U.S. Embassy Is Warning Beijing on Iran Gas Deal

WASHINGTON — The Bush administration and Congress are warning that a proposed $16 billion deal between a Chinese company and Iran could trigger economic penalties under an American law aimed at starving Iran of funding for terrorism and nuclear weapons.

Officials at the American embassy in China delivered a demarche Saturday in Beijing. They demanded an explanation of the deal from Chinese government officials and warned them that it could trigger a 1996 law, the Iran Libya Sanctions Act. The law prohibits foreign firms that invest more than $10 million in Iran's energy sector from raising capital in American financial markets.

The Democrat from California who will take over next week as chairman of the House International Relations Committee, Tom Lantos, said his panel will "closely examine" the deal next week to see if the sanctions would apply. The ranking Republican on that committee, Rep. Ileana Ros-Lehtinen, a Republican from Florida, said she will also be looking closely at the deal.

The Chinese company involved in the deal, the Chinese National Offshore Oil Corporation, or CNOOC, is state controlled but has some independent directors, including a former vice chairman of Goldman Sachs Asia. It is listed on the New York Stock Exchange. The company attracted American press attention in 2005, when it launched a $18.5 billion bid for the American oil company Unocal that it eventually withdrew amid congressional opposition.

The deal with Iran will test the effectiveness of the recently reauthorized Iran Libya Sanctions Act, which was originally championed by a senator from New York, Alfonse D'Amato. The deal also poses a direct challenge to America's financial war against Iran. For the past year, the Treasury Department has discreetly pressured Japanese and European banks to divest from Iran and end their relations with Iranian companies and banks, warning that such deals could risk the banks' own access to American financial markets.

Because the Iran-China deal was announced on December 22, only a day before the U.N. Security Council unanimously approved new sanctions against Iran's nuclear program, it also signaled China's willingness to soften any economic blow to the new sanctions would inflict on Iran. Others say that the China-Iran deal is driven on the Chinese side not by geopolitical considerations but strictly by economics, as China struggles to find affordable energy to support its booming economic growth.

Yesterday, a State Department official who requested anonymity said Foggy Bottom was trying to determine whether the deal with CNOOC is to purchase liquefied gas or whether it would actually entail CNOOC's investment in new facilities in Iran to liquefy the natural gas for export.

"Obviously, if this would involve some investment in gas liquefication facilities — we don't know that it does — then that would be a violation of the Iran Libya Sanctions Act. A strict purchase raises political concerns, but not legal concerns," the official said. When asked about those political concerns, the official said, "It would mean the Iranians would have another $16 billion for international terrorism and to pursue weapons programs."

Lawmakers were similarly blunt in warning of the consequences of the deal. Mr. Lantos said, "When the Congress convenes next week, the International Relations Committee will closely examine the reported $16 Billion Memorandum of Understanding China's state-owned oil company signed with Iran to develop Iranian gas fields." He added that his committee would specifically examine whether the deal would trigger penalties envisioned under the new Iran sanctions law. "China needs to be warned of the serious penalties it may incur if it pursues implementation of this agreement," he said.

Ms. Ros-Lehtinen said she would examine whether the deal would trigger penalties. "If this investment is confirmed, I will seek to ensure that this Chinese entity is penalized to the fullest extent. Chinese entities have a nefarious history of providing critical assistance to rogue regimes for their missile and unconventional weapons programs, and China also provides an economic lifeline to these threats to global peace and security," she said. "As such, we must carefully review any activity that would indirectly benefit or reward Chinese rogue clients like Iran and Syria."

Despite the tough talk, there is no precedent for enforcing the ten-year-old secondary sanctions that are on the books for foreign investments in Iran's energy sector. When Russia's Gazprom, France's Total and Malaysia's Petronas companies signed a $2 billion deal to develop Iran's South Pars gas field in 1997, the Clinton administration waived any sanctions required by law.

The deputy director of research at the Washington Institute for Near East Affairs, Patrick Clawson, said yesterday that it was unclear whether the Chinese government had approved the deal CNOOC announced last week, noting that Chinese companies in the past have pursued investments without checking with Beijing. But he added that if the deal was approved by the Chinese foreign ministry, it would hurt American efforts to present effective disincentives to Iran for its nuclear program.

"If in fact Chinese companies are prepared to make major investments in Iran, it is going to be more difficult for America to achieve its goals to pressure Iran on weapons of mass destruction and delivery systems,"Mr. Clawson said.

The president of the Center for Security Policy, Frank Gaffney, said he was not holding out hope that any government sanctions would be applied to CNOOC. "The president keeps waiving the sanctions on foreign firms," he said. "We have come up with as an alternative approach. Americans investing in companies like CNOOC ought to divest from those companies if they are doing business with our enemies. This is not only inconsistent with the investor's moral values, but inconsistent with the national interest and a fiduciary risk."

One investor in CNOOC is the New York City retirement fund, which owns more than $8 million worth of CNOOC stock. Yesterday, a spokeswoman for New York City comptroller William Thompson said the comptroller's office is looking into those holdings.

The New York State Common Retirement Fund directly owned $5.2 million worth of CNOOC Ltd. as of March 31, according to the fund's annual report.