June 30, 2010 | Forbes
Beyond Gasoline: Congress Targets Iran’s Access to Critical Energy Know-How
This past week, 507 members of the United States Congress passed the toughest Iran sanctions legislation in history, with only eight members opposing. The bill, which President Obama is expected to sign this week is likely to create serious heartburn for Iranian leaders.
The Comprehensive Iran Sanctions Accountability and Divestment Act, which has now cleared both houses of Congress, lives up to its name. It is an exhaustive sanctions bill that targets the Iranian energy and financial sectors. Most of the legislation's provisions were telegraphed in advance when the core of the bill, then known as the Iran Refined Petroleum Sanctions Act, initially passed the House and Senate in December and January. Representatives added more provisions during the conference committee, including sanctions on Iranian officials involved in serious human rights abuses, and tough measures against international financial institutions that do business with designated Iranian banks and front companies run by Iran's Islamic Revolutionary Guard Corps.
While the original bills focused only on choking off Iran's access to refined petroleum, two tweaks that occurred in committee have the potential to inflict even greater pain on the regime's entire energy business — beyond gasoline.
The Iranian regime claims it can withstand energy sanctions even though it imports 30 percent of its gasoline. But its much-ballyhooed countermeasures are exaggerated, and its reported cuts in gasoline subsidies could backfire and double or triple already high inflation rates. Foreign companies — which were already cutting back their gasoline supplies to Iran before the legislation passed — now have even more incentive to do so.
The regime may not be ready for what is to come.
What should be particularly troubling for Tehran are two changes that occurred during the conference committee: the first, Congress eliminated one sentence in the Iran Sanctions Act which for fourteen years permitted companies providing technology, goods and services to the Iranian oil and natural gas sectors to escape U.S. sanctions; and the second, Congress added additional language to the legislation which could bar foreign companies that do business with the U.S. from entering into joint ventures, partnerships and investments with the Iranian regime for foreign energy projects outside Iran.
With these tweaks to the bill, U.S. sanctions laws could now strike a blow at the heart of Iran's energy wealth.
Without energy wealth, the Iranian regime would collapse. Tehran is the world's fourth-largest producer of crude oil. Oil exports constitute more than 24 percent of Iran's gross domestic product, according to Government Accountability Office estimates, and as much of 75 percent of government revenues.
At some 981 trillion cubic feet, Iran's natural gas reserves are second only to Russia's. Oil already gives the Iranian regime enormous wealth to fund its proliferation and terrorism activities and a vast state system of repression. It also gives the regime significant international leverage. Once it becomes a major natural gas exporter, the regime will have even more influence.
Government mismanagement and the threat of international sanctions on foreign companies are already showing clear signs of slowing Iran's energy industries. During President Mahmoud Ahmadinejad's first four years in office, foreign investment in the Iranian energy sector plummeted by 64 percent, from $4.2 billion to $1.5 billion. As the hint of sanctions poisoned the air, Ahmadinejad replaced a number of competent energy technocrats with regime loyalists, including Revolutionary Guard officials who had no previous experience in the energy industry. Iranian officials now say that without an annual investment of at least $25 billion, Iran could become a net importer of oil.
While the Revolutionary Guards make the case that they are the guarantors of the regime's survival and security, they are also contributing to the deterioration of the Iranian energy industry. The Wall Street Journal recently noted that “Iran's beleaguered oil industry could be on its way to passing an ignominious milestone: being replaced [by 2015] by its onetime nemesis, Iraq, as the Middle East's second-biggest oil producer.”
To revitalize its energy business, Tehran needs help from foreign companies.
Natural gas projects are complex endeavors, requiring specialized, sophisticated technology and services. Iran lacks the equipment 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.
According to informed estimates, about 60 percent of the technology Iran uses to exploit its natural gas resources comes from one European nation: Germany.
Iran also depends on foreign technology, goods and services to develop its oil resources. While Chinese and Russian companies can provide significant capital for both natural gas and oil projects, they too depend on foreign subcontractors to provide critical know-how.
Until last week, companies were free to provide these products and services to the Iranian oil and natural gas businesses. That has now changed: With a stroke of the pen, Congress has provided President Obama with the means to sanction any company that provides technology, goods or services valued at $20 million or more in any single year to the Iranian energy industry.
The other significant change to the bill in committee involved closing a loophole that overlooked Iran's business relationships with foreign companies for energy-related projects outside Iran. Iranian leaders had been skillfully pursuing partnerships outside Iran with European and Asian energy companies to frustrate American attempts to build an international consensus behind enforcing sanctions.
Iranian entities were involved in numerous foreign energy projects, including joint ventures with foreign energy companies for natural gas projects off the coast of Scotland, in Croatia, and in Azerbaijan, investments in European energy and infrastructure companies, and refineries in Malaysia, Indonesia and Vietnam. These partnerships gave Tehran access to technology and expertise to develop its own energy resources, influence over foreign partners, and a source of additional funding for its nuclear program and terrorist activities.
As a result of a last-minute addition to the legislation, the Obama administration must now report to Congress every six months on which companies are involved in these overseas projects with the Iranian regime.
The Obama administration must also apply the sanctions stipulated in the legislation against international companies providing technology, goods and services both directly to the Iranian regime and in the context of partnerships and joint ventures with Iranian entities. These sanctions include denying these companies support from the U.S. Export-Import Bank, prohibiting them from receiving U.S. government contracts, or restricting imports to the U.S. from these companies.
There are more surprises in store for the Iranian regime. The U.S., France and the United Kingdom added language to the preamble of the recently-adopted UN Security Council Resolution 1929 noting “the potential connection between Iran's revenues derived from its energy sector and the funding of Iran's proliferation-sensitive nuclear activities.”
The resolution also expressed concern that “chemical process equipment and materials required for the petrochemical industry have much in common with those required for certain sensitive nuclear fuel cycle activities.”
Remember: China and Russia voted for this resolution, and the European Union appears to be taking it seriously. At a summit on June 17, the EU announced a ban on new investment, technical assistance and technology transfers in connection with Iran's natural gas and oil industry. Details on the complete sanctions package are expected in mid-July.
Both Beijing and Moscow will resist efforts to target Iran's energy business, but they have only so much technology and assistance of their own to offer. With Gazprom's and other Russian companies' Iranian commercial interests in mind, Russian ambassador to the EU Vladimir Chizhov criticized the announcement: “If you want to dissuade Iran from pursuing a nuclear programme … then why the hell are you banning the supply of equipment for the oil and gas industry?”
Ambassador Chizhov should know the answer, since his government voted for the UN resolution that emphasizes the nexus between Iran's energy wealth and its illegal nuclear activities. Sanctions are one of the few peaceful ways left to persuade the regime to abandon its pursuit of nuclear weapons, support for terrorism and human rights abuses.
Congress was wise to slam the door on the Iranian regime's access to energy expertise. It's now up to President Obama and European leaders to make sure that it stays shut.
Mark Dubowitz is executive director of the Foundation for Defense of Democracies and heads its Iran Energy Project.