokesman Scott McCormack said he "was sure" the government "will take a look at this particular deal."

Ilan Berman, vice president for policy at the American Foreign Policy Council, said the State Department has not taken any action against companies under the Iran sanctions act since the law has been on the books, instead choosing to use the right to waive action.

But several analysts, including Berman, think the new Democrat controlled Congress will increasingly put pressure on the President's administration to apply the sanctions act as a diplomatic alternative to a military strike designed to interrupt Iran's alleged nuclear weapons program.

Shell announced the project, which is being developed with Spanish oil company Repsol (REP) and is currently at the feasibility stage, over the weekend. A spokesman said Shell expected a final decision in about a year.

"If there is an investment greater than a certain amount, as specified under U.S. law, then our folks, our lawyers take a look at it and the policymakers take a look at it and see if there's any further steps that we, as a government, take," McCormack said.

He said he wouldn't speculate whether the government would take any further action.

As the Organization of Petroleum Exporting Countries second-largest producer, almost 60% of the state's revenues are from oil and undermining development of its energy sector is seen as one way of putting pressure on the regime to stop its alleged nuclear weapons program.

Other companies, such as France's Total SA (TOT), Norway's Norsk Hydro ASA (NHY), Statoil ASA (STO) and Aker Kvaerner ASA (AKVER.OS) have signed energy deals within the past few years, with investment levels well over the $20 million threshold and no U.S. government action under the Iran sanctions act.

Washington-based research and consulting firm, Conflict Securities Advisory Group, estimates that there are more than 20 companies currently in violation of the Iran sanctions act.

But, said Berman, "Congress is much more hawkish" on sanctions, especially with leading Democrats pushing for a diplomatic solution to the nuclear crisis rather than a military strike, and will give the administration less flexibility to use its waiver rights.

Tom Lantos, Chairman of the House Foreign Relations Committee said at a hearing on the Iran nuclear situation in early January, "The administration needs to enforce the Iran Sanctions Act to make sure that companies which invest in Iran's energy sector pay a painful price in relations with the United States."

"This law remains ignored," Lantos said, but said amendments to a re-certification of the bill last year means, "the administration will either have to impose biting sanctions or attempt to give Congress persuasive and compelling reasons as to why it is continuing to ignore them."

Lantos' committee will meet Wednesday to consider the Iran imbroglio again, where the Congressman will press for additional sanctions, a spokeswoman said.

The ranking Republican on the committee, Ileana Ros-Lehtinen of Florida, has already said she would be introducing this session two new pieces of sanctions legislation that would penalize companies investing in Iran.

Congress has also asked the State Department to investigate a potential $16 billion LNG deal between the National Iranian Oil Company and the China National Offshore Oil Corp.

"I can assure you that this committee will hold the administration's feet to the fire, demanding biting sanctions," Lantos said.

Berman said the waiver of the sanctions act over the past decade "makes for a remarkable political statement...consistently prioritizing bilateral trade issues over sanctions."

If the sanctions act was used against China, "it would make them very mad and potential start a trade war."

Andrew Davenport, Vice President at Conflict Securities Advisory Group, said the government has instead been focusing more on capital markets. Through its newly created terrorism financial intelligence team, the Treasury Department has been able to prompt major banks such as Credit Suisse (CS) to stop their financial interactions with Iranian banks because of the reputational risk involved.

Davenport says, however, that the more stringent language added to the Iran sanctions act late last year, "gives the Administration a lot less wiggle room" to waive the law.

But Congress, considering recent United Nations Security Council sanctions weak, is actively considering other sanctions options and legislation, particularly some which would target its energy sector and the country's gasoline imports. Iran imports about 40% of its demand for refined petroleum products, and subsidizes much of the cost for consumers.

According to several Congressional aides, more sanctions legislation focusing on foreign oil companies investing in Iran are expected to be proposed this session.

Copyright (c) 2007 Dow Jones & Company, Inc.


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