May 12, 2010 | Politico

Fix Iran Energy Loophole

The Senate Homeland Security Committee is scheduled to hold hearings Wednesday on companies that have provided Tehran with financial resources for its illicit nuclear program.

These hearings aim to build on steps already taken by Congress to find a nonmilitary means to thwart Iran's nuclear quest. Indeed, legislators are in conference to iron out the most comprehensive Iran sanctions legislation in 14 years.

But a loophole may allow companies doing business in Iran's oil and natural gas sectors to evade stronger measures.

The proposed legislation, known as the Iran Refined Petroleum Sanctions Act, targets Iran's economic Achilles' heel — the regime's need to import an estimated 30 percent to 40 percent of Iran's gasoline from foreign companies.

Tehran lacks adequate refinery capacity to produce enough gasoline itself. Congress seems ready to exploit this shortfall.

The proposed bill would extend an earlier act, giving the president authority to sanction foreign companies involved in Iran's refined petroleum trade, including suppliers, insurers, banks, shippers, investors and providers of technology, support and information.

As written, however, both the new law and the current legislation have a gaping loophole.

While the House and Senate versions of IRPSA target the entire supply chain for gasoline, and the earlier law prohibits investment in Iranian natural gas and oil projects, neither addresses the supply of critical technology, services, support and specialized information required for these energy projects.

This is a major oversight — and a missed opportunity.

Iran's energy sector is the regime's lifeblood. Tehran is the world's fourth-largest producer of crude oil. Oil export revenues represent more than 24 percent of Iran's gross domestic product, according to Government Accountability Office estimates, and from 50 percent to 75 percent of government revenues.

Iran's natural gas reserves, some 981 trillion cubic feet, are the world's second largest after Russia's. Oil already gives Iran enormous international leverage. Once it becomes a major natural gas exporter, Iran will have exponentially more influence.

As international pressure on its gasoline trade has increased, Tehran has responded with “energy independence” countermeasures to leverage its natural gas and oil wealth against the threat of sanctions.

This effort, launched during the past five years, reportedly includes a range of projects — from running most vehicles with compressed natural gas to a sweeping mandate for all new cars to be “flex fuel.” There is one overriding objective: to ensure that gasoline sanctions, when they materialize, have considerably less bite.

But today, thankfully, Iran's plans remain mostly notional. Government mismanagement, coupled with international pressure on foreign companies, so far shows clear signs of slowing Iran's efforts to “sanctionproof” its economy. Though it is clear that Tehran is working toward this goal.

To do so, however, it needs help. Natural gas projects are complex endeavors, requiring specialized, sophisticated technology and services to enable the compression or liquefaction of natural gas.

Iran now lacks the technology and scientific expertise to harness its gas reserves and has turned to its international trading partners for help. The principal culprits here are not the usual suspects, Russia and China, but U.S. allies in Europe.

Indeed, according to informed estimates, about 60 percent of the technology used by Iran to exploit its natural gas sector comes from one European nation: Germany. Other critical assistance comes from countries such as France and Holland.

Iran's oil development is also dependent on foreign technology, services, support and specialized oil information. Right now, companies providing these products or services to the Iranian oil industry are free to do so as long as they don't make investments of more than $20 million per year and don't provide anything used to refine the oil.

This legislative hole is wide enough for companies to drive an oil tanker through.

Congress has the power to plug this hole for both natural gas and oil. Lawmakers must use the opportunity in the coming conference negotiations to produce a consolidated bill for President Barack Obama's signature that expands the act's language to cover oil and natural gas technology, as well as the services, support and specialized energy information that Iran needs from foreign suppliers to fully exploit its energy wealth.

Congress needs to amend the current legislation to punish firms for sales of goods, services and technology that assist Iran in developing and maintaining its oil and natural gas infrastructure — not just those making “investments,” as the current law says.

Otherwise, the energy sanctions that could be the best chance of peacefully stopping Iran's nuclear drive risk falling short of accomplishing this goal.

Mark Dubowitz is executive director of the Foundation for Defense of Democracies and head of its Iran Energy Project. Ilan Berman is vice president of the American Foreign Policy Council.

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