Tuesday, May 25, 2010

U.S. Bill Takes Aim at Iran Oil Partners



A U.S. House committee has proposed barring the Pentagon from buying fuel from companies that do business with Iran's energy industry—a stance that is a long shot for becoming law but that underscores U.S. lawmakers' continuing dissatisfaction with international efforts to slap tough sanctions on Tehran.
An Air Force airman participates in a refueling exercise at Hurlburt Field, Fla., in January. The Pentagon is the world's single-largest consumer of oil.
.An amendment to a defense-spending bill, co-sponsored by a Republican and a Democrat and passed with full support in the House Armed Services Committee, would cost some European oil firms billions of dollars in Pentagon contracts if they buy Iranian oil. It would also dramatically escalate U.S. sanctions against Tehran. "The Secretary of Defense may not enter into any contract with an entity that engages in commercial activity in the energy sector of Iran," the amendment says, according to a copy reviewed by The Wall Street Journal.

The measure's passage reflects growing frustration in parts of Congress with the failure of diplomacy to rein in Iran's nuclear program.

The bill passed through the committee last Wednesday, a day after the U.S., Russia and China agreed on a new list of sanctions against Iran for what they say is its refusal to abide by the United Nations Security Council resolutions calling for Tehran to halt its uranium-enrichment program.

The U.N. sanctions would crimp trade in Iranian weapons and certain investments. But like existing U.N. and U.S. sanctions, they don't ask international companies to stop doing business with Iran's energy sector. About half of Iran's government revenues come from oil exports.

Iran Gives Shell, Repsol Two-Week Ultimatum. Access thousands of business sources not available on the free web. Learn More .The Pentagon is the world's single-largest oil consumer, burning around 400,000 barrels a day for its sprawling fleet of aircraft and vehicles, according to Congressional estimates.

The amendment was co-sponsored by Howard P. "Buck" McKeon, a California Republican and Ike Skelton, a Missouri Democrat. The full House is scheduled to vote on the legislation later this week.

Even if the amendment passes the House, it is likely to face stiff opposition in the Senate and at the Pentagon, which would be forced to find alternative suppliers. Iranian oil officials have also said recently that any move by the U.S. targeting its oil exports would be viewed as an "act of war," another reason the Pentagon and the White House are likely to look unfavorably on the House amendment.

An aide to Mr. McKeon said the measure gives the U.S. defense secretary the right to override the measure if he deems it too burdensome for the Pentagon to find alternative fuel suppliers. The aide also said that, at this point, there is no sponsor in the Senate for a similar measure.

.European energy companies Royal Dutch Shell PLC and BP PLC have been the Pentagon's top fuel-supply contractors in recent years, according to data from USAspending.gov, an Office of Management and Budget website that tracks federal contracts. It estimates that since 2000, Anglo-Dutch Shell has signed deals with the Pentagon worth about $8.8 billion. BP PLC has signed contracts worth a total of about $7.2 billion in the 2000-2009 period and has an estimated $838 million worth of contracts expected this year with the Pentagon.

The two oil companies also buy crude oil from Iran. Last week, The Wall Street Journal reported that some companies, including Shell, have been disguising some of those Iranian purchases, according to shipping records, even though they remain perfectly legal.

Spokespeople for Shell were not available to comment on the amendment. A BP spokesman declined to comment. A Pentagon spokeswoman also declined to comment.

The House and Senate currently are reconciling bills that would expand existing U.S. sanctions against Iran over its nuclear program by penalizing companies that ship gasoline to Iran.

The country imports around 40% of its total gasoline needs due to limited refining capacity. The legislation has drawn opposition from some U.S. business groups and from foreign companies, which say it tries to impose U.S. law beyond its borders.

Fearing those sanctions will come to pass, some oil companies with U.S. operations, including Shell, say they have stopped sending gasoline to Iran.

But the buying of Iranian crude—a more lucrative business than selling gasoline to Iran—continues.

U.S. companies long have been banned from doing business in Iran. The U.S. believes Iran is trying to build nuclear weapons; Iran denies this.

Write to Spencer Swartz at spencer.swartz@dowjones.com and Steve Stecklow at steve.stecklow@wsj.com

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